In a previous article that I wrote entitled 'Trading Digital Options' we looked at what digital options are and how one can trade them. Yet in this article we will be looking at what it is like losing money with Binary Options (digital options).
You may be thinking that this sounds like a bit of a bleak subject to write about; but one has to be realistic. For whilst one can make good money with Binary Options, losing money with Binary Options is also just as likely (well even more likely to be honest).
Anyhow before looking at how people tend to lose money trading Binary Options, I think it best we have a recap on what Binary Options are.
What Are Binary Options?
Binary Options are a derivative form of trading where essentially you are entering into a contract with a broker. This contract states that you will be staking a certain amount of money (say £10) that after a certain period of time (1 minute, 5 hours, 1 day, etc) the price of some asset would have moved in a certain direction. If you are correct, the broker will not only pay you back your stake but a large percentage of the stake money on top. If you are wrong, well you lose the money you staked.
For example, let's assume that I decide to create a contract with the broker (Binary Option) by saying that in the next 2 hours, I believe that the price of Gold is going to decrease in value. And to make the contract occur, I am going to stake £100. Now before placing the trade, the broker will inform me as to the odds of what I would receive in return should I be correct. So for £100, if the price of Gold ends up lower than it currently is, I will receive £185 back (£100 my stake plus £85 profit). Yet if the price is either the same or higher, then I would have lost the stake of £100.
Now during the 2 hours that the contract (Binary Option) is running, the price of Gold is fluctuating up and down. Yet only at the moment when the contract comes to an end is it determined if you won or lost (depending on where the price stands and if had ended up in the direction which you said it would). So if after 2 hours the price of Gold is lower (even by one point) the the price was when the contract started, you have won. As we said from the outset that the price would go down in value. As such we win the full £185.
Likewise if the price was higher (even by a single point) then we have lost. And as such don't receive any money in return.
This is how Binary Options work and how one can make money from there.
Losing Money With Binary Options
While Binary Options are a legitimate way to make some money, I should say from the outset that it certainly is not easy to make a consistent outcome; though certain individuals are doing just this. From my own personal experiences, I am able to build up a small profit from trading Binary Options, yet still end up losing money with Binary Options due to nothing else then my mentality!
When it comes to trading Binary Options (as well as the vast majority of other forms of trading) the key difference between those few traders who are able to make a consistent income and the rest of us is mentality. The way in which they enter trades, perceive trades; as well as execute them.
I have recently watched an online series by the late Mark Douglas, a successful trader turned trading coach, who teaches people about the psychological make-up of a successful trader compared to the rest, who often make a bit of income before losing all the money they have earnt; I unfortunately fall into the second category.
Fortunately the psychological changes that one needs to make in order to make a consistent income as a trader are changes which almost everyone of us can make if we choose to. These trading skills are not something which one is born with but rather a psychological mindset which successful traders evolve over time.
I say evolve in that according to Mark Douglas, the vast majority of traders who are making a consistent income in the past were like the rest of us; trading and ultimately making a loss in the process. Yet it is through a slight change in their mentality that these traders switch to being the wealthy elite of traders that make most of the money on the financial markets.
So according to Mark Douglas, what are the psychological changes that one needs to make? What about analysis however? Surely the more analysis you do the more correct your predictions are going to be; whatever your psychological make-up? And why haven’t I as yet been able to adopt this mentality when it comes to trading Binary Options?
The Psychology Needed To Stop Losing Money With Binary Options & Other Forms Of Trading
So what is this change in one’s psychology that is needed in order to consistently make an income in your trading? Well one major change which you will need to make is to give up the notion of trading on a trade by trade basis. Most people when placing a trade, will actively scan the market, thoroughly applying as many analysis tools as possible. They will treat the trade as if it were a big thing; for some traders it is almost a life and death situation.
Once they place the trade, they will be checking on it with lots of emotion. And if it turns out that their trades win, they will emotionally feel like a winner, yet if the trade turns out to be incorrect, they will feel like a failure.
The trouble with thinking like this is because when you are so emotionally involved in the trades, as well as seeing yourself as a failure or a success per trade; you will ultimately set yourself up for failure. The reasons for this are numerous.
One reason why trading on a trade-by-trade basis will lead to failure is because of fear and greed. If you are getting a string of successful trades, it is so easy to fall into the trap that you are actually a great trader and that the market is operating to make you win. Hence the temptation to put on even bigger trades becomes almost too hard to resist. In other words, greed has kicked in.
And usually when that happens, it doesn’t take too long before you lose. And when you lose, you’d usually lose big due to the size of your trades. One of the reasons why you’d lose is because as emotions kick in, you will naturally stop using the logical part of your brain; the part of your brain used for analysing the trade before putting on the trade.
Due to the big loss, you’d naturally feel the urge to put on a massive trade, to not only recoup the money that you have lost but also carry on with your stream of profits. In other words fear will kick in. And once this happens, you will either win the trade, feel good again and greed will resume; ready for an even bigger collapse down the line. Or you will lose, and feel the desire to do an even bigger trade; else walk away from trading altogether.
Yet worse still, you will be acting as if the market wasn’t impersonal but acting in for or against you. It can make you believe that the market is personal and loves you one day, and hates you the next.
So how do those traders who make a consistent income trade psychologically? Well one of the main differences is that traders realise that the markets are completely random and beyond their control. Beyond stating their position, there is nothing else they can do with regards to how the markets act.
Yet they also realise that while analysis can tell you how the market is likely to behave, there is no way of knowing. The markets never follow any guaranteed direction. As such the best thing which analysis enables you to do is give you a probabilistic outcome that the markets might behave in X or Y pattern. Yet they can never be certain.
So instead of trading on a trade-by-trade basis; personally taking each blip up or down as a high or low (and often praying for the price to go more in one direction then another) they think in terms of probability. So in other words, no particular trade is going to be a winner or a loser. Instead each trade is a mere probable outcome; yet by using basis analysis, over a series of trades they will score more winners than losers.
To give you an illustration, imagine you were to flip a coin 1000 times. You’d expect a pattern to occur where it would be very close to 50% heads and 50% tails. It is just as unlikely that all would be heads as all would be tails. Despite knowing this, you can never accurately predict on a coin toss by coin toss whether the next one is going to be heads or tails!
However, imagine you adjusted the coin so that 60% of the time it would land on heads and 40% of the time, tails. While you could predict with a certain degree of accuracy that after 1000 coin flips, the total would be near 60% heads and 40% tails, you’d never know for certainty what each coin toss would land on.
As such, the consistent traders tend to trade on the basis of a number of trades at a time, using technical analysis to give them an edge so that they win more likely then they would lose over a series of trades. As such they measure their overall profit not on how much they make per trade, but the amount made over 10, 20 or even 100 trades.
And if they are consistently losing after a set number of trades, then they know that they might need to change the analysis tools that they are using. But they never take the outcome personally but just realise that it is the luck of the draw and they need to readjust their positions.
This is the basis of how to trade for consistent profits. If you would like to know more then all means feel free to look up more on the teachings of Mark Douglas. Yet by being able to make the psychological adjustments discussed in this article should be enough for you to make a turn around in your trading style!
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