Binary Options are high risk – Tips for success and pitfalls to avoid

By: Tom Cleveland

In case you missed it, Binary Options have been the rage for the past few years and have actually been the fastest growing sector of the retail forex trading industry. Yes, you can trade more than single currency pairs with these “all-or-nothing” instruments, but the big draw is the simplicity of the process and the chance to win large returns in a very short period of timing. Does that sound to you like gambling? There are many similarities that cannot be ignored, and the majority of regulators across the planet regard these options as pure gambling, regardless of the investment terms used on broker websites.

Binary Options Trading

The truth of the matter is, however, that trading binary (also called “digital”) options can be fun and quite lucrative, if you stick to a disciplined step-by-step plan. Does that part sound familiar, too? Knowledge, experience, and emotional control are also the keys to success, but if you do not follow a plan that tilts the odds in your favor, you are doomed to join a host of casualties on boot hill. As soon as you fall into the gambling mindset trap, then the House has you right where they want you, and the House always wins.

Unless you are buying and selling on a regulated exchange, as in the United States or Japan, the broker controls every aspect of the binary option business model. He does not pay to win, place or show, only to win. After the race is over, the pot is divided between the House and the lucky winners. The losers fund the entire operation. There is no investment process taking place. There is no market that is rewarding investors. The House manages the odds and determines if you have won or not. If you are to be successful in this exciting genre, then you need to follow the wisdom passed down by veterans and avoid the pitfalls that will hasten your departure and deplete your account.

It is important to understand how the numbers work in this arena. Let’s say that you pick an asset with an 80% payoff ratio and no rebate. Let’s also assume that you follow basic money management guidelines and only risk 5% of your original account balance on each option. If your winning versus losing ratio for ten bets was “50/50”, you would have received 80% of 5% for five options and lost 5% times five for the rest. “Net/Net”, in this example you would have lost 5%, roughly the same odds as if you had bet on “Red” at the roulette table. Binary options are known for their simplicity, but it does come at a cost – 5% in this example. Asset payoff ratios can be much less, too, but to win consistently, you will need to achieve a “60/40” winning percentage or more, not an easy task.

Is it possible to win consistently with binary options? Of course it is, but you have to be patient, disciplined and follow a plan to the letter, while enjoying the process, as well. The following tips, gleaned from veterans that have gone before you, may sound like common sense, but it is easy to be distracted in this exciting medium. If you treat it like it is the latest and greatest form of online gambling, then you can wish for luck to be on your side, but if you want to be an effective trader, then absorb the following advice on how to succeed and how to avoid the many pitfalls that will tempt you along the way.

Winning Tips for Trading Binary Options

1)    Curb your enthusiasm: Why are you trading binary options? Did you choose this medium because you wanted to make a big score? Did you hear that you could make a whole lot of money quickly at this game? Make no mistake about it – When there are high payoffs, there is high risk, much higher than with traditional trading. Asset movements over a short period of time are highly unpredictable, which means that you need discipline and a good trading strategy to win. If you leave it to chance, then be prepared to kiss your hard earned money goodbye. If you are overly excited at the start, then your emotions are playing into the hand of the House, as if you were at a gambling table. Curb your tendency to gamble, and you will have a chance.

2)    Pick your broker wisely: When binary options hit the scene nearly a decade ago, the only brokers capable of offering these new items were located in some far off land, typically a tax haven where casino gambling was legal and staff was available to handle back room operations. If you wanted to trade, your risk was compounded by having to deal with unknown and untested brokers. Today, many new brokers have joined the fray, and traditional brokers have set up subsidiaries to offer these options, as well as cater to your traditional trading needs. There is now less risk, but that does not mean zero risk. Take the time to choose your broker wisely. Start with small amounts and test the withdrawal process. Be wary of promotional bonus commitments and Internet ads that tempt you.

3)    Know your assets: Some brokers offer sixty asset choices. Others may offer over two hundred. Knowledge still counts in this genre, but there will be the temptation to dabble in something else that sounds interesting. Stick with what you know. In fact, you want to research how your asset has trended in the past in order to get some fix on how it might react going forward. You may also want to have one index that you know well for those times when the entire market shifts in one direction. Going long or short in an index can be a profitable way to go in those circumstances. The key point is that your odds are improved when you understand the nuances of how your asset choice behaves, especially when it trends or even ranges for that matter.

4)    Avoid Turbo temptations: Yes, 30 and 60 second options can be exciting, but, once again, if you are looking for excitement, it is the same as “putting it all on Red to win”, so to speak. Predicting if something will go up or down in a short period of time is nearly impossible. At short timescales, technical analysis tools become ineffective. Candlesticks might be helpful, but more time buys you more liquidity and market action, the true determinants that drive market behavior. For this reason, trade only at the times when market volumes are substantial enough to dilute noise impacts. Start with one-hour options to test your strategies and gain experience before trying other alternatives.

5)    You need a Plan: Disciplined trading is all about having a step-by-step plan to guide your decision-making process. Your goal is to pick correctly 7 out of 10 times on a consistent basis. Based on the numbers discussion in the introduction, a “70/30” winning ratio will put you ahead 13% each cycle, not the gargantuan returns that you may have expected, but surely a healthy return on your investment. Losses will occur. No plan is perfect, especially in this medium where technical tools are not nearly as effective as in traditional trading. The odds are still the best when markets are trending, but a study of your asset’s past behavior will alert you as to how it might behave. Patterns do repeat, and candlestick pattern recognition is a must have.

6)    Practice or perish: Most newcomers to binary options jump in with both feet, choosing items at random, based on sentiment gauges or whatever looks interesting on a mini-chart presentation. When their luck runs out, they move on to something else, just one more casualty for the books. As with any other trading modality, your practice regimen on a demo system is the only way to develop the experience you need and the emotional control to survive for the long run. It is here that you test out your strategy for picking winners and learn the patience you will need to succeed. There are no shortcuts for experience – Practice or perish.

7)    Obey Money Management Rules: The simplicity of binary options removes many of the risk concerns that pervade traditional trading, but prudent money management still looms large in the scheme of things. For this genre, a 5% wager of your original deposit balance is the upper limit recommended for any given trade. The reason for so low a figure is that losing streaks will occur, as will winning streaks, but if the former occurs, you want to have the ability to recover. Most newcomers tend to double or even triple down to get back to even, but this tactic is the desperate move of a gambler. Stay with your plan, and leave your ego and emotions at the door.

8)    Overtrading is a sin: It is easy to get caught up in the “buzz” of your broker’s website. Opportunities are coming at you every second. Choices abound. The temptation is to start grabbing right and left, getting as much of your money into the game as you can to profit as quickly as you can. This reaction is called “overtrading”. It will bring you down. Patience is key in this genre, as it is elsewhere. If you are focusing on just a handful of asset choices with a strategy that reacts to trends, then you will be waiting for just the right moment. You will not be grabbing for everything in sight. If the market is moving in your favor, then you may load up to take advantage of the momentum, but only if your plan requirements are met.

9)    Find a good signal provider: No one wants to sit in front of a computer screen for hours going cross-eyed looking for good setups. There are good signal providers out there, but the majority of them are a waste of time and money. If your time is valuable enough to justify this expense, then check with other traders and find one of the few good signal providers in this field.

10)    Control your emotions: Lastly, we have to repeat it once more, “Control your emotions!” Brokers control every aspect of this action. They take their cut, a hefty one at that, and pay winners from the losers in this game. Much of what is offered on their websites is designed to distract you from following your plan or dealing only with assets or option types that you understand. Stay focused!

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