Binary Options Provide a Good Introduction to Trading
The simplicity of trading binary options, where all one needs to decide essentially is their entry points and not have to worry about when they will exit trades, can be a big advantage to those just learning to trade or those who have struggled trading other products.
This encompasses a great deal of amateur traders out there and the majority of them in fact at any given time. For every trader who makes it and gets profitable longer-term, there are many who fail or take a very long time to get there.
There are two main components to successful trading and we can break these down to good entry planning and good exit planning. Both have their own complexities, and while it’s not simply a matter just looking at charts and easily figuring out where a good entry may be, as this takes both effort and experience, it’s just easier to only have to worry about that and get that down well first before we move on to seeking to manage our exits well in trades.
While there may be more potential for rewards in doing both, this only happens when we have our entire game together so to speak, when we devise effective trading strategies that allow us to manage trades well from entry to exit, but these skills take real time to develop. If we can gain a good sense of what makes a good trade a good trade and not be concerned about timing it like you have to do with all other forms of trading, binary options trading can serve as a good stepping stone to becoming a good trader overall.
Entry Planning vs. Exit Planning
Like with standard options, with binary options we’re going to have to pay close attention to the potential magnitude of a trade to ensure that it is likely to move enough in our direction to get paid. This is not only where the main challenge lies with binary options, it’s the only thing that we are focused on.
We need to look at magnitude with all trades, as a trade that only has the potential to move a little may not be worthy of our time, and in particular, the upside may not be enough to justify the downside, the risk we’re taking with the trade.
This is even more important of an element with binary options trading, as it means the difference between making money on a trade or losing all of our money on it. If we don’t get this right, we are going to be losing money on our trading, because with binary options this is the only task we need to address.
While poorer entries can be made up for to some degree at least by overall trade management, and some traders claim that the entry is considerably less important than where we get out of a trade, we don’t have this ability to add to our equity by timing our trades better with binary options.
We also don’t generally have the option of taking partial profits when a trade moves in our favor but less than we expected, and these trades can still be profitable with normal trading but still result in a loss of all one’s money with binary options. The inability to time our exits comes with both a challenge and a cost.
On the other hand, we definitely need to master our entries well enough, and overall, doing this is the easier two of these tasks, as we both need a good plan and good execution to exit trades well. The pressures of the trade can and often do have us making mistakes when in a trade, exiting either too early or too late, and this can and does really mess up our trading.
There’s also the matter of needing to come up with a good exit plan if we are to become a complete trader, and this is no small task to get right. Of the two main tasks in trading, this is the one that traders struggle with the most, and the one that tends to do them in the most as well. In particular, traders tend to cut their profits and let their losses run too much, which is the complete opposite of what successful traders do.
Profit Potential of Binary Options vs. Other Forms of Trading
Not having to execute exits can be a real benefit and while it does limit the upside to trading it also may limit the downside, depending on the trader. Those prone to hanging on to losers will be better off only risking a small percentage of their account on any given trade, where this format has them doing the right thing and managing risk fairly appropriately at least provided that they actually do trade small enough.
There are a lot of binary options traders who do not do this though, and who may risk way too much per trade without even a positive expectation, which just hastens their demise. Even the most skilled binary options traders cannot get away with such thing, as trading too large will do anyone in over time, due to normal distributions of probability which will set the best trading plan on losing streaks.
We do want to be aware of what else is out there at the stage when we are beating binary options. Contrary to what many people think, or are actually told by those promoting binary options, the profit potential of this type of trading is actually quite modest, and pales in comparison to some other ways to trade.
How much money you can make from binary options comes down to the combination of your trading advantage and how often you trade them. Trading very frequently will get you more trades and multiply your trading advantage, but over very short periods of time it is more difficult to maintain the same advantage generally, and this advantage tends to be reduced when trades become extremely short, as in one minute ones.
Over a minute, we are trading the noise so to speak, and while this so-called noise does move in a somewhat predictable manner overall, it’s less predictable than time frames of a longer duration.
The bar is set fairly high to succeed with binary options, where on average we have to be right 56 times out of 100 and not just be right about the direction of the trade but the magnitude as well. This is not as hard as it might sound but what does stand out is that you aren’t going to beat 56 by that much really, and how much you beat it by limits your profit potential.
We should not get into binary options trading with unrealistic expectations and starting out our expectation should be that we aren’t going to start out making money, and it will take you a while to get to the point where you’re not losing more than you are making. When we do get to where we need to be, we aren’t exactly going to be printing money and we’re going to need to be happy with more modest success than we may have imagined when we started out.
On the other end of the spectrum, good traders can crack out three figure annual returns and scale things up to where these returns can add up to some real big money indeed, even beyond what many new binary options traders dream about.
The trick is that it takes some considerable skills to do this and not just skill in entering and exiting trades but especially in managing risk, which like everything else, is more complicated with highly leveraged trading. Binary options trading simplifies this to things like knowing how to divide by 100 so if we at least are willing to manage our risk, which we must be, then we can do that very well even being a trader with little experience and skill.
Which Type of Trading is Better?
Binary options can be very suitable to new traders or those who have had difficulty navigating the more complicated landscape of other forms of trading. It’s not that it is all that difficult to learn to trade anything at least decently, but this all takes time and effort and dedication. New traders can eventually achieve success, but this involves spending a lot of time trading and it takes quite a bit of discipline to see this through and not become impatient.
All things being equal, binary options trading is not the most lucrative way to trade and far from it actually. This does not mean that it does not have its place, and it clearly does with some traders, a lot of them in fact.
You can fail at any form of trading pretty easily if you’re not careful, this includes binary options trading. Provided that we are careful enough though, the greater simplicity of binary options trading can be a real benefit and we should never forego opportunities in trading just because they may be less exciting or even less profitable, if trading these opportunities make sense.
Many traders may think that they can take on the more exciting standard options and expect to do well in a short period of time, they will soon come to realize that this is much more difficult to do and may end up hurting themselves by making the wrong choice.
If we choose to trade stocks, we’re going to need a fairly large amount of money to trade, and this is also the case with futures trading. If we are newer and unproven, putting all this money at stake even if we’ve done well on a simulator is often not a good idea. There will be a period of learning here with the real thing and we need to be able to comfortably afford the tuition.
With forex and CFD, we can trade real money without a small investment, and can do so safely with quite a bit less money than it takes with some binary options brokers. If the minimum trade size with a binary options broker is $100, you better have $10,000 or more that you can lose without too much pain to make enough sense of this.
Some binary options brokers offer $1 trades and this is much more like the size that newer traders should be risking, even though it isn’t all that exciting to win less than $1 on a trade. This is not what it is about at this stage and what we need to do instead is look to put up some positive albeit small numbers and then look to ramp it up when we are ready and only when we are ready.
You can do that with forex and CFD trading as well, which are quite suitable for less successful traders, especially those with smaller stakes to start out with. No one should start trading with anything but smaller stakes actually and the right amount to risk in a trade when you are just learning is zero unless you are looking to just blow money for thrills.
As we get better, we can then look to start out by staking small amounts on trades and then work our way up from there as our success dictates. Binary options trading with the right broker, ones that allow this, can also represent a good starting point in trading.
With the way that binary options trading simplifies the trading process so much, it may be worthy of special attention. Many new traders choose binary options to start with and many of these traders are also choosing well.
Andrew is passionate about anything related to finance, and provides readers with his keen insights into how the numbers add up and what they mean.