Options Trading: Common Flaws

Options Trading: Common Flaws
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Mistakes while Trading

There are many flaws a novice binary options trader can make when beginning to trade. Steering clear of pitfalls requires discipline, determination, and the will to succeed.

Underestimating the Market

One of the most common flaws in trading binary options is to assume that because trading them is so simple and the decision is one of two alternatives, that there is no need to bother with market data. This attitude is a major flaw and can lead to losing all your capital. Don’t trade based on how lucky you feel. Just because you won a little something on the Lottery or at Bingo does not mean you are going to be lucky trading binary options. Take the luck out of it by taking notice of the data.

Excessive Risk-Taking Behaviour

Increasing you risks does not necessarily mean that you are going to increase your profits. For certain assets, most binary option brokers offer the option of closing or selling back your option prior to the expiry time, so if you are making a profit it’s better to close the option rather than increase your risk by holding off until the expiry time. Always try to minimize your risk, so if for example your option is out-of-the-money, don’t panic and decide to hedge it by buying an option on the same asset in the opposite direction. What is most likely to happen is that you lose both options and double your losses because you have doubled your risk. Also if the market does suddenly change in your original direction you will gain 85% on the winning trade and lose 115% on the losing trade. So hedging is not a good thing to do.

The ‘Early Weekend Warrior’ Error

Another flaw which the novice binary trader can fall into is to trade on weekends too early. As a novice trader your eyes will light up when you see the possibility of earning over 200% in profits over weekends. Don’t be tempted until you thoroughly understand the markets and your chosen assets characteristics. Most weekend binary option trades involve you having to decide if the asset price will touch a certain price level. These price levels are far away from the current price so you must have a good knowledge of the asset, the market and the economic situation to be able to predict with accuracy if the option prices on offer will be touched or not.

You have probably heard of the old adage that it takes money to earn money; well as a novice trader you should not follow that adage. You should use as little of your own money as possible while you are learning to trade. Use the minimum amount of money which the broker allows you to deposit. Once you have got some mileage under your belt and you feel comfortable, then you can trade larger sums of money. Good luck!

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