Binary options trading is exciting and offer prospects to making some good money. But without proper instruction and correct application of strategies, emotions and risk management, a lot could go wrong. This article pinpoints the 10 mistakes that binary options traders commonly make and how they could be remedied for the trader to make profits.
Trading with an unregulated broker
Trading of binary options with a broker that is not regulated subjects the trader and the trading capital to a lot of risk. Regulation primarily serves to protect the consumer. Regulation makes the broker accountable to an authority that can enforce punishments for infractions. Brokers play major roles in the market. In addition to the defined role of providing market access, they also provide the platforms and market conditions under which binary options are traded. One of the functions of brokers in the market is to keep the trading capital for thousands of clients and these monies sometimes run into hundreds of millions of dollars. Surely when a business is keeping such money on behalf of clients, there should be some degree of checks and balances and this is part of why we have regulators in place. The binary options market is just emerging from a very dark period when scam brokers took advantage of the lack of regulation in many places to wreak havoc on clients. However, many countries are now rectifying this problem and there is no longer any reason for traders to trade with unregulated brokers. Make sure you confirm directly from the regulators if your preferred broker is regulated. This is the only way to be sure of who you are dealing with. In any case, trading with regulated brokers is the only way you are assured of the safety of your money.
Recommended Binary Options Brokers
Misuse of Bonuses
Bonuses are provided to traders as a means of bolstering their trading capital, so that they can trade larger volumes and potentially make larger profits. This is supposed to be a two-way arrangement which benefits the trader (increased capital) and the broker (increased revenue from larger trade volumes). However, the bonuses can and are frequently misused by traders.
Traders misuse bonuses by either overtrading with them or by taking on more bonuses than they should in the mistaken belief that this is free money. In the first place, a trader should only sign up for a bonus after reading the fine print of the bonus terms and conditions. This will enable the trader only take a bonus that can be managed. Secondly, traders should not overtrade in an attempt to cover the volume or turnover requirements. Bonuses are there to help the trader and must be used responsibly.
Not Having a Trading Plan
When a trader starts to trade without having a trading plan, it can be likened to a scenario where a traveller sets off on a journey without knowing what path the journey will assume and where the journey ends. Yet many traders just dump money into their trading accounts and then start trading without a clue of profit targets, time frame, strategies or even options types to trade. Any traveller that is embarking on a journey must first sit down to count the cost and plot the way to reaching the destination before the journey is undertaken. In the same vein, a binary options trader must first devise a trading plan. Such a trading plan must include the amount of capital to be deployed, the kind of trades to be deployed, the strategies to be used, profit targets, acceptable rate of losses and the tools to be used in achieving the set objectives. Nowadays there are tools that can be used in planning financial trading. Some of these tools include excel sheets for trade planning. A trading plan is a must-have if success is to be achieved in the financial market.
Ignoring News Feeds
News feeds that provide up-to-the-minute information as to what is going on in the market are very important but mostly neglected by traders. It should not be surprising why certain trades end up as losses. A news trader can turn a trade that was heading into winning territory into a losing trade, if the numbers negate the current trade direction. News feeds should be considered by traders before any trades are taken.
The news is what dictates the movement of the asset or the entire market. If you have observed the news carefully recently, you would have noticed how the buzz around the US interest rate decisions for the last quarter of 2015 have caused market volatility across several assets. This is what the news numbers can do. Markets can assume a risk-on or risk-off sentiment on the markets in an instant. So traders who are serious about making money cannot afford to ignore news feeds. News feeds are superior to any technical analysis and they must be used in every trading decision to be made.
Using Untested Autotrading Systems
In the last three years, literally hundreds of binary options autotrading systems and robots have been introduced into the market. Some of these are good while others have not matched their hype. The new trend is that the vendors provide access to these automated trading systems for free, but require the traders using them to open accounts with specified brokers. Some of these brokers are not regulated and others may not be the right kind of broker for the trader. For instance, using a broker which offers a minimum trade investment size that cannot allow the autotrading system use the acceptable risk management options will end up not being viable in the long run. To make sure that some of these problems do not show up along the way, it is necessary to test the autotrading system or the signals providers to know how it works, which brokers’ platforms it is designed to work on and whether the system-broker relationship is one which will eventually work out for the trader. These tests can be done with evaluation periods.
Tested Autotrading System: iROBOT
Not Using a Demo Account
Many traders see a demo account as basically an avenue to place practice trades here and there in preparation of live market trading. A demo account is more than that. Unfortunately many binary options brokers only provide demo accounts to traders who open and fund live accounts. Due to the perceived stress involved in all of this, most retail traders do not bother opening demo accounts and simply dive into live trading with all of their money.
A demo account encompasses more than just entering a trade to know if the strategy used would make money or not. A demo account can be used for strategy development and testing, learning the functions and workings of the binary options platform as well as performing historical studies to improve good trades and learn from bad ones. A demo account is a very important component of the binary options market and not using a demo account will invariably lead to losses and a blown account or two. Pilots are never taken into aircraft without undergoing simulator training where they are exposed to several conditions to test and hone their flying abilities to the maximum.
Overreliance on Short Term Trades
Short term trades are by nature, trades that have more uncertain outcomes than long term trades because of the difficulty in assessing the true trend of the asset. Assets will obey the time-tested dictum of following the trend until that trend comes to an end. However, traders get badly tempted and lured by the prospect of trading up to 20 or 30 short term trades in a day and possibly making thousands of dollars (from the sales pages on the internet), and end up getting blindsided by the fact that it is possible to also lose thousands of dollars trading short term trades without a proper way to analyze the assets.
Trading must be balanced, and there should also be a way to modulate the uncertainties of short term trades with long term trades that accurately measure and display the trend.
Trading Unfamiliar Assets
Which is easier? For an American or a US-based trader to trade binary options of a US exchange-listed company or for the same trader to try trading binary options on a Japanese company that he or she has probably never even heard of? It is a lot easier to make profit trading assets that are familiar to a trader. How can a trader hope to make money when trading an asset whose behaviour and fundamentals are unknown to the trader? Every asset has specific fundamentals that guide its movements. For instance, SAB Miller is a brewing company. It recently signed a merger deal with Anheuser-Busch In-Bev in a $106billion takeover deal, leading to a surge in its share price. A binary options trader that is unfamiliar with the company, its product or has no knowledge of this merger deal will be unable to accurately trade the fundamentals that will proceed from this merger deal. In contrast, a trader with sound knowledge of the brewing industry, the companies that are the major players in that industry and the fundamentals that move the industry’s stocks stand a much better chance of predicting the outcome of this merger deal than others who do not have this knowledge. It is therefore advocated that traders in the binary options market trade assets that they are familiar with, or at least, spend some time to familiarize themselves with the assets they intend to trade before trading.
Trading too Many Assets
Being a Jack of all Trades and Master of None is what will happen to any binary options trader who engages in the practice of trading too many assets. Trading too many assets can turn out to be a handful as it will be quite difficult managing all of them at the same time. Each asset has its own peculiarities and it is usually better to stick to a few assets and master them thoroughly. Even the professionals do not trade all manner of assets. If you take a look at the institutional trading firms, their trading divisions are highly specialized. There are traders who are assigned strictly to the interest rate trading desks. Some are sent to trade only on emerging market assets. Then there are those who trade purely currencies, and yet others who are assigned to trade Treasuries. You can never see a situation where a single trader is assigned to trade multiple desks or cover multiple asset classes. It is a wonder how retail traders go against the principles that institutional traders use and expect to get the same results as the institutional traders. One of the things that retail traders in binary options do that is very wrong is spreading themselves thin across several assets or across several asset classes. It is better to be a Master of one or two assets as this leads to better profitability.
If indeed a trader feels he can trade several assets at once, then it is better to trade correlated assets. For instance, a trader who is familiar with the fundamentals of the US Dollar, especially with regards to interest rates, can use this single factor to trade the USDZAR, gold, crude oil and any other USD-based asset. This is a lot better than trading several unrelated assets all at the same time.
Not Using Cashback Bonuses
Cashbacks are a policy where the trader receives back a sum of money that is equal to the initial capital investment after generating some trading volume and history in the market. Cashbacks are now offered by many affiliate partners to brokers. Sadly, many traders are unaware of their existence and so do not use them. Cashbacks offer a 100% risk-free approach to trading the binary options market. If you have the opportunity to get a cashback, there is hardly any reason not to use it.
Most mistakes that binary options traders make fall into these categories. They can all be remedied and they are pointed out here so that traders can avoid them and make more money doing so.