Ten Mistakes to Avoid with Binary Options

Disclaimer: Binary options are not available to European traders

ForexTraders doesn’t recommend trading binary options. See our recommended and regulated brokers that can help traders with their portfolios legally approved, legitimate ways. Nonetheless, here is our advice to avoid binary options mistakes.

In case you had not noticed, Binary Options have been the rage over the last five years or more, drawing new customers, especially from traditional forex trading, as well as from other trading venues. There are several reasons for this sudden popularity. Most newcomers enjoy the excitement of this all-or-nothing trading medium that promises large rewards in very short periods of time. Does this attractiveness sound very similar to the reason why people like gambling? Yes, it does, and therein lays the primary issue that binary option traders need to address at the outset, if they are to be successful. Here’s a look at some of the top binary options mistakes.

For individuals that have already had experience in the trading realm, the draw is also the simplicity of this venue. The steps are easy to understand:

  1. Choose an asset
  2. Pick an expiry time
  3. Decide if the value will be higher or lower than your starting point at expiration
  4. Enter the amount you wish to risk, and, lastly
  5. Execute the order.

Gone are all the complications of Bid/Ask spreads, margin calls, stop loss orders, and best of all – the anxiety over when to close out a position. At the time of execution, you know exactly what amount of money is at risk and what your potential reward might be. You simply wait until your option expires and collect your winnings, or, oops, kiss your money goodbye.

Unfortunately, casualty rates are high in the binary option space, something that no self-respecting broker will ever tell you for fear of sending you on your merry way. This need not be the case, however, if you approach this market the same as you would any other. Knowledge, experience, and emotional control are still the factors for success. You need to understand the playing field, develop a trading strategy, and then practice it on a demo system until it is routine, thereby blocking your emotions from destroying your plans. Discipline, patience, and a cool head will still prevail, even if a few things about binary or digital options are different and require a slightly different approach.

There also can be several pitfalls that you will want to avoid when trading these new instruments. Avoiding these mistakes will not guarantee success, but you will be well advised to take note of the common sense of each tip. As a companion article, we have also discussed ten tips on how to win in binary options trading. If these points are helpful, then please let us know, and do tell us of any other problem areas that you might have encountered. It is always good to share. Lastly, binary options are popular for many reasons, but pitfalls do exist. Avoid the ones below, and enjoy your trading experience.

1)    Beware shady no-name brokers: When and wherever a financial service gains in popularity, unfortunately, you can expect the criminal element in our society and unethical types to flock in droves to fleece unsuspecting consumers at will. If you are to have a favorable and profitable experience, it all starts with choosing the right broker. Many newcomers to binary options, however, have clicked on blinking Internet links that promise immediate wealth with little or no risk. All too often, the broker behind these siren calls are shady operators, hiding behind the anonymity of the Internet and never disclosing who runs them or where they are located. On a positive note, there are may binary brokers that have stood the test of time, reaped industry awards, and developed a large following. During your due diligence, you will obviously run across many of these. Check online review sites or with regulators and other traders for valid testimonials before making your final decision. After your choice, start with small amounts and attempt a withdrawal request to see how that process works. Invest the time in your search, and it will pay huge dividends down the road.

2)    Do not have unrealistic expectations: Why do you want to trade binary options? If you think you are going to make a lot of money in a short period of time, then you are gambling. You have the mindset that favors the broker and his odds, since he only makes money when you lose it. Yes, it is possible to win at this game, but only if you attack it from a disciplined perspective. Do you imagine having 5 to 10 options open at any one time? First, this strategy will require a considerable deposit to survive the long run, and second, the best way to win is when the market is trending, and it only does that about 30% of the time. Binary options do remove many of the complicated parts of traditional trading, but brokers are in the business to make money at your expense. Resist the temptation to gamble at every turn.

3)    Resist the impulse to pick random trades: The biggest mistake made by newcomers to the binary option space is to pick a few positions totally at random, just for the excitement of it all, without any step-by-step plan to guide their choices. Success with this medium requires that you guess correctly 6 to 7 times out of 10. If you rely on intuition, you will fail in the long run. Remember that if you feel like you are gambling, then step back. Take the time to take tutorials, understand the “dos” and “don’ts” of this game. Practice on a demo system until you find a way to achieve a high winning percentage. Follow this logic, and you will not be playing into your broker’s stacked deck.

4)    Know your asset or expect the worst: Trading on hearsay or rumors is another big problem. If you have heard something in the news about a particular asset, then the market has more than likely already adjusted to the news. Predicting how an asset will react in a minute or hour or week is extremely difficult, nearly impossible. How do you succeed? You let the trend be your friend. You have to be patient enough to wait for trending momentum on an asset that you have studied and understand. Invest the time studying how your chosen asset reacts when trending. Does it often overshoot the mark at some point, when investors take their profits? What time of day is the asset most active? Higher volumes lead to more predictability. Again, if you blindly pick options at a whim, you are gambling, plain and simple.

5)    Overtrading can bring you down: Are you constantly active in the market or are you patiently waiting for the best setups before acting on your plan? This may sound like a trick question, but trading too often can be a big problem. The reasons for over trading are never good. Impatience, ego, emotions, unrealistic expectations, the need to recover prior losses quickly, or the need to double your account balance quickly – each of these issues can pressure you into abandoning your plan and resorting to gambling type behavior. Accepting that losses are part of a winning strategy can also diminish over trading. Remember that for every ten trades for a successful trader, 7 trades are winners, and 3 are losers. You have to lose a few.

6)    Never start with Turbo options: There are few things as exciting as winning an 80% return in only 30 or 60 seconds. Predicting quick moves in the market for any asset is nearly impossible, unless you use technical analysis (TA) and candlestick formations to guide your position taking. Beginners tend to go for the quick hit and immediately lose their initial deposit after a few tries. Develop a plan based on TA techniques, and then try it out on a demo system using 1-hour options first. You may want to use even longer-termed options, if you want to take fundamental analysis into account, but reconsider if you are losing sleep overnight over open trades. It is also good advice to stay away from more exotic options (One-Touch, Boundary, Ladder, etc.) until you have more experience and knowledge.

7)    Ignore Money Management Rules at your peril: Prudent money management rules dictate that your position size with binary options should not be more than 5% of your account balance, and that figure is on the aggressive side. If 5% sounds too small to you, it is because you need a buffer for losing streaks, so that you have the remaining funds to get back to a “net” gain position. Let’s put it another way. Assume you guessed correctly on 6 options with 80% payoffs, but missed out on 4. The math states: 6X5%X80% = 24% profit less 4X5%, or 20% losses, for a net gain of 4%. If you had 7 wins, then the net would be 13%, healthy, but not enormous. If you think that you can do better by betting larger amounts and getting lucky by hitting the jackpot, so to speak, then once more you are gambling. Money management rules help you stay in the game. Be happy with gradual progress, or bet and perish.

8)    Avoid scam robot salesmen and signal providers: Once you are into binary options, you will be inundated with all types of offers for strategy development, automated robot trading, and market signal alerts. It may sound harsh, but a majority of these offers are borderline at best and scams at the worst. No one wants to sit in front of a computer screen all day looking for predictable setups, but many of the signal providers out there use algorithms that are wrong as often as they are right. There are a few good ones, but you have to search them out and find confirmation from traders or from a host of review sites. You also want to resist any attempt by your binary broker to trade for you. The goal for the customer service rep is for you to increase your deposit by showing you how easy it is to win. If it were so easy, why isn’t this customer service rep out trading on his on behalf? It is not easy.

9)    Be wary of all promotional bonus offers: The biggest complaints that you will see on Internet sites devoted to binary options have to do with withdrawal requests being ignored. Most of the time, the newcomer has accepted a large sign-up bonus, then lost money, thinks he has been scammed, and then asks for a withdrawal. If you accept any promotional bonus, be sure to read the fine print in the terms and conditions for your broker. Your deposit and bonus will be tied up until you trade a specified number or dollar amount of trades. The broker expects to get his bonus back and then some, if you comply with these terms. The odds favor the broker. If you have complied and still receive no withdrawal funds, then question the legitimacy  of your binary options broker. It may be time for a change.

10)    Keep your emotions at bay: As you may have surmised by this point, there is a fine line between trading and gambling when you jump into the binary options arena. Many brokers try to blanket their websites with investment terminology, but do not be fooled. They want to tempt you to discard your plan and experiment with their vast abundance of asset choices and platform features. The more distracted you are, the more the odds are tilted in their favor. They are appealing to your emotions, which have no place in trading decisions. A disciplined approach is the only way to win at this game. The odds are already stacked against you. Do not expect Lady Luck to save you. She will turn a blind eye, while the broker wins at your expense. At the end of the day, binary options can be a fun and exciting trading medium, but remember to stick to your step-by-step plan and enjoy the process.

More reading:

Binary options trading explained

Binary options strategy

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.