Trading binary options is basically comparable to trading other products. The differences mostly lie in the structure of the products. In order to be prepared for pitfalls in trading binary options, traders should therefore first carefully consider the pitfalls of trading in general and then consider the binary option itself.
General traps in trading
The pitfalls in trading are general in nature. This means that, apart from the structure of the products, beginners should pay attention to the following things:
- Smooth transition between gambling and trading
- Leverage products encourage the taking of high risks
- emotions do not have the same effect on profits and losses
- Frequent lack of transparency in the products offered
The transition between gambling and trading is fluid. Since you are always dealing with forecasts when trading, the comparison to gambling is not far. The beginner should keep that in mind and consider how to replace happiness with planning and knowledge. This can often be achieved by traders getting rid of the forecasting idea and trying to react to given facts, i.e. what the price trend indicates. For example, if a trend is pointing up, traders should only trade calls and vice versa.
The leverage that is available with new products such as CFDs, Forex and binary options encourages you to take high risks. This incentive is particularly effective for customers with small accounts. The lower the capital, the more emotional the beginner acts, because he wants to get rich as quickly as possible or increase his capital. Beginners should always come to terms with the fact that nothing becomes rich at first and consider the whole thing as a hobby - with the aim of generating an additional income. This also helps to look at trading from a relaxed perspective and promotes planning when trading. The beginner should therefore get into the habit of having fun planning and not trading.
Emotions are the enemy of every retailer. The tricky thing is that emotions cannot be rated equally. Losses are felt more intensely than profits. Accordingly, the subconscious mind memorizes these emotions faster. This can go so far that the trader unconsciously develops the habit of placing himself in loss positions because he cannot deal with profits. He doesn't trust them and therefore maneuvers into bad trades on purpose. The trader must adopt habits that make him a successful trader and not the other way around.
Another problem in trading is the lack of transparency of the products. This is normal in the capital market, and laypersons often need several months or even years to understand the structure of a product. The emphasis here is clearly on "understood". Because even if all boundary conditions are communicated openly, customers are often still not aware of the effects they have on trade and the associated risks and opportunities. In this case, it is worthwhile to research thoroughly and possibly have some things explained in detail by the broker.
What about the flexibility with binary options?
Also for binary options, the general pitfalls in trading mentioned above apply. With regard to the product structure, traders should pay attention to the following:
- Binary options are less flexible
What does flexibility mean? Binary options have a limited term. This in turn means that the trader can react less flexibly to price behavior. This does not necessarily have to be negative, because it is often said that the more flexibility, the more emotional action could gain the upper hand.
The fact is, however, that not every retailer wants to build his strategy entirely on emotionless criteria. There are retailers who even list intuition as one of the most important success factors. Admittedly, for beginners, acting without emotion is more recommendable. Experienced traders who know the price behavior inside out, however, may feel restricted in their ability to act.
Some brokers are slowly reacting to this fact and are increasingly offering the possibility of extending a trade or increasing the capital. The premature closing of a position, as offered, for example, by the broker StockPair, also belongs to the adjustment of flexibility.
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For binary options, the same pitfalls apply as when trading with others products. An individual characteristic of the binary option is the limited flexibility. Due to the limited term, which is determined by the broker, the trader has little alternative to react to the price behavior.
This may not be particularly relevant for the beginner, but it may well be a deficit for advanced traders. In order to avoid this shortcoming, brokers for binary options now offer several options of flexibility, through which traders can either close early or extend the duration of a trade. But this is also usually linked to conditions that the dealer should inform about in advance.