Of course, there are no keys to success in trading. Otherwise, everyone will be trading online, working from home and making millions without sweating.
We don’t live in such world.
There is no secret formula or absolute strategies to predict financial market moves and make money. There is not a single set of steps you can follow to achieve success with trading and with binary options.
Nevertheless, there are a number of rules and personal disciplines you can work on to maximize your chances of success. If you follow these rules, you may not become a millionaire overnight but you will avoid many of the mistakes made by binary option traders that end up broke in no time.
The road to success is long and difficult. You will have to keep learning about binary options and financial markets while applying the guidelines and risk management tips explained below. It takes time and mistakes to become good at something. It is not linear. You will have periods of euphoria and periods of depression but if you stick to it, you will become a successful trader.
- 1 1. Take time to Learn the Ins and Outs of Binary Trading
- 2 2. Ensure Proper Money Management
- 3 3. Practice Proper Risk Management
- 4 4. Work on Your Trading Psychology
- 5 5. Keep Your Trading Strategy Simple
- 6 Stick to this setup and adjust it until it works – Make your trading simple
- 7 6. Avoid the Most Common Binary Trading Mistakes
1. Take time to Learn the Ins and Outs of Binary Trading
When you don’t know anything about financial markets and binary options, it’s rather difficult to know where to look for advice and tips. But if you really want to learn about binary options trading, there are plenty of freely available resources you can use out there on broker websites.
We believe that the most efficient way to learn something is to get your hands dirty: learning by doing. Of course you will need to learn the theory about financial markets, in order to understand how financial asset prices are fixed and which kind of factors may impact a specific asset class.
But when you are done with the basic theory, you will need to learn by trading. Most binary options brokers propose demo accounts once you’ve made your first deposit. That way, you can try different strategies on different assets with different option types without any risk on your capital and you can get a better understanding of each product and each feature. Moreover, all our recommended brokers propose different educational tools to help you start with binary options trading, such as:
- Ebooks / manuals
- Educational videos
- Seminars or webinars
- Risk-free demo accounts
- One-on-one training with a trading advisor (this king of privileges may only be available for VIP accounts that require higher initial deposits)
As we mentioned above, most of these educational tools are freely available and we highly recommend you to have a look at them before you trade with any broker. These tools may help you avoid the typical mistakes made by binary option beginners but also provide you with some useful tips regarding the implementation of basic trading strategies. In our article “Binary options definition – explanation and example”, we already presented you with the key things to know about this financial instrument. Some of the educational tools listed above and detailed below may go further into details and be more appropriate for those that already have a good understanding of financial markets and binary options.
Learn with binary option ebooks
An ebook is a downloadable manual that will present you the most important characteristics and features of binary options. Each broker proposes its own ebook and may also introduce the different functionalities of its trading platform in the manual. We will learn about binary options characteristics, order management, risk management, trading functionalities (early closure, rollover, double-up…), trading strategies… Anyoption and Topoption both offer 5 ebooks for free, you just have to login with our name and mail details to access them. 24option also proposes a 25 page ebook and many FAQs to help you better understand the specificities of binary options as well as an interactive ebook that makes reading about binary options a more fun and exciting experience. You don’t even need to login to access the 24options’ educational center.
Learn with educational videos
Videos are by far the most popular method for traders to learn about binary options and for brokers to present the different functionalities of their platforms. These videos typically include simplified diagrams that simply explain how binary options work as well as order styles and platform tutorials. Videos are extremely popular among beginners that get to visualize certain concepts that are difficult to understand without illustrations and examples. All our recommended brokers propose an extensive library of interactive and educational videos to help you learn while using real examples of trades and strategies. OptionTime proposes more than 20 different videos ranked in 3 different categories (trading basics, options trading and advanced courses) available for free that will enable you to learn things that are appropriate to your level.
Learn with seminars and webinars
Not all brokers are able to offer such advanced learning tools. A webinar is an online event that is hosted by a broker and broadcast live to a select group of individuals via the Internet. It means that a professional trader will host the event live and will be able to answer your questions.
It is not a simple video that everybody can watch, it is a tailor-made event that is broadcast live via video software. You can see it as an interactive workshop where you will be able to follow the instructions of the professional trader hosting the event. You will definitely have to login with the broker to access the webinars but you may not be required to deposit anything. 24option and Anyoption are the best in this field with weekly webinars on diversified themes (introduction to binary options, fundamental analysis, trading strategies…)
Learn with risk-free demo accounts
As we mentioned it in our introduction, we believe that a demo account is the most efficient method to learn about binary options. You can try and implement different strategies and learn to use the broker’s platform and its specific features without any risk on your capital.
Don’t hesitate to have a look at our detailed reviews of each of our recommended binary options brokers and use our secured links for additional benefits.
2. Ensure Proper Money Management
So what is money management? Money management represents a set of investment rules or discipline. And it is absolutely essential that money management becomes an important aspect of any of your binary options trading strategies.
Advanced money management skills allow you to properly decide on the level of conviction and amount you are ready to allocate to a trade. If you don’t follow strict money management rules, chances are that you will lose all the funds in your trading account without learning anything.
Money management is a trading discipline
As we repeated it multiple times on the website, you cannot win on every trade. Even the best traders on the planet don’t make money on every trade. They just have a bulletproof money management discipline. It means that they will likely lose a little amount of money on many trades but compensate with huge profits on few trades.
Inexperienced traders are always tempted to let their losing position worsen in the hope that the market will bounce, and to cut their winning position too early to cash in the achieved (albeit lower) profit made. This is because trading involves both money and emotions.
The financial markets world is a stressful environment and money management rules are designed to deter you from following your emotions blindly. It is the discipline that will prevent you from trying to go all in to make up for your losses after a string of losing trades.
Practical rules of Money Management for Successful binary options Trading
There exist no fixed Money Management rules. These rules will depend on your trading profile, your risk aversion, your available capital, the financial instrument you use… Nevertheless, it is possible to draw general guidelines to improve your money management when trading binary options.
For example, you should have a fixed number of trades a day you are willing to execute. Be it 1, 2, 5 or ten, you need to have a number in mind that you must not exceed. Most of the time, traders are tempted to reopen a new trade after a loss. A fixed number of trades can help you avoid bigger losses through trades that are only driven by emotions.
Number of trades and trade sizes
As explained below, you should set yourself a limit of trades per day to avoid over-trading. You also need to set yourself a maximum amount per trade that you should not exceed. This maximum trade size can be determined nominally ($10, $25…) or as a percentage of your capital (10% of your capital, 15% of your capital…).
We personally prefer to determine it terms of your available capital as the limit remains proportionally the same whatever the amount you have on your trading account.
Another risk with trading is to disproportionately increase your maximum trade size if you start to make money. A fixed percentage of your capital will help you keep the same risk exposure compared to your available capital. You should thus look for the binary options brokers that are proposing the lowest minimum trade size to be able to split your transactions if you only have as small available capital.
Another technique a binary option trader can use is to alter the bet size based on the payout and volatility. For example, short term binary options (30 or 60 seconds) would require a smaller bet size as the payout is smaller and the volatility is greater than a longer term option.
Combined money management rules
Once you have determined your money management rules, you can combine them to follow your own discipline. You will then be able to focus on other important aspects of trading such as asset specific trends or advanced strategies. Your money management only determines the path you should follow and help you keep a cold hearted relationship with your trading. Find below two examples of combined money management rules:
- Example rule 1:
Risk 5% per trade – $200 account, risk $10 per trade
Only 2 trades per day
- Example rule 2:
Risk 2% of account per trade – $1000 account, risk $20 per trade
Stop trading once 5 losses made on same day (10% loss)
Stop trading once 3 wins made on the same day
Eventually, don’t worry too much about the losses you incur, especially in the beginning. That’s when you’re still learning the ropes and making mistakes. Remember, you don’t need to be correct with your price predictions to be a profitable trader. The key is to learn from your mistakes. This is how you will build your own money management discipline.
3. Practice Proper Risk Management
Risk management is the most important aspect of trading. Especially when trading binary options that are highly speculative financial instruments. Most traders and members of the website team believe risk management is a more important aspect of trading then the actual strategy you implement.
It is a common mistake for traders to overlook the risk they take in their pursuit of high and quick profit. Most of the successful binary option traders lose on 80% of their trades, but they manage their risk to lose little on these trades and make sure they more than offset their losses with high profits on their 20% winning trades. Here, we look at 3 important rules to help you become a better trader and manage your risk.
Asset diversification is the key to risk management
You should never see trading as the sole pursuit of high profits. You should always see this activity as a trade-off between risk and reward. As such, a simple way to manage the risk of your portfolio is to diversify it. Binary option is a good instrument to diversify your risk as most brokers offer you the possibility to invest in different asset classes and different underlying assets within each class.
Strategy diversification can help you improve your risk management
It is always a good thing to concentrate on one strategy type and improve it until you master every factors of it. Nevertheless, binary options types cover large range of strategy and scenarios (uptrend trading, range trading, one touch trading…). You should always try to use as much different binary option types as you can in order to hedge your portfolio against multiple market scenarios.
Build a trading plan and stick to it
Most traders who lose money never follow their trading plan and try to make up their losses by adapting their strategy to the market. For every transaction you open, you should have a strong conviction about your market scenario and stick to it whatever the evolution of the market. Discipline is the most important skill a trader can possess. You should never open a position when you are not confident about your view and when risk is too high. The ability to stay out of the market and wait for the optimal opportunity is another extremely important skill for successful traders.
4. Work on Your Trading Psychology
Psychology represents a key aspect of trading. The best traders are the ones who are able to let their emotions aside and trade with discipline whatever the market conditions and whatever the mark-to-market of their positions.
The psychology of trading intends to analyze and rationalize the trader’s emotional responses to the events in the market and in their holdings. The three most commonly spread emotions amid investors during the trading process are the followings: Fear, panic and greed.
Fear and panic are the most dangerous emotions of the trader psychology
Fear and panic are responsible for more than 90% of inexperienced traders’ losses. They are mostly experienced when a trader makes a series of unsuccessful trades and is anxious to make up for lost ground immediately. This is the worst reaction a trader can have and this reaction is closely linked to the investment psychology.
Remember, if you want to be a successful trader, you need to have a trading plan and stick to it. Binary options traders are less impacted by fear and panic. With binary options, you cannot lose more than your invested capital. That is a great advantage of binary options compared to most financial instruments (forex, CFD, warrants…). Nevertheless, fear and panic can still happen when the market is going against one of your open positions or after a series of losing trades.
To avoid these emotions, you need to have clear levels in mind (entry level, take profit level and stoploss level) and stick to them. Another way to resist these parasitic emotions is to think in terms of acceptable losses rather than targeted profit. Whenever you reach you loss threshold, you should stop trading for the day and let these emotions express elsewhere than on the trading floor. Always improve your trading risk management by not risking more than 20-30% of your account capital as maximum exposure. This is why you should always look for brokers that proposes the lowest minimum investment /trade size levels.
Greed is good but greed can wipe an investment portfolio
Greed is emotion that makes trader cut their winning positions to early in order to cash in a certain (albeit smaller) profit and that makes trader let their losing positions open for too long hoping that the market will finally adjust in their direction.
Greed is responsible for a fair share of missed profits and unexpected losses. Greed will fuel the temptation to cover up ground using the Double up or the Roll over functions provided by binary options broker platforms. These functions should not be used to cover up a series of losses but should only be implemented when they fit your initial trading plan.
Once again, there is an advantage to use binary options compared to most other financial instruments, binary options have short maturities. Your trading plan can thus be quickly confirmed or infirmed.
Psychology plays a major role in all forms of investment activity, causing a consistent need to keep emotions in check. This can be a tough task when money is involved, but it can be accomplished by establishing and sticking to a set plan of action. Those who precisely plan out their trades in advance, based on both fundamental analysis and technical indicators, and who stick to them tend to earn more than those who do not on average.
5. Keep Your Trading Strategy Simple
This is one of the most used quotes in financial markets. It is posted on every specialized website, forum and we might even have used it before here on prior articles.
The key to make money on financial markets would be to Keep Your Trading Simple. But what does this really means and how to efficiently follow this rule? This is what we will try to cover here.
We hope that it will help you on your daily trading activities, that it will improve your performances and that it will teach you how to Keep Your Trading Simple. When someone says “Keep Your Trading Simple” we each tend to think of something slightly different because we all have different trading experiences, we all have different favourite indicators… Nevertheless, there exist general rules that anyone can follow to keep its trading simple and improve its risk-reward ratio.
Simple means that you first need to follow simple steps
Each trade must involve a set of steps that you need to follow methodically. The transaction must be triggered by a strict number of rules that you need to define yourself. It can involve the coordination of different indicators meeting certain conditions (RSI lower than 30 and MACD cross from below triggering a BUY order for instance), or the underlying asset crossing a specific level (a specific moving average or a specific resistance).
Once this set of steps is met, you need to trade whatever the external conditions. So keeping your trading simple means you have defined a set-up. Something that you have previously determined needs to occur in order to trigger the opening of a trading position.
If you want to keep it simple, define a basic setup as well as a trigger level and stick to them. It may take some time and work to find a setup and a strategy that generates profit, but it must be done. This is the only way to be able to build simple and reliable trading strategies.
Determine a time horizon, a target and a maximum loss level
Now that you have setup that identifies simple trading opportunities and a trigger level to open the position, you need exit levels in terms of profits and losses as well as a time horizon. If your setup has been built to identify short-term trends, use short maturities and vice-versa. Binary options with longer maturities are mainly used by fundamental traders that try to speculate on longer trends. By definition, traders tend to use far price targets and close maximum loss levels. When the setup identifies a trade opportunity, it is always better to benefit from a large upside until the next price resistance and risk a small downside until the next support. If a setup looks like it could form, you need to begin to consider what type of expiry you would choose if this setup turns into a trade. Confirm your decision so that if the price hits your trigger you can act without hesitation.
Stick to this setup and adjust it until it works – Make your trading simple
Keeping once trading simple also means that you need to resist the temptation of constantly switching strategies, assets or targets. Trading is an experimental process. You need to test your strategy and your setup, improve it constantly and learn from your mistakes and losses. Only through this process will you be able to isolate the wrong parameters and build both an efficient trading setup and profit generating trading strategies. Focus on a single trade setup, isolate a trigger and establish guidelines for how you will exit.
So this is how you keep it simple. Keep your trade set-up limited to a couple criteria. Then define what your trade trigger is. Set up a target price and a maximum loss level. Do it over and over while adjusting the parameters until it becomes efficient.
All our recommend binary option brokers will propose you advanced tools to manage your risk and keep your trading simple. From binary option builders to post-trading functionalities, all these tools will allow you to improve your trading strategies and generate higher profits. Don’t hesitate to have a look at our reviews of the best binary option brokers in Europe and benefit from our special binary option bonus offers with multiple brokers.
6. Avoid the Most Common Binary Trading Mistakes
Being a successful trader requires a lot of different skills (patience, curiosity, discipline…) and years of experience. Even thought it is difficult to identify the precise characteristics that make you a successful trader, it is quite easy to identify the main mistakes that unsuccessful traders repeat over and over.
We have been trading all sorts of instruments on all asset class over the last ten years and there exist common mistakes that you should definitely try to avoid if you want to make money with binary options.
There is no magic formula that you can follow to become a successful trader. It all depend on your strategies on the specific assets you decide to trade and on the self-discipline you will apply to your trading plans.
Mistake 1: Don’t try to trade all assets and implement different strategies
You should try to focus on one asset and one strategy and improve it the best you can while taking into account the mistakes you do along the way and learning from them. It is important to be flexible when trading binary options, however, you should try to gain experience in one specific area to be able to accurately understand the relevant factors and opportunities. Successful traders are able to show patience and perseverance and stick with their trading plan. If you constantly jump from one strategy to another as soon as you start to generate loss, you will never be able to fully understand your mistakes.
Mistake 2: Don’t try to make trends happen but follow them
No trader is able to sell the top and buy the bottom of a trend. Successful traders try to identify trends with fundamental and technical analysis. Once their scenario is confirmed, they simply enter the trend while it has already started and just follow it. Timing is the single most important factor for binary options trading. There exists a thigh line between entering too early and hesitating for too long. Try to choose one asset available with binary options and follow it until you are able to understand and identify trend confirmations. This is the only way to effectively improve your timing.
Mistake 3: Perform your due-diligence and wait for strong conviction
Successful traders are able to show their true skills after a sting of losses rather than a string of profits. Successive losses can quickly dent a trader’s nerve and motivate him to open positions without convictions. You should definitely try to resist this matter of fact. You always need to show strong conviction in your trading plan and perform the require due-diligence before implementing any strategy. Never let stress dictate your trading behaviour and always keep a cold-hearted attitude regarding your binary options trading strategy.