The psychological aspects of trading binary options

Trading binary options successfully obviously requires a strategy which has an ‘edge’ and can be proven, over time, to perform successfully against simply selecting random higher or lower options. Equally important, however, is the way that a trader psychologically approaches the trade. Even the most successful investors say that in order to succeed a trader needs to master the psychological aspects of trading binary options. Initially, this can seem as though it is the simply a case of being executive in trading decisions to invest, or not, in any trading opportunity. However, there are other fundamental aspects to the psychology of trading binary options which also have to take into consideration once the options have been purchased.

Acceptance of being a binary options loser

Beyond the simple decision to invest in a trading opportunity, using a chosen method or strategy, a trader will need to consider the worst case scenario of facing a loss. Luckily, for binary options traders, a price movement in the opposing direction does not increase the losses that will occur and which have already been pre-determined before the purchase of the options. This essentially means that a trader should not be so emotionally attached to the trade as watching a forex trade accumulate a huge loss. Nevertheless, watching price move hopelessly in the opposite direction before expiring out of the money can initially be a depressing scenario for all new traders.

The temptation to try to claw this loss back with an unplanned gamble shortly after the binary options expire out of the money is a classic response which also often ends in failure. Rather than allowing it to determine your emotional state, a trader should instead take the loss as one of many which all methods, setups and systems will endure. Rising above this, knowing that the method or system employed is a winner over the longer term, will improve a trader’s ability to trade both rationally and profitably although this is often easier said than done. Those traders who are consistently successful understand that losing will be frequent, as long as the winning occurs even more frequently.

Temptations to use broker tools

Most binary options trading platforms have introduced new tools for traders beyond the traditional binary option format. Although many of these are marketed as tools to ‘assist’ the trader, some of these have been designed to take advantage of the psychological elements of binary options trading. One example of this is the ‘close early’ feature offered by many platforms and which allows binary options traders to expire their options for either a partial loss of profit. Although, on the face of it, this seems like a very useful tool, it creates a psychological dilemma for traders who are holding profitable positions.

Closing early taps in to the uncertainty and fear of incurring a loss from a profitable position but at the same time undermines both the trading strategy employed by the trader and the profit-to-loss ratio over time. If all trades are closed before reaching their predetermined profit target then it is very likely that the value of in the money trades will be significantly lower than out of the money losses. Platforms already know that by offering the temptation of early closure will require that a trader will have to also increase their frequency of winners in order to be profitable. Over time this will almost certainly benefit the binary options broker over the trader.