The following is a guest blog post:
Binary options are one of the most popular trading methods among novice investors since they are easily accessible and offer better returns compared to other trading methods. Also, many binary options trading platforms offer a social trading feature in which traders can copy and execute the trades of other successful investors. Despite its recent popularity, there are many instances where traders have lost all their deposited money by trading with binary options. Some unsuccessful traders blame their brokers as the reason for their loss while some frustrated traders compare binary options to gambling and believe that there is no chance to make money using this trading method. However, there are many successful traders who make a lot of money using binary options by choosing the right broker and following some effective trading strategies. Let’s take a look at some possible reasons for binary options traders to lose money.
1. Lack of research in choosing the right broker:
Since binary options are becoming more popular, there is also the rise of scam brokers in the market who try to lure customers with free accounts and unrealistic payouts. Some beginners who are not aware of the hidden risks get attracted by such false promotions and fall prey to scammers. To become a successful binary options trader, the first and foremost thing is choosing a reliable and licensed broker. You should do thorough research about the broker and ensure they are regulated by the government authorised trading commission.
You should also go through their withdrawal and deposit policies, security policy, and financial policy and find out how much commission they charge per trade. You should also read the testimonials of existing customers and if possible get direct reviews by meeting them personally. Also before you open a trading account with any broker, you can make use of tools like FINRA’s BrokerCheck and National Futures Association’s Background Affiliation Status Information Center (BASIC) to make sure your broker is registered with SEC (Securities and Exchange Commission). You should choose a trusted and regulated broker like anyoption which is licensed by CySEC (Cyprus Securities and Exchange Commission).
Traders who fail to do such research and open trading accounts with unregulated brokers have a greater possibility of losing money with binary options. Some fake brokers make use of manipulated software to generate losing trades, and whatever positions you choose, you will always end up losing money. Also, some brokers charge you with a lot of hidden fees and will not allow you to withdraw your money when required. You should be careful not to fall prey for such scam brokers.
2. Lack of market knowledge and fundamental Analysis:
Another big mistake which novice traders make while investing in binary options is failing to do proper research about the assets against which they invest. Lack of market knowledge and failing to do some basic research about the market trends of the assets can lead to big losses. Some beginners think they can learn to trade by trial and error method which is a false assumption. If you want to invest in binary options, you should first gain some basic market knowledge about the assets you wish to trade against and read the market news regularly. You should analyse how the asset has performed in the past so that you will be able to accurately predict its future price movement. Also, you should understand that market is always volatile and will change frequently based on investor sentiment, geopolitical factors and important financial announcements like policy changes, interest rate hikes, earnings reports of various companies, etc. You should follow the market news carefully and be aware of sudden changes in market trends.
There are lot of free resources including educational articles, training materials on trading techniques and strategies, e-books written by market experts and informative videos, etc. You should go through such training materials to get some idea about market fundamentals before you start investing your money in binary options. If you plan to invest in commodities like gold or silver, you should know about the market trends of these assets and read all the latest news about it. Similarly, if you want to trade against currency pairs, you should do some fundamental analysis about them to be able to speculate price movement in currencies accurately. Failing to do such market research is also an important reason for traders to lose money.
3. Emotional trading and investing too much on a single trade:
Another reason for some novice traders to lose money is because of their lack of money management and emotional trading. They get swayed by emotions and invest all their money on a single trade which leads them to bankruptcy. You should always define your risk tolerance and should plan your investments in advance. If you become greedy and try to put all your money in a single trade with a hope of luck, you are the biggest loser. Only inexperienced gamblers will stack all their chips on a single play which is the same way novice traders perform their trades resulting in failures.
4. Lack of proper trading plan and adoption of trading strategies:
Any binary options trader who invests blindly without adopting any trading strategy is prone to failure. If you want to become successful as a trader, the first step is devising a proper trading plan and formulating effective trading strategies. You should devise a clear trading plan with well-defined entry and exit criteria, investment amount, position size, investment duration etc. If you don’t have a plan and just invest money randomly by believing in luck, you have a higher possibility of losing all your money. There are various trading strategies like risk-reversal strategy, hedging strategy, co-integration strategy, trend-trading strategy etc. which are used by successful traders. Failing to adopt such strategies is also a reason for investors to lose money in binary options.
5. Not using technical indicators or signals to predict market movement:
Technical indicators are helpful tools for investors to obtain a good understanding of the market trends. By using technical indicators like Candlestick charts, MACD (Moving average convergence divergence), Wilder’s Directional Movement Indicators, Commodity Channel Index, RSI (Relative Strength Index) etc., investors will be able to predict the price movement of certain assets accurately. But novice traders who are not aware of such technical indicators and invest money without doing any market analysis will eventually lose money. Traders should also learn the use support and resistance levels to predict the market trends of certain assets before investing their money. Failing to perform technical analysis is one of the important reasons for binary options traders to lose money.
If you want to become a successful trader and make money using binary options, you should understand all the possible reasons for failure as described in this article and start working on correcting your mistakes. By gaining market knowledge, devising a proper trading plan, adopting good trading strategies and making use of technical indicators you can also become a successful binary options trader.
Disclosure: I do not recommend any decision to the reader or any user, please consult your own research. Thank you for your understanding.