Binary Options, or any other type of financial trading, should never be taken lightly. Yes, the nature of binary options seems very easy – traders predict if the price will go up or down and trade accordingly. However, there are many elements that have to be taken into consideration in order to make a profit: not only brokers, platforms, analysis, but psychology as well. When it comes to binary trading, it is easy to forget that humans are emotional beings and that very often we rather act based on our emotions than on common sense.
Making good trading decisions is directly correlated with our emotions at the moment the process of trading is taking place. Very often, it is considered that emotions are one of the biggest enemies of every trader due to their extreme influence.
Financial Markets and Human Behavior
Everything that happens in financial markets is a result of human behavior. If we put natural disasters aside, everything else that influences the market movements can be described as human factor. Luckily, humans are creatures of habits and thanks to the market movements in the past it is possible to predict movements in the future, as well.
One of the phenomena of financial markets is round numbers, and how attractive they are to traders all over the world. Round levels like 100 or 1.50 are extremely attractive, and many traders can’t resist trading them. It is believed that round numbers are easier to understand and much more convenient to use. For example, people say they spent $1000 on a computer, but in fact, they spent $999. Both numbers have their psychological aspect of using: $1000 is much easier to perceive, but $999 on the price tag seems much smaller than $1000.
Financial levels visible on charts are a usual feature, and it was noticed, that when the price is approaching a certain round number, there is a higher chance that traders will act. Once the level has been reached, the market will move more and faster. Traders who know that price rarely breaks that important level can easily deceive their emotions and perception and avoid unnecessary or unprofitable investment. For example, when there was a level 100 on USDJPY, it failed to break on the first attempt.
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Personal Control – Important Factor in Binary Trading
Round numbers are very attractive to both traders who are selling, and traders who are buying binary options. But, traders who don’t have enough patience, will probably never profit not only from round numbers but from other strategies as well.
Binary Options Overtrading
Let’s say a trader loses a trade. The prediction was simply wrong, or the market took an unexpected turn. It is in human nature to try and compensate for the loss. So, in most cases, the trader will place another trade, often furious, mad and without proper analysis. Often will happen that the trades placed afterward will be a complete failure. Why? Because trader allowed emotions to control him rather than common sense.
This behavior is often known as overtrading and is considered to be one of the biggest sins in binary options trading. When emotions take control, a trader usually places more trades than originally planned, but that’s not all. In most cases, the trades aren’t executed properly and are placed without prior analysis.
Overconfidence in Binary Trading
There is another effect similar to overtrading, and it is overconfidence. Overconfidence usually happens when the trader is on a winning streak. Trader profits from the first trade, the second, the third – and the self-esteem only grow. Soon, the trader feels invincible. Confidence gives trader enough courage to place even more and more trades, as he is convinced all of them will be successful.
Of course, this is also a type of overtrading, and what is interesting is that it often interacts with the first type. Sooner or later, the trader will lose a trade, as lost is a part of binary trading just like a win. In that moment, overtrading can go in other direction, as the trader will be desperate to gain the lost investment again.
Conclusion on Psychology in Binary Trading
Of course, keeping a cold head is much easier said than done. As emotional beings, humans find it hard to admit they were wrong and accept the consequences. It is very important for binary traders to be realistic and aware of their personal flaws before they start trading, as this is the only ways to prevent mistakes and unprofitable trades on time.
Also, traders should utilize all features and tools that are often provided by the broker for free. For example, sell feature allows traders to sell binary options that seem unprofitable. There are also rollover and double up features that can help the trader to be more profitable.
Probably, the most important tool for successful binary trading is investment plan. Every trader must be aware of the fact that trading without a plan is rarely profitable. A good investment plan can help traders to remain rational even when it seems that all markets are against them. It can also prevent them from overtrading or force trading.
Also, traders who accept education as essential part of binary trading will rarely get under the influence of emotions, as they know the importance of analysis. While doing the analysis, traders can cool their head and make rational decisions that will help them gain more long-term profit.