Learning any new concept, trading or otherwise, requires a lot of time, dedication, hard work and practice. However, when it comes to financial markets, and binary options trading in particular, most wannabe traders expect to learn everything within a short span of time.
This often leads to incorrect expectations and trading with half the knowledge and skills and, more importantly, not having enough practice time.
Imagine, for example, you were in a plane where the pilot had a similar expectation. Chances are you would not step onto the flight if you knew the pilot was a beginner who thought he knew how to fly a plane because he read a few articles and played a few simulation games.
Trading is no different to learning how to fly a plane or learning a new career for that matter. Having the right expectations is necessary, and being grounded in reality is key to keeping a binary trader’s expectations in check.
So, what are the factors a binary or a forex trader needs to bear in mind when it comes to learning about the markets?
Price action trading
The word price action might bring about interesting interpretations. Most likely, beginners to trading will often frown at this term.
What is price action, and why is it so important for traders?
To begin, price action is the study of price, void of any technical indicators. There are many different approaches to this, from understanding volume and then correlating it to price to identifying the market structure and trading accordingly, and so on.
Price action is often ignored by new traders because they think it is very complex, when in reality, it isn’t. Think of price action as the language of the markets. A trader who spends enough time understanding and learning price action, can also learn to trade binary options.
Price action deals with what the markets are doing and how they behave regarding certain aspects of the financial market. To visualise price movement, traders use candlestick patterns, such as Head and Shoulders, Double Tops and Double Bottoms.
Spending a good amount of time in understanding how price action works can help traders not just improve their trading confidence but also avoid any market scams, such as fake trading systems or false promises of riches.
Think of price action as knowing how the engine of a car works!
Most traders avoid fundamentals because they think it doesn’t matter when trading in the short term. This might seem like a perfect argument. Indeed, why would interest rates affect prices of the markets you are trading over the next minute?
But this couldn’t be farther from the truth. Fundamentals of the financial markets play an important role in the markets every second and every tick!
After all, it is the fundamentals that are the driving forces behind price. So yes, interest rate changes affect price, to the tick, because someone somewhere believes that rates will change and thus buys or sells accordingly.
Learning fundamentals can be a great way for the trader to build a larger context. This means that the trader simply does not focus on whether a GDP report was good or bad, but he or she goes beyond that into analysing how the GDP report plays a larger role in the economy and how this can impact the price of the security or the asset.
Understanding fundamentals requires a bit of work in learning about the concepts, such as the economy, and requires a lot of reading. However, the economic or macro-economic factors are not rocket science and are relatively easy concepts to understand.
While most traders tend to shun the fundamentals, it is essential whether you trade long term expiring options or the very short term expiring binary options as the changing fundamentals play a big role in determining the market sentiment.
A good way to learn about the fundamentals is to keep an eye on financial news websites, such as Bloomberg or CNBC, which do a splendid job of covering the financial and economic news in easy-to-understand language.
Keeping a trading journal
Practice makes a trader perfect, and binary trading is no different. Just like a pilot will likely spend a lot of time in the flight simulator, a binary trader needs to spend a lot of time trading in a demo environment. There are, of course, obvious benefits to this as it helps the trader to become familiar with the markets.
Not only can one learn how the markets work, but a demo trading environment ensures the learning is put into practice and is risk free. But it doesn’t end there. A trader also needs to have a trading journal to record his or her trades. Think of a trading journal as a progress report. It can help you understand your weaknesses and your strengths and build upon them accordingly.
These days there are a number of tools available for traders. Some are free and some are paid, but they make it very easy to keep track of your learning when you are trading. Even professional traders maintain a trading journal to ensure they are always learning something from the markets.
Having a trading journal ensures that a trader can always look back on his or her trades, both winning and losing, and understand what he or she did right and wrong.
As mentioned earlier, a trading journal is like a progress report. The moment a trader starts to ignore his progress, he starts to lose control of his trading journey and potentially sets him up for epic losses down the line.
Having a trading strategy
A trading strategy is like a plan of action. It basically tells you what to do when certain things happen. A trading strategy, therefore, is an essential aspect to your trading success. Think of it as a compass for a traveller out in the wild. Without knowing which direction to go or what to do, it is practically useless.
Most traders spend a lot of time in developing their trading strategy. There are billions of dollars poured into automated trading systems just in an effort to build a robust trading strategy that can make a trader money.
Most traders end up chasing this goal of finding a trading strategy that will make them rich overnight. Sadly, such trading systems do not exist. Finding a good strategy to trade binary options requires a thorough understanding of the markets (fundamentals), the technical aspects, such as the indicators being used, and price action.
At the end of the day, a trading strategy is rather personal and unique, and the sooner the trader realizes this, the better his chances at trading rather than burning a hole in his pockets and buying a holy grail trading system that promises him riches.
Trading is like a business or a career, and the sooner traders realizes this, the better they are at setting realistic expectations in their trading journey.
Most traders fall prey to the advertising tactics from binary options brokers, such a making 85% returns and so on. All of this is possible only when a trader truly understands the various concepts of trading, such as the fundamentals, the technicals, money management and trading strategy.
The bottom line is this: Anyone can trade binary options, but only a few can make profit trading binary options!