Binary Options Trading Psychology

October 27, 2015 2:08 pm

Mastering trading psychology can help traders boost their profitability as well as avoid costly trading mistakes in the market.

The binary options market is a perfect analogy of a wild jungle. A trader can perform proper market analysis, have a clear trading and money management strategy but his emotions can still upset his plans. There are various psychological traps in the market that traders ought not to fall into. To achieve this, traders would need a great deal of discipline and self-control.  Many binary options brokers, such as Banc De Binary, offer a wealth of information on the psychology of trading as well as how emotions can impact the end results. If you want to be a successful trader, it is vital that you have a clear understanding of what role your mind set plays in the outcome of your trading journey.

Here are some of the psychological factors that affect traders and how they can overcome them:
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Traders usually tend to attach their thoughts and decision making criteria to a particular reference point, although there might not be any obvious relation to the current situation. For instance, a trader may place a Put order on the EURUSD currency pair because it has risen sharply higher while a dominant downtrend is in place. Such a trader may be anchoring his thought on the common market axiom ‘sell on strength and buy dips’. While the trade can become successful, this strategy is very flawed because such a spike in price may also mean that fundamental factors for the asset may have changed and a trend change may be in progress.

To deal with anchoring, traders must ensure that any trading decision is made after thorough research and analysis (both fundamental and technical) has been done. This would ensure that all factors that affect price movement have been analysed and trading decisions are not made based on a hunch or intuition.

The Availability Bias

This behavioural bias is mostly exhibited by traders who employ a news trading strategy. The binary options market is one of the most efficient markets around as it reacts to economic news releases strongly. A news release impacting on an asset will be priced in the market instantly and in some cases, even earlier before the release itself. Some traders usually place orders solely based on economic news releases. For instance, after the US Federal Bank releases favourable employment numbers, investors can expect the value of the US dollar (USD) to rise. A trader can then place a Put order on EURUSD based on this expectation. Sometimes, such a trade can end up being a loser. Prices may surge lower and reverse sharply within seconds or prices may react completely negatively to the news.

To curb this bias, traders should always analyse the market sentiment ahead of a major news release. Market expectation ahead of a news release affects the price more than the news itself. Traders can gauge the market sentiment by studying price action prior to news releases. Traders should also adopt a long term view of an asset and evaluate the likely impact of impending economic news releases as well as the extent to which such news have been priced in the current rates.

Gambler’s Fallacy

The binary options market is not a casino and trading is not game. Yet, some traders usually approach the markets with little knowledge and understanding and still expect to make lots of money. Such traders usually have a skewed understanding of the price behaviour and probabilities in this market. If a trader’s strategy has a winning rate of 60%, it would mean that the trader can expect to win 6 out 10 trades he places on the market. So, after placing 5 trades which all end up as losers, a trader begins to expect that a winning trade is ‘around the corner’. This is what is known as the Gambler’s fallacy. Traders affected by this psychological mind-set usually believe that every losing trade is bringing them closer to the eventual ‘jackpot’. Another example of this phenomenon is a trader who places a Call order in a market that has fallen ‘too much’ because he views further declines as improbable.

Such traders should understand that the market is random and does not owe them anything. For the trader with a 60% winning strategy, the odds of winning the next trade will always remain whether the previous trade was a loser or a winner.

Fear and Greed

Fear and greed are the two most common emotions that ruin the trading activity of binary options traders. Greed is the excessive desire of more money than you can realistically attain from the markets. It is a natural human emotion as everyone always tries to do better or get a little more all the time. Nonetheless, this emotion can cause traders to commit costly trading mistakes in the market. Greed is linked to trader ‘sins’ such as overtrading, taking low probability trades and risking too much in individual trades.

Fear is the opposite of greed and it is also a natural emotional reaction to what humans perceive as a threat. In the markets, traders fear failure; missing out on big trading opportunities as well as losing a trade or their entire capital. This fear can keep traders from exploiting trade opportunities that meet their set criteria.

Being human beings, fear and greed are natural emotions to traders. Traders cannot keep these emotions out of their trading activity but they can harness them to their advantage. For instance, a trader who is fearful can liquidate a trade that was taken irrationally or without following his rules by using the Early Close feature available in platforms such as Banc De Binary. This feature allows traders to exit their positions before expiry for a small loss or profit.

Final Word

Successful trading is not only hinged on technical competence but also in mastering trading psychology. The secret to success in trading begins with you. Understanding your personality and psychological profile will give you the mental edge needed to succeed in the dynamic binary options market.

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