Preparing to Trade Binary Options

When we are looking to get into trading binary options or looking to learn to trade any financial instrument, the first thing we need in place is good trading ideas that at least have a good potential for success.

We’re not going to really know whether a trading idea will work for us over the long run until we test it in real time, and looking back on charts and even backtesting with software will only take us so far. Purely mechanical systems don’t really work all that well or they at least don’t capture the full potential of our trading as we’re always going to be looking to make adjustments to a completely rule based system in order to improve it.

Preparing to Trade Binary OptionsIf we’re looking at past data on charts, we can get a good idea of what may be potentially good ideas to trade, but it’s only when we actually seek to trade them that we can see whether or not these patterns both work out and are ones that we’ll be able to trade effectively.

There may be some psychological issues with trading a certain trading idea for instance and while the idea may manage risk well from a theoretical standpoint, we may still be uncomfortable with the amount present. Perhaps we get edgy when a trade behaves a certain way, gives back too much of our paper profits or goes into the red too much for our liking and we may bail in these situations when our system tells us to stay in.

We may be able to adapt to some degree to these urges and it’s certainly good to learn to be more disciplined and follow our trading plan more faithfully, and this is a lot harder than most new traders think because when the pressure of real money trading is on it does cause a lot of traders to flinch.

The first order of business though is to come up with some profitable trading ideas, and until we get to this point, we aren’t going to be very good at trading at all, and in fact we will lose money. We can’t rely on luck here as there is a negative expectation with a random approach to trading due to trading costs, and we’re going to need to carve out an advantage to exceed this and provide trading profits.

How This Plays Out with Binary Options Trading

With binary options trading, newer and less experienced traders have a big advantage provided that they so not look to trade their positions prior to expiration. The ability to do so profitably is a huge advantage for skilled traders but this is only because they can pull this off well, but if you don’t have the proper skills for this, you will just mess up these decisions and add to your losses.

This is why it is strongly recommended that less experienced binary options traders stick to the one and done approach with their trades. This involves not only not trading them during the life of the option, we should simply avoid trades which even allow this.

The good news is that most binary options trades do not permit selling positions prior to expiration, which will serve to completely prevent us from making mistakes with our trades by exiting at inappropriate times.

There is a lot of skill involved in doing this effectively and more so than the simple buy and watch approach and this is not something we want to even entertain unless we have the skills to pull it off, which means at a minimum being quite profitable with the standard binary options trades.

We’re still going to need to come up with a trading plan that will have us winning these roughly 6 times out of 10 in order to start making some money from this form of trading. While binary options do serve to simplify trading a great deal over trading anything else, this doesn’t mean that there isn’t some real work to do in order to come up with ways to profit from it.

Most new binary options traders start out seeking to trade purely off the cuff, and while very good traders can do this and leverage their vast experience in trading to trade a purely discretionary system, this takes years and no small amount of talent.

If you do not possess this knowledge, skill, and experience, and have it in abundance, then off the cuff trading simply won’t work out very well. A newer trader may be dedicated to learning to trade this way but this takes a long time to master and the price of one’s education, the losses that one will incur while on the path to being profitable trading this way, will be significant.

It is far better to look to devise a set of trading rules that one will follow, at least primarily, and this is felt to be the best approach by a great many good traders. A blend of rules and discretion is ideal, allowing our trading plans to be more flexible than a complete rules-based approach would be, yet still having trading rules provide the foundation and the structure for the trading plan, having it based upon sound trading ideas that work generally but may benefit from adjustment.

Even making these adjustments takes some real skill, as we have to know when a certain rule benefits from being overridden. Once again, the simplicity of standard binary options trading makes this a lot easier, as coming up with a trading plan when you’re not making decisions during the trade and actually cannot do so is going to take discretion right out of the picture, which is a very good idea if you aren’t able to make these decisions well enough.

Trading standard binary options actually ends up being a rule-based system by default, as there is no other option here. The rules are devised, they are applied to trading opportunities, and we then adjust our rules as we improve our skills.

Devising Profitable Trading Rules with Binary Options Trading

We can’t just expect to come up with rules that work with binary options trading without putting a fair bit of thought into this. The amount of thought we’re going to need here to ultimately be successful is quite considerable. Much of this will come from the experience we gain, seeing what works and what doesn’t, making mistakes, and learning from all of our trading experiences.

If we use a completely random approach, we know that for every 100 trades, we will be behind by 12 trades worth of money due to the need to win more trades than we lose, due to the winners paying out lesser amounts than what we lose.

If, therefore, we come to binary options trading with the idea that this will be easy and that we can just use our intuition or not think too much about why we’re taking certain trades and we will somehow see this approach succeeding, we will be in for a real disappointment.

The process of seeking good trading rules always starts out by observing and looking to seek out patters that tend to work more than not and tend to work enough to provide us a way to gain a profit from them.

Once we’ve come up with candidate ideas, we then test them and perhaps tweak them and eventually end up with ones that do work. From there, we may look to further refine and improve these ideas, and learning to trade well is an ever-involving process that even very experienced traders will look to continue to improve over time.

Seeking Success at Binary Options Trading

Being successful at any form of trading is being able to successfully predict the future well enough, based upon past data and past patterns. Binary options trading is no different, and even though this is a simpler version of trading, it still does involve a fair bit of analysis to put yourself well ahead of your typical binary options trader.

This is where we need to be starting, to first work on coming up with some ideas that do work or at least have a reasonable expectation to work in practice. Once we do come up with some good candidate ideas, it is not necessary to be certain that these ideas will work well, but we at least need to be reasonably certain before we put real money on the line with them.

This is why trading on a simulator is so important, and even if we are not concerned about losing money at binary options trading during the learning phase, it simply does not make sense to trade without a positive expectation.

When we do this, we are simply giving money away, and giving it to our brokers. Our brokers will love us for this but we need to be concerned about ourselves and realize that we are looking to make money from this form of trading and ensure that we’re in a good position for that prior to risking our funds on our ideas.

Once we devise good trading ideas and test them out reasonably, which doesn’t have to be for all that long of a period of time, then we may finally be ready for the real thing. New traders tend to greatly underappreciate the time and effort necessary to become a successful trader, and instead think that it will be far easier than it turns out to be.

Depending on our natural ability, we may be able to get to the point where we know enough about what we are doing in a matter of just a few months, but other traders may need more time. The amount of time we need can never be determined our influenced by any lack of patience we may have and we cannot afford to ever rush this unless we are looking to hurt ourselves.

To prepare ourselves well for binary options trading, we’re first going to need to find a good broker, one that is both trustworthy and has good payouts relative to other good brokers. We then need to seek and test out trading ideas which we’ll be using to base our real money trading decisions on once we’re ready.

Finally, we’re going to need to develop the discipline that it takes to put our good trading ideas onto practice, to act upon them in other words. If our ideas are good but we are hesitant or afraid to trade them, we will miss out on these good opportunities and any advantages we have will remain theoretical.

Succeeding at binary options trading is not anywhere near as easy as many people starting out think it is, but with the proper effort and patience we can give ourselves at least an opportunity to see if we really do have what it takes to make it in this game.

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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