High School

Binary option trading Psychology | Learn to control emotion

The psychological aspect of trading is extremely important, and the reason for that is fairly simple: a trader is often darting in and out of stocks on short notice, and is forced to make quick decisions. To accomplish this, they need a certain presence of mind. They also, by extension, need discipline, so that they stick with previously established trading plans and know when to book profits and losses. Emotions simply can’t get in the way.

Did you know that in order to be successful trader you need to have your emotional and mental state like robot – sort of? It is important as the knowledge itself with experience and skills, this all determines if you are going to be a success or failure. Two most important aspects when it comes to trading is discipline and taking risks. But when it comes to psychology, emotions come in play such as fear, greed, regret and hope.

What emotions we need to control

Please do not shoot yourself as the picture is referring too but some people get really frustrated that is why you have to better understand emotions. We will take a closer look at the ones that are connected directly with trading.

Greed can kill you!

Once you get greedy you will start abandoning necessary discipline. Nobody, i repeat nobody, no matter how smart they think they are has a fail proof system or process or secret trading technique that guarantees 100% success. I surely don’t. Neither does goldman sachs or anybody else. While there may be some hft firms out there that are trying to algo their way to a perfect system i have news for you: you are not an hft or an algo. You are an individual trader and as good as you may be: you will have losing trades, things will go against you and oddly enough this will happen when you are at your most vulnerable: when you are overconfident, greedy and overexposed.

Denial is harmful

One thing humans are particularly good at is rationalizing. We can rationalize anything, especially our mistakes, because mistakes go straight to ego and ego is the last to go. We want to believe we are in control when in fact nothing could be further from the truth. The illusion of control provides comfort. We feel more comfortable when we think we are in control, and of course feel very much uncomfortable when we feel we have no control. Denial is an easy way out to avoid confronting the reality that this trade just went bad because something happened that we didn’t foresee. The method we had so much confidence in suddenly stopped working. Or did it? Maybe it was just a fluke? So traders often dismiss the losing trade even though it hurt.

Revenge/catchup trading is not good

The second you start initiating trades to make up for a previous losing trade you may as well go outside and burn your money in the yard. Every trade needs to stand on its own set-up and rationale and cannot be emotional linked to a previous trade. If it is then you are trading emotionally and feelings of anxiety, pressure and stress will start to creep in, none of which have anything to do with finding a good trade set-up. Often then another losing trade or set of losing trades starts to chip away at the confidence of the trader which often then exacerbates the situation, especially for a brain that is still fresh on the hunt for another dopamine high. You see where this spiral is heading.

It is just about in this point in time then where things slowly start going array for many traders. This may happen quickly, or it may take time, but unless addressed traders will start circling the drain that is their account. Frustration builds, discipline gets abandoned, anger, fear, panic, paranoia can set in. Traders start taking things personally and are projecting of what could happen as opposed to what is happening, they sleep less, signs of mental exhaustion are building. In short: nothing of what worked before is working any longer. Not to scare anyone, but this spiral can literally ruin people.

But there is good news. Awareness breeds action, meaning there are specific action steps one can take to minimize the pitfalls of negative psychology impacting your trading.

Never Regret

Usually it happens when you miss your start on a trade and you do it at later point but this is something that you defnitely need to have in order if you want to make profits. You have to be disciplined.

What skills we need to master

You may think now when you are reading this, why is this so important. It is because we act differently when we involve our own money into something. We do not want to lose and therefore emotions come in play. You have to master few rules for yourself in order to work normally.

What we must first understand is that our mind doesn’t react under stress the same way it does in normal conditions. In other words, once money is involved, we start to see things a bit differently than under normal circumstances. To overcome this we must acquire a very important skill:

Discipline is the key

When you will have this mastered you will take emotions away from trading and will not affect your trading strategy. That means, you have a strategy before entering a trade, when you go out if it is a profitable trade and what to do if it does not go the way you want. You need to do this because before you start a trade, your choices are better since there is no emotion involved and you are in sort of neutral mode. After you put in a trade, we are in adrenaline mode where everything comes to your mind, from losing to profiting. Follow your plan and strategy to the point and you will be good.

Once we become disciplined traders, we will not allow emotions to take over and we’ll always follow the trading plan. One of the first steps to becoming a disciplined trader is to stick to the decision you made before you entered the trade. Why stick to that decision? Because before a trade, your logic is not affected by emotion, you are in a neutral state. After the trade is placed, all emotions and questions start rushing in: fear of losing, fear of failing, greed, uncertainty. A disciplined trader will know better than to make decisions while he/she is in a trade and will also follow the trading plan, the strategy and the money management he/she chose to use.

Patience is the most important virtue

Patience is another skill that definitely needs to be mastered. More than once i found myself jumping into a trade before my strategy gave a good signal, and before all the conditions were fulfilled; almost every time this happens, the trade goes against me and closes out of the money. To make the long story short, if the strategy you are trading requires 2, 3 or 10 conditions, wait until they are all fulfilled and only then place the trade. There is another kind of patience involved: the one related to understanding that wealth from trading will not come overnight. Yes, i saw all the movies about wall street, millionaires and hundreds of thousands of bucks made every 5 minutes, but we are not those guys… well, at least i’m not. If we want the slightest chance to get there, we will need patience to execute our plan and slowly but surely the account is going to increase. If you believe you will achieve this kind of wealth overnight, you are mistaken and the market will punish you for it.

You think this is easy one but it is not. When you get a feeling that you can make money with a click of a button you will start seeing how important this is. You have to wait for appropriate setup to put a trade in. So wait for your strategy to fall in place as you plan not predict and then put a trade. On the other hand we also have patience that you need to have in mind, which is that you will not become a millionare over night. But if you keep profiting on daily, monthly basis and so on, guess what? You are on the right path to become one. Do not make mistakes otherwise market will give you a trading lesson of his own.

Peace of mind is all you need!

No, you do not need to start training yoga every day. It means that when you make a loss, you have to accept it and move on since it is part of trading and no one in this world is 100% trader. Prepare yourself, for best and worst.

Don’t worry, this is not turning into a yoga class and when i say “peace of mind”, i’m referring to the fact that you must accept a loss before going into a trade. In other words, prepare for the worst and hope for the best. Once you accept that it’s possible to lose the money invested in that trade, you will have peace of mind. By assuming that once you pressed call or put, you already lost whatever sum you invested, you remove a lot of the emotions involved. What else can go wrong if you imagine that you’ve already lost the trade? Maybe it’s a weird way of thinking, but for me it works. Try it.

What we should avoid

You have to avoid these emotions but also accept them otherwise they will strike you at once! Accept but act by plan as we said and profit.

Don’t be overconfident

What most traders often don’t realize until it is too late is how quickly one can lose a lot of money in a single trade often with disastrous consequences.  More often than not this painful experience comes from poor risk management following a period of successful trading. It is natural of course. We are pattern seeking mammals and when something starts working for us we get confident in our abilities and quickly forget we know very little what the market or a given stock may do at any given moment. In short: we easily become overconfident.

It is after a period of successful trading that traders tend to loosen up on good intentioned rules of discipline. They start thinking in term of dollar signs as opposed to the trade discipline. In short they think they can fly. “look how much money i would have made if i had traded x % of my portfolio”. Stop yourself right there. While it is tempting to play mind games like this no good will come of it. Why?

Fear must be avoided

We have already covered this one since it is really important. You have to learn to control it because it can destroy even the best strategy you have if you will act upon this emotion. If you fear to lose money maybe you should first take a step back and start slowly so you become comfortable with trading.

Fear is probably one of the first feelings that traders must learn to control. Trust me, fear can destroy a good strategy in minutes and an entire account in a short while because it is the trigger for other negative feelings. The fear of losing money can lead to missed opportunities, in other words you don’t take a trade because you’re afraid you might lose. Ok, you don’t take a trade today, you will not take one tomorrow or the day after, but what if those trades would have expired in the money?

Frustration can make you loose

This is something that is well connected with fear itself. For example, you see that if you would follow your strategy you would made 5 profitable trades in the past days but you were too scared to put a trade. Now you just jump into the market to make back the profits that you potentially did not make and again, ignore the rules to the point. We know where this leads you.

Frustration starts to creep in. “ah, my strategy was good, i should have followed it. Crap! I missed four trades that would have brought me money. I’m not going to be scared anymore.”… And you start trading. But because you are frustrated by the missed opportunities, you jump into the market without following your plan to the letter because you want to somehow make up for those missed profitable trades… you are now…

The Bottom-line

Once the psychological aspects of trading are recognized one can identify specific traits and emotional states that are beneficial to trading and those that are to be avoided at all costs. I’m outlining a list in the adjacent chart.

If you experience any of these issues listed in the left column stop trading until you’ve set your mind right. You will not be in the best position to make a good decision when any of these apply to yourself. Nobody is forcing you to make a trade. Trading discipline is as much knowing when not to make a trade as when it is a good time to initiate a trade. There is no rule book of success that says you have to trade every day or even every week.

There is no secret recipe for learning to control your emotions and for becoming the perfect trader. For that, you have to reach deep inside, find your balance and most of all, you have to know yourself.

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Binary Option High School

All Lessons in Part 2: Trading Psychology
Lesson 1: Binary option trading Psychology
Lesson 2: Reasons of losing money in binary option trading
Lesson 3: Good habits of a successful in binary option trader
Lesson 4: Preparing yourself for binary option trading
Lesson 5: How To Avoid Distractions binary option trading

About the author

David Richard

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