Challenges of Trading Binary Options

Binary Options are Easier, But No Trading is Easy

There is no question that the simpler nature of binary options trading is one that traders find easier to understand and navigate, and especially for less experienced traders, simple is better. There is less potential for sure for traders to screw up when trading binary options as when you are only deciding to take trades or not, you can’t mess up the exits.

Challenges of Trading Binary OptionsExiting at the right time is the biggest challenge for traders and this is one that takes quite a bit of skill and experience to master, and this is where traders can give in to emotions or faulty thinking and either exit too soon or too late.

Improper exits tend to greatly impact our trading results where even the best entries can be undone very easily if we don’t get this other side of trading right. With binary options, we still need to pick the right trades, but that’s all we need to do, and this is a big advantage for traders who haven’t mastered the art of exiting trades well, which is the majority of traders.

Picking the right trades though is not an easy proposition at all, even though it might seem to be. Once we start trying to do this, we will quickly come to the realization that it is going to take both time and effort to be right often enough to actually make money doing this.

Being good at binary options trading does require us to acquire a very good knowledge of how markets move, because that is what we are going to be basing our predictions and subsequent trades on. Newer traders tend to have a view that this is much simpler than it actually is, and this is why it’s so important to start out with a demo account, as this allows any illusions of binary trading to be dispelled without this costing us real money for the lessons.

What Binary Options Trading Success Really Entails

We’re being asked to not only predict the direction of the market but to predict its magnitude as well. While this is the case with trading generally, as it just isn’t enough to predict the direction a price will move in, we have to also make sure that it moves enough in our favor to want to trade it, enough to allow its profit potential to be sufficient to offset the risk involved, getting this right is an even more central feature with binary options trading.

With binary options, like all options, if the price does not move enough, we lose the trade. This can have us being right about the direction a lot but still losing a lot of these trades. When we lose a binary options trade, we generally lose all our money, in spite of some brokers throwing us a bone so to speak and paying out a little for losing trades as well, to soften the blow a little.

These small consolation payouts of course come out of winning payouts, where we would have won more with our winners if not for this, so we don’t want to think that some brokers are just being generous or being merciful by paying on losing trades. This is not to say that this setup is a bad idea but we have to account for the total return from trading with a certain broker, and once again, this is one of the things that should be vetted on demo accounts.

What we need to realize is that due to the nature of binary options trading, being a zero-sum proposition, the money that brokers make is included in this sum, and this means that most binary options traders will lose money.

This is similar to playing poker where money changes hands between players and once we figure in the rake, more poker players will lose money than win money.

We need to approach binary options trading with this view as well, and while there are plenty of people who are profitable trading binary options, just like there are plenty of poker players who make money overall playing the game, we’re going to have to be good enough to expect to be profitable.

The payouts that binary options brokers devise is based fundamentally upon their traders, and ultimately, the skill of their players, and there are forces at work here which end up making it easier or more difficult to win depending on how good or poor the traders who trade with them are.

We need to strive to be well ahead of the curve here, well ahead of the average binary options trader, if we want to make money at this. While a lot of binary options traders aren’t that skilled, and don’t approach their trading anywhere systematically enough, relying on things like hunches or trading ideas that just haven’t been proven enough, if we do the same thing we have no right to expect our fate will be any better.

Learning to be a good binary options trader is a real process, and it will involve coming up with trading ideas and testing them in practice and keeping what works and throwing out what doesn’t, and continuing to refine the process as we go and become more familiar with what are good choices and what are not.

This is the real challenge that is present with binary options trading, to realize that this is not something that you are just going to start out making money with, and although we can get there if we have enough resolve and patience, both are going to be required in abundance.

We all start out not really knowing what we are doing when we start out trading, and it is those who realize this and look to eventually figure it out well enough, and put the proper time and effort into doing this, that end up succeeding.

Binary Options Trading Really is a Grind

People promoting binary options trading will always tell you that the profit potential with binary options trading is great, and say things like what other investment will net you 70 or 80 percent returns in as little as a minute, and this is said to excite traders who may not have much of an idea about how this works.

There are a couple of major things wrong with this view, with the first being that we’re not going to be able to realize an 80% return on our portfolio unless we risk our entire account balance on a trade. This is obviously not something we’d ever want to do and in fact we must dilute our trading sizes substantially, and it’s wise to not put more than 1% of it in any given trade in fact.

Our 80% has now become 0.8%, which is still pretty good for a short-term trade, and if we can keep winning or win a lot this could add up to a lot over time. However, there’s also the times when we lose, and that’s going to impact our results a lot.

If we place 100 trades and we win 60 and lose 40, which is a real good winning percentage and one that traders should not expect until they get really good at this, and we’re risking $10 per trade, with an 80% payoff we’ve won $480 and lost $400. So, we’ve made money here but 100 trades take a fair bit of time and it takes a lot longer to become experienced and skilled to be able to pull this off or anything like it.

While we can make good money like this trading binary options, especially if we manage to grow our account to where we can take on much bigger trade sizes than this, the growth isn’t going to be fast, and this is far from a get rich quick scheme.

Among the various ways that we can trade, binary options can be said to be more of a grind than just about anything else, especially when compared to trading that employs high leverage such as futures, forex, and contracts for difference. With leverage, if we have a significant advantage, we can allow this to propel our account size provided that we can manage risk well, which is no small matter actually.

With binary options, we’re talking very small advantages here even with the best traders, and while we may seek to accelerate whatever advantage we have by trading very short term like one minute expirations, it’s harder to maintain an advantage over these very brief time frames because you are trading the noise essentially and time frames like this are less predictable for sure.

Those seeking to make their way with binary options really need to prepare themselves for the long haul and be willing to really grind it out over a long period of time to achieve success. This is not why a lot of people come to binary options trading, as they often will have visions of making a lot of money fairly fast, but it’s usually not very long before reality kicks in.

If we insist on clinging to these notions though, perhaps thinking that if we only get better we will then get to the promised land and see our account balances explode, this can certainly hinder us, as it can cause us to always want to be too aggressive with our trading and take on too much risk. Too much risk always will come home to roost and will knock us down and we’ll end up being knocked down more often than we should and perhaps even get knocked out.

Patience and a willingness to learn can be said to be the two most important qualities of any trader looking to master trading, and this especially applies to binary options traders, who need to be even more patient than the average trader to allow themselves to succeed.

Even though binary options trading is pretty distinct from all other forms of trading, the lessons learned trading them do benefit us when we look to move beyond binary options to other types of trading, and binary options can indeed serve to be a good stepping stone into more potentially lucrative forms such as highly leveraged trading.

There are important lessons to be learned first though. While binary options can be a good place to start, or to start figuring things out better in the case of traders who have tried other forms of trading and have not done all that well, success in trading binary options still requires quite a bit of skill and still presents real challenges.

These challenges tend to be more manageable due to binary options trading simplifying the trading process and while we may find that very appealing, we still need to be aware that this is going to take some real effort to master.

Andrew Liu

Editor, MarketReview.com

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.

Contact Andrew: [email protected]

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