Becoming A Successful Trader Is Much Easier With Binary Options And Spreads

The S&P 500 is still making new highs even though most momentum based indicators, such as the RSI, are showing that it has been an overbought state since June 3.  Calling the tops of markets is quite exhilarating and markets can fall very fast. Traders often love to short the market at the first indications of a top.

For example, suppose a trader had shorted at the close on June 3 at 1922. Since then, the market has continued up and the high for this week is 1954.75. The current loss on a position entered on June 3 would be 32.50 points, or $1,625 per contract.

Of course, when a trader decides to exit their position, the market will often reverse in their favor. A trader may then think that they exited the position too quickly, or doubts their own ability to read the chart correctly.

Trading challenges both the psychological and emotional beliefs held by traders (sometimes unknowingly), and also their ability to abide by rules, especially when the rules result in losses. The good news is that traders now have more choices– specifically Binary Options and Spreads.

Here are a couple of the psychological issues that have detrimental effects on traders.

• Thought Processes – The brain is designed to be a thought-generating machine. Research has shown that people have more than 50,000 thoughts a day. These thoughts can be benign, or cause a person to develop a bias. When a thought is accepted as a belief, it can trigger emotional responses. For example, the brain can generate a thought “all dogs are friendly” and, if accepted as a belief, a person will automatically assume all dogs are friendly – until they are bitten. Then, the thought process may change to “all dogs are dangerous” and anticipation changes to one of danger (fight or flight) anytime a dog appears. Unfortunately for traders, most thoughts that are accepted as beliefs are accepted without rational evaluation and without questioning.
• Negativity Bias – In a research study conducted at Ohio State University, researchers found that negative information has a stronger impact than comparable positive information. In fact, they found that the emotional distress that people suffer when a loss of money occurs is far greater than the positive feeling they experience when they win, even though both amounts were the same. Given that it is impossible to trade without experiencing negative trades and, losing money, traders are even more susceptible to the negativity bias. For example, if a trader suffers three losses and then three wins (overall, gaining money), then the trader will still remember only the losing trades and respond accordingly in the next trade setup. This bias typically results in an inability to take the trade, or even moving the stop to prevent another losing trade.

The good news is that these psychological issues can be overcome using logical thinking skills and a little practice. However, the problem is that trying to implement logical thinking processes while trading most markets can be very difficult for most traders.

Market movements can be quite fast and losses can be quite large in a very short time. This can intensify the psychological effects, such as eliciting unquestioned fear-triggering thoughts or over-confidence, to name a few. Instead of following trading plans and their rules, these belief-based emotions become the motivating spur for upcoming trades.

Even if a trader is diligent in placing stops, price can go beyond the stop without ever touching the actual stop price. This is where binary options and spreads can be useful for a number of reasons.

Trading the binary options and spreads actually encourages traders to use a logical thinking approach for each trade. When trading the binary options, a trader is faced with deciding simply whether or not the price will be above or below the strike price at close.

Once traders decide whether they believe it will be above or below strike, the next question will be what amount they are willing to risk if the statement proves to be false? For example, would they be willing to risk ninety-five dollars for a five dollar gain? A new trader would be more likely to consider entering a trade with a fifty dollar risk and a fifty dollar gain as a more acceptable trade alternative.   

Since binary options allow traders to exit trades early, if market conditions change, traders are able to exit with an even smaller loss. In other words, traders can still feel a sense of control after entering their trades.

Additionally, since binary options offer multiple expirations (in time and in price), traders are given time to focus on their entry methodology and to document their trades in their trading journal. For example, during the U.S. session, there are binary option expirations at the top of every hour. Traders have a full hour prior to expiration to study the chart, decide whether to buy or sell the option, then enter or not.

Since the risk is limited on entry, instead of being held captive by the profit or loss window, traders can maintain focus on their charts and simply monitor their position as needed. Since there are new expirations at the top of every hour, traders can feel at ease in taking a break knowing they are not missing the one and only trade of the day (which often happens when trading the futures market).

In summary, binary options and spreads offer a great alternative for both new and experienced traders that encourages them to use logical thinking in order to overcome psychological and emotional issues faced by all traders. By implementing a more logical approach to trading, traders can keep their focus on their entry criteria, money management and trading journal to improve their trading proficiency.