Since the boom in popularity in binary options occurring over the past 5 years, there have been some commentators questioning whether it should be considered as a scam. Given that early reviews of the first binary options brokers were not very flattering, traders may have been correct to have initially been wary of trading binary options. Fortunately, binary options trading has come a long way since then and now finds itself as one of the most popular trading methods for both new and experienced traders. The reputation that it unfairly acquired in the beginning has rapidly been replaced with the positive emergence of highly reputable brokers and increased regulation, which ensure that binary options trading remains a safe investment decision. Since traders are happiest when they are profitable, it is well worth considering how binary options traders can fail before parting with any real money.
Avoid martingale trading strategies
Martingale trading strategies have been around for a long time in all forms of gambling. They are based on the assumption that, in a 50-50 (win-lose) situation a gambler cannot consistently lose without winning. Therefore, for every loss, if the gambler consistently doubles their stake for the next bet, they will eventually cover all losses and result in a small profit.
Two flaws in this method apply and which is why binary options traders should avoid this form of trading. The first of these is known as the ‘gamblers fallacy’, assuming that the market has a memory and somehow ‘owes’ a positive outcome to a trader after a series of losses. After several losses, a trader will likely find their account depleted and the market can still continue to go against their bets.
In addition to this, martingale strategy relies on the odds being 50-50 for a winning or losing outcome. Ultimately, this is the reason why casinos introduced the green ‘0’ on the roulette wheel to distort these odds in favour of the casino. Given that most binary options provide up to 80% profits on investments, it is clear that martingale would not work effectively and should not be employed as a binary options trading strategy.
Trading binary option impulsively
Binary options trading is very simple indeed and the platforms are designed so that trades can be executed as quickly as possible. However, many new traders interpret that simplicity of these platforms as a requirement to enter as many ‘gut-feeling’ trades as quickly as possible. As with any form of blind speculation, this becomes gambling and success is unsustainable in the long-term.
In order to avoid depleting a trading account in this way, binary options traders need to formulate a solid trading plan, and stick rigidly to this. The excitement of trading live markets and the profits available (sometimes in just 60 seconds!) can be overwhelmingly tempting for many traders. However, by patiently waiting for a back-tested and reliable setup to occur, traders not only give themselves the required edge to be profitable trading binary options, but also provide a basis to learn from this should the trade fail. Understanding what works and what can be considered unreliable is a key part of trading binary options and learning how to eliminate bade trades is essential to long-term success.
Analysis paralysis and bright-light indicators
Trading software is a wonderful thing and the charts which allow traders to analyse markets for high-probability setups are one of the key methods to becoming consistently profitable. Many traders, however, suffer from the problem that arises from such a wide range of charting tools available. This known as analysis-paralysis and is often the result of studying too many indicators in search of an elusive trading opportunity. Rather than providing a clear trading setup, this will often offer a confused, and contradictory, view of the market which ends up in the eventual trade becoming nothing more than a gamble.
Using the charting tools in moderation, and with the belief that one or two, back-tested indicators will positively aide trading decisions can be highly effective in providing successful trading outcomes. This, after all, is one of the main reasons why many successful trader prefer to trade price-action from ‘naked’ charts rather than over-reliance on a set of colourful indicators.
