Financial Trading Blunders in Binary Option Trading

Description:

An overview of things that can go wrong with basic trading strategies; what a trader needs to do to avoid the common pitfalls.

In binary options, as with any other kind of financial trading, if you fail to plan – you plan to fail. The secret to success of any endeavor is that the people behind it did not rely solely on blind luck; there is a method behind every madness and those who discover it might as well reap the rewards. Even those who know how to trade in options could benefit from a lesson or two, so here goes:

What constitutes a trading strategy in terms of binary options?

Technically, any kind of a fixed plan whose goal is to achieve a profitable return in a binary options market can be classified as a binary options trading strategy. Some prefer to formulate their own trading strategies, others tweak the existing ones, but the majority simply follows through on a plan that was made by someone else. However, most financial strategies employed across the financial markets are either difficult or impossible to verify, produce accurate and measurable results, to provide any sort of consistency or reliability and are usually highly subjective.

In other words, most of these strategies have yet to be verified, their results are inconsistent at best (or consistently negative at worst), and their success largely depends on the person implementing it as well as their goals and expectations. Every single binary options trading strategy is focused on a particular type of asset, the time when it is best executed as well as the manner in which funds are invested. That means there are at least three things that could be inherently wrong with a strategy:

Murphy's Law

It could be that you are applying it on the wrong kind of financial instrument; some strategies are more suited to stocks than, say, commodities. Or a forex trading strategy, which may translate into a successful binary options trading strategy with minimal tweaking may also prove disastrous. It is not just about knowing how to trade in options; you also need to know which options to trade and even when.

On that note, certain strategies simply work better under certain conditions, while others may not work at all. Figuring out the best timing and only trading when the conditions are favorable is one of the safest methods to succeed in binary options trading.

Finally, we come to the least objective thing on this list: money management. Knowing how much to invest and when to quit are quintessential in this line of work. You could be employing the best trading strategy known to man and losing money because you can't manage your cash. The other flaws are more closely related to the particular type of trading strategy.

Types of strategies in binary options trading

There are many ways to trade binary options and still adhere to a general plan; you can rely on fundamental and/or technical analysis to predict future price movement. Or you could come up with your own strategy and test it on a demo account or trade on a small scale and analyze the results; both of these are difficult and time-consuming, but what you would end up with is your very own, custom-made trading strategy.

If you choose to adapt one of the existing types of strategies, this is what you need to have in mind:

First of all, swing trading strategies are next to impossible to apply on binary options, so don't even try. Binary options are usually not something you can sell when the price is right, and no, early close feature that some brokers offer is not the same thing. Day trading strategies, on the other hand, just might work. Unlike the former, they involve methods to predict price movements within the same day, and can be applied to a reasonable extent.

News Trading and various trading signals should be regarded as helpful but to base a large portion of your funds on something like that is risky at best. Of course, taking into account the scheduled events and predicting possible outcomes might come in handy, and having a piece of software monitoring the markets on your behalf could also be beneficial but that is about it.

Conclusion

In order to avoid the common mistakes that can arise from a bad trading strategy, it helps if you could analyze its performance or better yet – test it in advance. This would not only save you a lot of money and nerves, but also help you work out some of the kinks before they even set in. Luckily, most demo accounts are very realistic and free, so they are a perfect method for this kind of activity.