Given that so many people are trading with Binary Options these days you could almost forgiven for thinking that everyone using this popular form of fixed odds investment is making money. You would of course be wrong.
As with most forms of financial trading there are very few people that participate that actually make money, despite their best endeavors. The reasons for this are of course varied. However a quick look around some of the many trading forums and chat rooms on the Internet reveal that they might not be as varied as we first imagine.
While much has been written about trading techniques and the pitfalls to avoid, it seems that many fail to heed this advice or perhaps they choose to ignore it. Nevertheless if you want to be ‘in the game’ for any length of time and reach the top you will need to follow the advice of champions or in this case traders who actually make money.
Here are the top five trading mistakes that you need to avoid. Both new traders an existing traders should take note.
1. No Money Management Plan
One of the most unfortunate things about the trading failure of many investors is that their failure could so easily be avoided. Financial traders from all disciplines will spend hours analyzing and back-testing strategies and chasing down the latest indicator or system and scarcely give a second glance at the risks involved.
Of the many articles you will find on the web that are related to trading strategies, only a handful concern themselves with money management. And yet this is perhaps the most critical determinant of whether you make your trading a success.
The really crazy thing when it comes to a putting together a money management strategy is that it only requires a bit of logic and thought to put in place a balanced system that will lower your risk and prevent you from going broke.
It is often said that a good approach to money management can actually turn a poorly performing system into a star performer. While this may be stretching the truth a little, it is fair to say that it can certainly help to maximize performance and limit your risks. If you choose to ignore your money management then your trading career will quickly fail. Period.
2. Having Unrealistic Expectations
Having high expectations from life is not a bad thing. However when it comes to trading, having expectations of impossible returns can lead to a premature termination of a trading career.
A lot of the expectations that traders carry with them in the markets is perhaps the fault of overzealous marketers and the industry itself.
However a little common sense should help to distinguish between the returns that are often touted and what can realistically be achieved. So can you really make a 100% profit on your money each day when the bank will only pay 2% for a year?!?
One of the dangers of not setting out realistic expectations as to how you are going to make your trading returns is that you fall foul or one of the many other mistakes that traders make. these are namely disregarding money management rules, relying only on signals and not learning to trade yourself. Oh and course, trading on emotion and over-trading.
Define your trading goals and form a plan to work towards them. By booking small regular profits you will be able to work towards your goals. In this way you won’t over extend yourself and will also lower your risk.
3. Trading With Too Small An Account
In addition to unrealistic expectations, another pressure that traders put their account under is the result of under-funding it. The minimum deposit requirements from brokers are exactly that. They are the minimum amount you have to deposit to fund your account. They are not amount that you should be using to run well balanced money management strategy on your account.
The minimum amount per trade with for most popular trading platforms is $25. Therefore if trading at 5% per contract you should be looking at a minimum of $500 for your deposit. At a more conservative 2.5%, a $1000 deposit.
Of course any strategy is only as good as its trader. The temptation to trade beyond these levels is ever present no matter how much capital the account is funded with. However it is important to remember that a small account is unlikely to deliver significant ‘monetary profits (i.e. you aren’t going to make a million from a $200 deposit) and it can quickly be blown if you don’t respect correct trade sizing and manage your risk.
Trading too frequently on your account known as ‘over trading’ can wreak havoc on your account. There are many situations that can give rise to over-trading. Both success and a lack of it can encourage traders to trade their account more frequently than they should.
- The successful trader over-trades from ego; he has ‘beaten the market’
- The unsuccessful trader over-trades from inadequacy; he ‘needs to beat the market’
Both standpoints lead to elevated level of trading activity for very different reasons. Either scenario is unhealthy for the trader and generally their account balance too.
Of course over-trading can also be the result of points 2 and 3 above. It you expect to make too much and lack the capital to do so, then the tendency is to push your account in an effort to meet these unrealistic goals.
At the core of over-trading lies ’emotion’. Emotion drives trading, not the analysis or trading plan. This can be incredibly dangerous for the trader and invariably leads to loss. Even a single session traded on emotion can do irreparable damage to a binary options account.
The lesson here is to stick with your trading plan and take time out of the markets.
5. Gambling Not Trading
It’s no secret that the all or nothing’ nature of Binary Options shares a number of similarities with the world of betting. Simply because the asset or market that is backed just happens to be financial, the actual mechanics are very similar. You wager on a result with the outcome being that you either win or lose.
Unfortunately many people who take up binary options trading fail to make the distinction between gambling and trading. This means they neglect taking a businesslike approach to their trading, forsaking plans or strategies for a simple throw of the dice.
Of course trading on instinct is not going to get anyone very far. To make consistent profits from trading you are going to need to carry out analysis both fundamentally and on the chart, and devise a strategy to follow. The ‘traders’ who fail to observe this rule are the ones who can be found complaining of losing their hats. They will blame their broker, their system… in fact anything but themselves.