The basic mechanics of how to trade binary options is one thing (simple). But learning how to trade profitably is something else a lot of people do not put effort into. If you are feeling overwhelmed, this article will cover the key things you should know before risking your hard earned money trading binaries.
So you are thinking about trading binary options. It’s pretty tempting. Big, fast returns. Way more than in traditional stock market trades. It’s risky. You’re probably feeling one of two things: excited or overwhelmed. While feeling excited is more fun than feeling overwhelmed, it’s better news if it’s the latter you feel.
If you’re jazzed about jumping into the market, it’s probably because your expectations are unrealistic. You may have watched a youtube video or seen someone bragging about how easily they just made a shit pile of cash. You can’t just start clicking your mouse and expect the big money to start rolling in.
If you’re feeling overwhelmed it’s probably because you’ve figured out that it’s possible to make real money trading binaries. You’ve seen that there are people who make a living trading, and that financial markets are incredibly complex. Trading for a living requires you to become an expert in something which most of us don’t know nearly as much about as we think we do.
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What To Learn – Your Education
What you need, is to know how binary options really work.
- You should learn how your broker makes money
- You should understand the odds, and why the broker has the house edge
- You should understand that you must win more than 50% of your trades to be profitable over the long run.
- You should understand that you need a strategy to win in the long run. It is not as simple as flip a coin and get lucky if you are trading over the long term.
This article will cover the above key points and a little more.
How does a binary option broker make their money – Most of the binary option brokers are market makers. This means they provide the market and the other side of your trade. They provide the offer to bet to you and you are taking it. The big brokers work in the same way many big sports books work in that they look to take an equivalent number of bets on both sides and amp up the volume as much as possible. Once this is achieved, they do not care if you win or lose directly as they are looking for volume of action on their bets. There are some brokers like Nadex that are a pass through options broker where they take your side of the bet and exchange it with someone else making the other side of the bet and they make money on the spread. There is a great article on babypips here about this in more detail.
The truth of the matter is that in general many binary brokers make money when traders lose more trades than they win.
The odds are in the brokers favor – they have the ‘house edge’ – Think of a slot machine with a 98% advertised payout rate. That means over the long haul if you put in $100 you will get back $98. The slot machine will take that action all day. The cold hard fact of the matter is that the majority of binary option traders lose money over the long haul. Whether it is poor trading choices, variance, or good old fashioned statistics that over the long run, the broker is going to win. Brokers work the same way as they odds are in their favor.
Education – How To Beat The Brokers At Their Own Game
Many people ask me is it really possible to beat the brokers. Hell yes. Is it easy? Hell no. Do I personally do it? Nope. I trade binary options for entertainment. I am risking money I can afford to lose. I’ve won trades and I’ve lost trades but I do not trade for a living. I’ve lost more, and bigger percentages more with the more traditional types of trading.
Here are some things you can do to get back some of that house edge and put yourself in the drivers seat.
- Learn about financial markets in general and how they effect one another. This includes currencies, commodities, stocks, and indices. These are the instruments that virtually all the binary options websites typically allow you to trade. You don’t need to be an expert in every aspect of the financial world, but you need to have a good enough general understanding to at least appreciate the complexity of that world.
- You also may want to learn about other types of trading. Binary options trading is best for some traders, but other types of trading are better suited to other situations and personalities.
- Learning about different types of analysis. There are three main ways that most traders plan their trades.
- Fundamental analysis – which means looking at news reports and other events that happen in the real world which can impact prices. You have to be an expert to trade fundamentals well, and we can’t emphasize that enough.
- Technical analysis – which means plotting indicators on charts and placing trades based on what those indicators tell you about price.
- Price action – This involves reading price patterns and placing trades according to the information the patterns contain.
Depending on your personality, background and skill set will help you determine which method, or a combination of those above will work best for you. If you are a numbers, by the book follow a system type of guy then you will want to develop your technical analysis tools with a series of buy triggers. If you are an expert in precious metals and understand the power players moves better than anyone then fundamental analysis might be your cup of tea. If you like to watch price movement, psychology of traders and can understand what is going on by watching candlestick charts then using price action might be for you.
Here is a good video from an expert on using Price Action
Trade In Real Time To Learn How It Truly Works
Now that you’ve done all this studying, it’s time to learn by doing. When you find a few trading methods which seem to make sense to you, download some charting software (MetaTrader 4 is perfect if you plan to trade currency pairs), and then scroll way back in time and start plotting trades on historical data based off of various trading methods. Once you find one that works for you, keep doing these tests on old data until you achieve excellent results.
Next, and this is where it gets real. Open an account with a legit binary options trading site which allows you to demo trade. Start with a quality site with top notch customre service like Banc De Binary (www.bbinary.com). Make a deposit and open a demo account with virtual money. Trade in real time using the demo account using the method you’ve come up with. Do this as long as you can or as many times as you can. You shouldn’t trade with real money until you’ve achieved great results with virtual money.
Keep a journal the whole time you’re doing all of this. That journal can help you track wins and losses and what caused them. Using the journal, you can find patterns in your trading, both good and bad, and make adjustments accordingly and without being random about it.
Keep learning and adapting. Trading is an ongoing learning process forever on some level. While you’ll probably not be going back to basics ever again, you will want to continue exploring different methods and adjusting your current method to market changes. If things stop working for you, you’ll need to take a break from investing your money and figure out what’s going wrong.
So there you have it—the learning process. Now you don’t have any excuses to sit on your hands and fret about where to begin, or to try to skip the vital process of discovery before you start trading. If you want to make the most out of your money and maybe even make more, this is the way to do it. Good luck learning how to trade!