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Psychology and discipline in binary options trading

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Binary options trading
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Lesson 9

No matter what type of job you do, having the right frame of mind is an important aspect that will determine how well you succeed. Binary options trading is no different from any other job, and trading psychology and maintaining discipline go a long way.

Building a successful trading strategy requires patience and hard work in your trading journal.

Many traders tend to focus on trading indicators to make a profit within binary options, but in fact, most of the winning and losing is done in your mind. It is essential to understand trading psychology, and discipline plays a significant role in your binary trading strategy.

The illusion of easy money

The human mind is a powerful thing, and when you combine emotions and money, you can expect one of two things. You can either end up being extremely profitable in your financial trading, or you can end up making very expensive mistakes. Neither of these extremes are preferred in most cases, and in order to make consistent profits with binary options trading, it is in the trader’s best interest to have a balanced mind.

Most traders tend to focus on finding a profitable trading strategy. Some even go as far as to pay high sums of money chasing out of the box trading strategies for binary options and even signal services. It is not surprising, then, that there are so many websites and services that claim to make you rich without any effort from your end. The truth though is far off from what is advertised, and more often than not, the trader ends up at square one, his or her wallet a few pounds lighter.

Now, if you had properly dedicated some time to your trading, including building the right mindset, things would have been completely different. That is one aspect of this because everyone wants to get rich without putting in any effort. Ironically, traders who want to get rich quick actually end up losing more money and some questions arise.

How can a trader build a mindset such that he or she has the right approach to trading?

What could a trader do to combine common sense and stay present into the real world?

You shouldn’t ignore the obvious signs. This problem is often seen in automated trading systems. It is known to be one of the major drawbacks of using auto-trading robots.

Trading psychology is a vast subject, and interestingly, considerable research on the topic has been done. One famous name that often comes up when talking about trading psychology is Dr. Bret Steenbarger, the author of the famous book “The Psychology of Trading.”

In addition to Dr. Steenbarger, another big name who contributed significantly to trading psychology is James Douglas, who wrote the famous book, “Trading in the Zone.”

Avoid trading mind traps

Do you ever feel confident after making a few winning binary trades, and then you start to pick the short term (60-second) expiries and trade on impulse? Or have you had some losing trades, and then you get into revenge mode and end up trading blindly, ignoring all your trading strategies and plans?

These mind traps are small “black holes” that a binary options trader can get sucked into quite quickly, especially after having a series of winning or losing trades. Very often, these periods can quickly result in your trading funds being liquidated. It is easy to simply tell the trader to walk away from his or her trading terminal, but in reality, this action is difficult.

Trading mind traps can be dealt with when a trader has a good trading system and is disciplined in his or her trading approach. Knowing when to call it a day is just as important as knowing when to make more from the markets.

It is exactly for this reason that expert advisors and automated trading systems have become popular, for the simple fact that these automated bots do not bring emotions into the picture.

Acknowledging emotions

To acknowledge your emotions is one of the keys to building a strong trading psychology. One of the most significant factors that play a role when emotions are involved is not fully coming to terms with your emotions.

For example, traders hate to be wrong, and at times, this is reflected in their bias toward a trade that is already losing. In trading terminology, this is called being married to a position, and the binary trader finds it difficult to shift his or her point of view.

Fear and greed, as one might have heard, are the two most common human emotions when it comes to trading. Fear of the markets makes a trader cut his or her winners early or invest the smallest amount possible on all trades, thus making no decent profits.

Greed, on the other hand, involves risking too much on just a few trades without doing proper analysis. The emotions of greed and fear are bad when used in the extreme, and the sooner traders realize this, the better it is for them to deal with.

How to create a trading plan to be disciplined

Creating a trading plan is one of the most basic, yet important, cornerstones to one’s success in trading, regardless of whether you are trading forex or binary options.

There are some major benefits to having and following a trading plan, one of which includes knowing when to stop trading and when to take your profits and leave the table. Trying to trade without a trading plan is like going to a poker table at a casino with tons of chips without knowing the rules of the game.

Without a plan, the poker player most likely will end up losing his money as other smart players around the table can instantly sense a weak player. No wonder it is often said that if you cannot spot the sucker at a poker table, then it’s most likely you!

The same goes for binary trading as well. You can start trading with $5000, but it doesn’t make any sense if you don’t have a trading plan.

So how does one create a trading plan?

The first step is having a trading strategy. You cannot plan without having the right tools, and a trading strategy in this aspect is your tool. You can choose any trading strategy that you are familiar or comfortably with. It doesn’t really matter as long as you follow the trading strategy’s rules to the letter.

Typically, a binary trading strategy should broadly have the logic of buying CALLs or PUTs based on the outcome or the signal sent from the strategy. Now, most traders tend to apply this across all instruments in an effort to make more profits quickly.

Having too many open trades at the same time can be disastrous as you will sooner or later end up making mistakes and poor judgment calls that will result in expensive lessons for you. A daily trading plan should include the following aspects:

  • Do your deep analysis on the charts
  • Check the economic calendar
  • Create a list of potential daily trades
  • Select trading ideas with the highest probability
  • Settle for two or three trades
  • Write down the reasons for successful or lost trades

Binary options trading might be advertised as being simple, and many times, traders are lured by the quick payouts one can make. However, one should remember not everyone can make profits and definitely not overnight.

If you fall into the quick money trap with 60 second trades, you will soon realize it is impossible to do a proper analysis.

Successful binary trading requires patience and applying your skills, which can only be developed by following a good trading plan and having the right mind set or psychology to trade.