Binary Trading Methods 101
When you first discover binary options trading, the temptation can be to dive in head first and start trading as quickly as possible. What are your goals with binary options? Do they include long-term profitability? If so, you may want to take a little extra time before you get started trading to learn the ropes.
“But I read the how-to pages and watched the video tutorials at my binary options broker’s website. I already know how to trade. It’s easy.”
That might be your response, but if so, you are making a very common newbie mistake. You are mistaking simple for easy. Binary options trading is simple in that there are only a few steps to placing a trade, and you can indeed start trading in a matter of minutes. But it isn’t easy in the sense that you can lose money in a matter of minutes as well. Actually trading successfully is a little harder, even though it is still not necessarily complicated.
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Binary Options Is Not Like Roulette
How do you profit reliably in a market where chance dominates? The answer is to reduce the influence of chance by stacking the odds in your favor. Binary options trading, unlike roulette, does not have to depend entirely on chance. “Win” or “lose” may sound a lot like “red” or “black,” but in reality binary options trading is very much what you make of it. If you want to profit reliably, it is possible, but you have to approach binary options trading as if you were a poker player and not a roulette player or a gambler at a slot machine. Poker players are able to win on a regular, reliable basis, enough to make a consistent living, if they study the game and the other players and put well-developed strategies to work.
Getting a Binary Options Strategy
And that is what you have to do as a binary options trader. You need to put strategies to work that are going to help you to reduce the chaos you encounter in the market. Where do you find a strategy for success? Strategies are usually referred to as trading systems or trading methods. The two words mean the same thing, though you will see different preferences among traders when it comes to naming them. A trading method or system is a set of rules for profitable trading.
You can find trading methods all over the place online. Community members at online trading forums will often share them openly. Check binary options communities as well as Forex communities. Systems used by FX traders can be adapted to binary options trading with a few tweaks. There are trading methods for sale, but I recommend that you try some free systems before you spend money on a system, since many excellent strategies are available for free, and they can garner top shelf results if you apply them correctly.
Click here for information on Trading Systems
There is nothing to stop you from coming up with a trading method from scratch either, though you will probably need to look at (and test) a number of other strategies before you know how to start coming up with one on your own. Note that you may also find the best solution is to take a trading method which someone else developed and modify it for your own use. Personalized systems like these are often the best.
What Is Included in a Trading Method?
As I mentioned, a trading method includes a set of rules for trading binary options. These include:
- Criteria that must be met for a trader to enter into a binary options trade.
- Criteria for exiting a trade. Will the trader let all trades go through to completion, or will he exit early under certain circumstances? Will the trader ever use double up or rollover to try and increase profits?
- What expiry times will the trader use?
- What financial instruments will be traded? Is the system for use on all assets, or only for stocks, or only for certain currency pairs?
- What indicators will be placed on charts? Will there be any other frame of reference for context? What timeframe will the trader look at on the charts when planning trades?
Most of the time the criteria for entering and closing trades are based on technical or fundamental analysis or price action. But this is actually just one facet of a comprehensive trading plan. A trading plan should also include the following:
- What time of day will the trader look at the charts?
- What percentage of the trader’s account will be risked on each trade?
- How will signals be used as part of trading (or not)?
- How will trades be monitored? Will the trader actually sit in front of the computer the whole time, or will he use a mobile device or alerts for monitoring?
- What time of day will the trader actually participate by placing trades?
- How will a trading journal be used to track progress?
- What is the goal of trading, and how is the trader taking steps to meet that goal every day?
Setting goals is more important than you might realize. You may respond, “My goal is to make money, obviously.” But that goal is so broad that it is hardly motivating. You need to set goals which tell you what kind of trader you are, and understand those goals. There is a big difference between trading for fun (and hopefully profit) and trading because you very seriously want to invest for a living. Or maybe you want to earn the money to use for a specific purpose. No matter what, it pays off to be honest with yourself. Read more about that in our introduction to trading psychology.
Using a Trading Method
It is essential to understand before you begin trading that your trading method is only as effective as you yourself are. If you find a top-notch trading method and you fail to apply it with discipline, your results will not be very good. The same system that works great for another trader may fail outright for you. Likewise, you might find a system that has mediocre results for another trader that works very well for you, because you apply it with more discipline. If you break trading rules all the time, no system is going to serve you. You need to actually allow your method to guide you with your trades, even if you still allow your discretion to play a role as well.
How do you know when you have found an effective trading method? The only way to be sure (without losing money in the process) is to test your method. To learn about that in detail, please read our binary options testing 101 article. Backtesting and demo testing are vital for a successful career trading binary options. Once you have taken all these steps (developing a system, testing that system, and coming up with a trading plan), you will be ready to embark on your journey as a live trader.