When you are new to the world of trading, especially in volatile markets that can change literally at the drop of a dime, there are mistakes you can expect to make unless you learn what they are and how to avoid them. Most new traders make exactly the same mistakes, so it pays to learn from the experiences of others who have gone before you. Whether you are getting advice on what ‘to do’ or tips on what ‘not to do’ it also helps to read as much as you can on sites like the Stern Options Blog. However, most of those mistakes will be mentioned briefly here so that you know what to look for when learning what to avoid as a new binary options or forex trader.
There Really Is a Difference between Traditionally Traded Forex and Binary Options
Perhaps the first mistake most new traders make is in assuming that forex is the same as options. Actually, you can trade forex with an options strategy, but do understand that this is a totally different approach than the traditional method of trading in the forex market. You can learn more about the difference here, but for the time being, it suffices to say that binary options are easier to trade because you only have two options, hence the name ‘binary.’ You ‘bet’ that the underlying asset will either go up or it will go down.
However, in the traditional way of trading the forex market, you not only need to know which direction a currency pair will move but also by how much. Do you see the basic difference? In binary options, it doesn’t matter how far up or how far down the value moves, just that they move in the direction you predicted within a predefined timeline. Forex, as mentioned, has other risks involved so unless you are trading the forex market with an options strategy as opposed to the traditional forex trading strategy, your risks are greater because more conditions need to be met before you win.
Not Defining Your Exit Strategy Early Enough
When you trade in the OTC market, you are considered to be a day trader because most transactions happen within a 24 hour period. Now that you understand the difference between options and forex, you can see how this mistake was most often made by forex day traders. In options, you’ve determined movement (up or down) and predefined a time.
Unfortunately, this can also pose a problem for options traders because if the market suddenly starts to move contrary to how you’ve traded, you’ll want an exit strategy to use before the expiry of your OTC trade. Not defining an exit strategy prior to your current expiration as the market quickly shifted could be your downfall.
Trying to Use a One-Size-Fits-All Trading Strategy
When you are new to trading, you’ve probably taken the same strategy across all investments and in all markets. This is the strategy you learned and it would probably be the one you are most comfortable with as well. Again, unfortunately that strategy will almost certainly not work as well for forex as it did for binary options and vice versa. There is no ne-size-fits-all in trading and the sooner you learn that, the better it will be for you in the world of trading. Even some seasoned traders think to cross over to new markets with the same trading style or strategy and find only too late that it won’t work as well, or even at all!
Doubling-up to Make up for Past Losses
So, you’ve lost on one or two of your previous trades and now you aren’t nearly where you thought you’d be. Maybe you didn’t lose everything but your profit margin sure isn’t good! So, what do you do? Some new traders think that if they double their investment they will make twice as much so they do that to compensate for those losses.
That would be a good strategy if you could be assured that your investment was going to be on the winning side, but what happens if you lose again? Remember, one of the major issues with forex and binary options is that you can lose more than you wagered. Therefore, don’t be fooled into thinking that doubling-up can get you back in the black. It could, but you need to accept the possibility that it just might not!
Not Buying Back Short Options Timely
Some new traders go short thinking to buy those options back when they are in hopes that the contract they’ve agreed to will expire without gaining any value or you are looking to gain just a little more of a profit from that trade. If you are going to go short, be prepared to buy those options back the moment the market moves in the direction you are waiting for. Just don’t wait too long. It’s in knowing how to gauge time in relation to market movement that will make or break you as a trader.
An expert’s rule of thumb goes something like this. It’s a formula you can use when waiting to buy back an option you’ve sold. The timeline would begin with you buying the option, selling the option for a tidy profit and then waiting to buy it back. If the market is moving in the wrong direction, don’t wait too long thinking you’ll wait to mitigate your loss. Instead, buy that option back when the value reaches a point of 80% of your gain. Don’t let it drop any lower or you will most certainly lose your shirt.
As a new trader, it pays to hear about the most common mistakes to avoid. Remember, these are common because a great deal of new traders (and sometimes even old traders!) fall into these traps. Learn what you can about mistakes so you can avoid them, and practice trading on your broker’s site before getting your feet wet. You’ll know when you’re ready to go live because you’ll have learned what mistakes not to make in your simulations. And that just might be another mistake to avoid! Never trade live until you’ve simulated a trade several times without making these mistakes.