This article will attempt to explain what determines the price of Bitcoin and similar cryptocurrencies. It is understandable that there will be confusion as to the exact nature of Bitcoin, so let’s start with this first.
What is Bitcoin?
Bitcoin is the brainchild of an anonymous inventor in Japan, one Satoshi Nakamoto, whose idea has been to introduce a currency that will be free of all government control.
Mr Nakamoto, assuming he is a real person, and not a group of individuals, has been right to push for a libertarian money. However, he may have predicted the misplacing of cryptocurrencies for nefarious and illegal ends. The current conundrums that lie ahead of Bitcoin and all cryptocurrencies that shield the identity of their owners today are two.
First, without a way to trace transactions, criminals may roam freely the Internet, meaning regular citizens and crypto owners would be at risk.
Secondly, introducing more government control would result in surrendering of the core value of all cryptocurrencies – independence from the state.
What Determines the Price of Bitcoin?
It is difficult to pinpoint the main driver of Bitcoin’s value. Most recently, the price has plummeted, wiping off $60 billion worth of FIAT currency in its wake. Traded at $7,600 per single unit, Bitcoin is a brilliant example how over-indulgence of impossible-to-predict cryptocurrencies may have pernicious effects on the economy.
Some of the main drivers of the economy are the stability of FIAT money. They are justly ingrained in the financial system, and as such, it is difficult to cause shocks across the system without central bankers and regulators noticing first or warning us ahead. With cryptocurrencies, on the other hand, shocks are impossible to predict.
Regulators around the world have been acting quickly these days. The Internal Revenue Service (IRS) in the United States is the latest regulator to lead the way in regulatory measures. However, even the intervention of the IRS has not been reason enough for cryptocurrencies to sway in terms of their absolute value.
What Then Should We Do To Guess the Pricing?
Simply put, there is little individuals or bankers for this matter can do. Bitcoin prices sway freely and without any intervention from regulators or third parties. This creates excellent opportunities for people to buy when the prices are low and sell when they go up. However, nobody actually knows when and if the prices will go up.
Since it is not a recognized way of exchange, Bitcoin and other cryptocurrencies are cyclical and their value could and then again could not be swayed by introducing new regulation. Some experts like to think that these cyclical stages will repeat themselves until such a time that Bitcoin has either lost all of its value or has established itself at a certain level.
However, the downside of this theory is that unless an underpinning regulatory framework is introduced, then nobody could actually know how to invest and rely on this currency for their livelihood, and that is a problem.
Binary options trading is not easy if you want to make money. To be successful it requires measured risk taking and someone who is willing to learn different strategies for different market conditions. Every stock moves in different patterns from other stocks, forex trades much differently than stocks do, and commodities also have their own trading personality.
Binary options traders must always learn and evolve if they want to keep a high enough winning percentage to make hefty profits. Here are some different binary options trading strategies that we use to make money.
Successful Binary Options Trading Without A Strategy
If you don’t have a trading strategy or if you are new to binary options trading, then you could try OptionRobot, the free binary options robot.
A lot of binary option contracts expire in one to ten minutes. A trade this short requires a scalping mentality. The fundamentals of the underlying security are probably not important to pay attention to here. What you want is to take advantage of short term patterns in price action. There are a few ways that you can do this well enough to make money. Here are some of the best binary option strategies to make money:
Use a technical indicator based strategy.
Use a signal service.
Read the tape of a stock by looking at prints.
Jump on momentum.
Trade the news and take advantage of trader sentiment.
Take advantage of a flat market by buying “in the money” options.
Use a Technical Indicator Based Strategy
There are many technical indicators to choose from. Examples of popular scalping indicators that we like to use for binary options include:
Relative strength index – Also called RSI, this is a measure of how strong or weak a stock is taking into account it’s momentum, and its recent momentum relative to its previous strength or weakness. The math behind this is complex, but what it is meant to do is to look for overbought or oversold conditions, and identify that a reversal is likely to take place in the direction of the price movement. Most people use a 14 period time frame (but you can customize this depending upon you preferences), and a high and low threshold of 70 and 30 respectively. You look for a signal when the relative strength or weakness crosses past your thresh hold. Many people will take their position when the relative strength crosses past the set threshold, and then crosses back past it again toward the midpoint. For instance your indicator may drop to 25 (below your threshold of 30), and they will take a position when it fails to stay below 30 and crosses back and hits 31. There are many different strategies involving RSI, and it comes down to the trader preference. A lot of charting software will simply give an indicator automatically so the trader does not need to actually think about the level. RSI is useful for binary options because it can quickly identify points where a short term reversal in price action is likely to occur.
MACD – This stands for moving average convergence divergence. Unlike RSI which is meant to spot a likely reversal of direction, MACD is meant to confirm that a price trend is likely to continue. While this is used more for swing trading than scalping, MACD is still useful for shorter time periods such as 30 minute or 1 hour binary options.
Bollinger bands – These are bands mathematically calculated by looking at the standard deviation of the moving average. They are a volatility indicator, because the more volatile the stock is, the higher the standard deviation will be of the moving average. These are useful for short term trades because when a stock hits the upper or lower band it can signal that a reversal of direction may be about to take place. In other words because stock markets move up and down constantly, we can see when a stock is statistically at a higher or lower end of its range compared to its previous moving average. The way to trade this is to buy a put option when a stock hits an upper band, and a call when it hits a lower band. Many brokerages allow traders to apply the bands to a chart.
Each indicator has its benefits and its weaknesses and limitations. Ultimately it takes some knowledge and experience to understand how to use them to your advantage so that they give profitable buy and sell signals for your trading.
Most brokerages will give you the tools to use something called “back testing”, which allows you see how well a technical indicator would have performed over some past period of time that you choose. Use the back testing feature to your advantage and you can find the indicator or mix of indicators that work for your trading style and whichever security you are trading.
You should also be aware that certain types of market environments favor different indicators. A very choppy market probably favors a relative strength or bollinger band approach, and a more directional market probably favors using moving average based indicators. Here are some additional strategies you should read as well.
Use a Signal Service
There are binary option specific services out there, and there are other larger services meant for all types of traders. Our very favorite is marketclub, which we use to trade with fairly often ourselves, but we also like barchart, and Traderific who have both free and paid services. Signaling services can be very good if you need some trade ideas, but blindly following every single will does not usually equate with profitability. The best results come from combining signals from multiple indicators and services.
Before you use any signalling service, make sure to do your research. Many services simply do not work. You need to ask yourself, if a trader can make money with their own signals, why would they sell their winning trades to other people? Sometimes the answer is to spread risk or diversify revenue streams, but many times it is because their methods don’t work. Whatever service you choose, test your strategy with them many times before putting your money on the line.
Use a Tape Reading Strategy But Trade Binary Options
This involves using a stock trading software such as “Think or Swim” to watch the prints of a stock and trade based upon the buy/sell flow. If you spot a lot of activity in one direction, or you see unusually large transactions or orders on the book, you may get an understanding of which direction the stock is likely to head in the near future. Professional traders have long used the order flow of a stock to predict which direction it is heading in the short term.
The only problem is that binary options brokerages do not display this information like some of the professional equity trading platforms do. The key for traders will be to have two platforms open at the same time, placing trades in the binary option account but using information from the equity account. This strategy will not apply to commodities or foreign exchange trades but it can work well with equity trades.
Jump on short term momentum
A trader can see when a stock is picking up unusual momentum compared to how it usually trades. Momentum is characterized by large quick moves, and moves that are much more prolonged than is normal. Even if a trader does not predict the beginning of a momentum move, they can still make money. The goal is not to predict momentum before it starts, it is to jump in and ride the wave until it shows signs of slowing.
Binary option trades are uniquely suited to taking advantage of momentum trades because they are so short term, and a trader only needs to be in the money by a tiny amount in order to have the option pay out. Even if a trader gets in later in the momentum based move, as long as they are in the money when the option expires they will get paid. This could be a 30 second or 1 minute trade that is highly predictable and pays 60%-80% on the binary option contract.
A binary options trader can easily make money using a momentum based strategy. Look for fast movement and jump in the direction of the move. This is a simple strategy, but it may take some time for a trader to hone their skills and understand what big momentum looks like so that they avoid moves that don’t follow through in the direction that they want a stock to go.
Trading the news can be a very tricky strategy, and it is not something that we would recommend to binary option beginners. News traders usually need to be in extremely quickly after news is released, because computers that can read news releases and act on the information before a human can read the first word are competing against people. A trader using a news based strategy needs to quickly read the release, asses what it materially means to the price of the stock, and judge how the stock is priced relative to where it should be given the new information. Traders who use news based strategies are often MBA types, or quantitative type people.
Even though news trading is complex, a binary options trader may be able to take advantage of the public reaction to news by capturing a small portion of the greater move. Remember binary option trading only requires you to be correct in your trade by one penny.
Remember when you are trading any news release that the direction that it will push the stock is not always apparent to an untrained person. You must balance what is released against what was expected by the market. Sometimes even if news is negative, but not as negative as the market expected, you will see the negative news make a security increase in value. Remember to always compare news against expectations before take a position. Expectations are not always readily apparent, and you should definitely test news based strategies in a demo account before you use real money. You will either get the hang of trading news, or decide that it is too hard to predict how news will affect the price.
Trade Correlated Pairs or Negatively Correlated Pairs
One strategy that many quantitative traders are taking advantage of is called correlated trading. This is largely done by computers, so you need to be fast, but a human can still make money if they are ready.
The way to make money is to find a pair of stocks, currencies, commodities, or some mixture of the two that either trade in tandem, or reliably move in the opposite direction of each other (negative correlation). An example of this type of trade would be Citigroup and Bank of America. On most days, when you compare the charts of these two stocks they will look very similar.
Let’s say that while watching the two charts, you noticed that all of a sudden Citigroup’s price moved up $.20 in one minute. Bank of America has not yet really moved. You quickly should take a long position (call option) in Bank of America, and often times after a very small delay it’s price will follow suite and go up. Usually you only have a few seconds to act before its too late, so be quick!
Of course this doesn’t work every time, and many times they move so closely together that you don’t even have time to take a position. Sometimes you will notice a lag, and these times with a slight lag you can make a lot of money with this strategy.
Trading Flat Markets by Buying Binary Options in the Money
This is a relatively new type of trade for binary options traders because brokerages are just now allowing clients to purchase binary option trades that are already “in the money”. These will trade at a discount proportional to how far in the money the price currently is.
If you have a read on the market that says that it will be flat for a while, you probably want to take advantage of this strategy. As long as the price remains in the money, the trader will receive the payout displayed when she purchased the option.
A good time to employ this strategy is during mid day trading hours (about 12 PM- 2PM EST) because the market usually does not move very much during this time. Another good time is on Friday’s after the morning is over, and Friday’s before a holiday weekend while volume is light.
Time of year may also matter, for instance trading is usually slower during the summer months than it is during the spring.
Long Term Binary Options Strategy- Trading Fundamentals
Another type of binary options strategy which is much less common is a long term trade. Brokerages will offer options, especially foreign exchange options, which may be a month or longer in term. Traders who think that a stock is fundamentally undervalued or overvalued may take a position here, assuming that they price will tend to move in the direction of the fundamentals over the longer period of time.
A fundamental analysis involves looking at what the price of a security should be given its underlying economics and the expected future growth. Some people may use a price to earnings analysis, or a Tobins Q, or they may look at a trade imbalance between two countries whose currency they want to wager on. There are many different types of fundamental analysis, but if you think that a security should be priced differently than it currently is, you may want to take a longer term trade with the thesis that the fundamentals will push the price towards the correct value.
Be mindful that once you enter into a binary options trade, you usually can not exit it. If market conditions change you will have to stick with your trade in most cases.
The Best Binary Options Strategy
There is not one “best” strategy. The best strategy is the one that makes you money. Different trades have different preferences, comfort zones, appetites for risk, and time horizons. Test different strategies in your demo account, and use the one that gives you the highest likely hood of making the most money. While this sounds obvious, it only works if you actually do it! Get started testing strategies today.
Opening a demo account is a necessary and very important step for new traders of binary options. Opening a demo account allows you to develop and test your trading strategies in a “sandbox” environment where you can not get hurt. Why waste money trying to develop your trading style in a live trading environment, when you can prove a strategy first in the demo arena?
Some people will tell you to skip a demo account because you can make money right after you begin trading. You should not listen to these people. It is very rare that a trader is profitable in their first few days, and many actually can get financially hurt if they don’t hone their methods with a demo account before going live.
Actually there are many benefits to practicing with a demo account before you use real money. Besides saving you a lot of money while you learn the software and how to trade, you will become more efficient and hone your skills. These are the most important reasons that everyone should have a demo account, even if they are already an experienced day trader.
Benefits Of A Demo Account
You will not waste money trying to learn how to trade profitably with real money. Learn how to systematically make money in a demo account first, and once you have a refined strategy you can transfer it to a live account and give yourself much higher odds of becoming profitable immediately.
You will gain confidence in your trading. Only through successful repetition will you develop the confidence you need as a day trader. Losing money in a live account can quickly lead to feelings of dejection and other emotions that hinder your trading. Develop your confidence first in a relatively “pain free” setting. If you lose money it doesn’t set your account balance back, and if you make money in a demo account then you will feel very confident when you trade live. This reduces the chances of you missing trades, and it also allows you to become more aggressive in your trading, which can make your profits much larger.
It is free and easy to set up an account. Anyone can do it. You are not required to put money into an account or to give any personal information that you do not wish to disclose. It takes about 3 minutes to set up and a trader can start using it immediately. With nothing to risk it makes sense to set up a demo account before you use real money.
You won’t lose your entire account if you don’t yet know how to trade profitably. The stock market and other trading markets are extremely competitive. If you don’t have the experience and knowledge you need, you will almost certainly lose money over time. If you open a demo account before you trade you can go through the growing pains of losing pretend money instead of real money, which keeps your real money in tact so you can use it to trade profitably in the future.
Test new strategies. Even experienced traders should keep demo accounts open so that they can test new strategies without having any negative financial consequences. Traders must always evolve, and when they are trying new things they don’t always know if they will work or not. A demo account allows even the most professional and experienced traders to test their methods and find out how profitable, or not, the strategy is.
Binary Options Traders Can Easily Get A Demo Account At How We Trade For Free
Keys To Making The Most of a Demo Account
It is not good enough to just haphazardly trade in a demo account if you plan on making money for real. Here are the ways for you to get the most out of a demo account so you can make more when you trade binary options with real money. This is something that both experienced and non experienced traders alike should consider. Any time a trader tests a new strategy, uses a new software, or trades a new security type such as binary options they should start with trading in a demo account before they move on to live trading with real money at stake.
Use Demo Accounts That Replicate Live Trading
If you are systematically making money in a demo account, but when you switch to live trading the environment is not exactly the same as it was in the demo account, you will not have the same confidence in your strategy and trading style that you had when you made money in the demo account. To become a professional day trader, you want to have the most confidence possible when you are trading live. A demo account should build confidence in your ability to make money when real dollars are on the line.
This is why you need a demo account that actually replicates the trading you will do when real money is on the line. Make sure the price is the same, the price that your trades fill at is the same, and everything moves at the same pace. Getting a feel for the software is important when your money is on the line.
Track Your Successes and Failures
In order to make money consistently, you need to know what works for you and what doesn’t work for you. The only way to do this is to actually keep track of your performance in different securities and using different strategies. Set up a spreadsheet and keep a trading journal. This is the only way to know for sure which type of trades are bringing in the most cash and which trades are likely to cost you money.
Be honest and take your demo account trading just as serious as you would if it was real money. This is the only way to know for sure whether a strategy will make you money or not. The information you will learn from charting your success and failure in a demo account could be invaluable to you down the road with real dollars at stake.
Make Sure the Demo Account Has Charting Tools Included
If you are going to use charting tools or signals, make sure that your demo account has exactly what you will be using to trade real dollars. Not all demo accounts include the charting tools, but some do. If you are going to use things such as moving averages, RSI, stochastic indicators, MACD, bollinger bands, or money flow index make sure that your brokerage of choice offers them.
If your binary options brokerage does not offer these tools, feel free to use ours by clicking on the open account button. Alternately, you could use a software such as Think or Swim for its charting tools but place your actual trades in your binary options brokerage account. We don’t recommend this but it is an option if you like your brokerage for other reasons.
We Provide and Use The Best Binary Options Demo Account Software
How We Trade provides access to the best demo account software on the web. It has accurate live quoting, payouts, and balance tracking. This software is exactly the same as you will use to trade with when you trade live with real money. We provide the best binary options account software because when we trade our tools are extremely important to us. We want all of our day traders to use the best tools that they possibly can have at their disposal.
It is Simple to Open Binary Option Demo Accounts
The Steps To Get Started With A Demo Account
Go to our “open account” page.
Input your basic personal information.
Create a Username and Password for your account.
Choose demo account mode when you are logged in.
Practice and refine your strategies in the demo account!
Don’t Overlook The Importance Of A Demo Account
Remember that opening a demo account can be one of the most important things a new trader can do. This allows you to test the software, test your strategies, and ensure that you can make money over time. If you are new a demo account prevents you from wasting all your money on losing trades before you develop confidence in a strategy. If you are new and working to develop a strategy but don’t really know where to start, try our trade indicator tools. Remember to test a lot of strategies at first, pick those that are most promising, and refine them to the best of your abilities. A demo account gives you the freedom and confidence to develop the best trading methods that you can.
Day trading has changed significantly over the last decade. New technology has pushed many of the human decision makers from the market, and super-fast computer driven trading has all but taken. Many of the old day traders are complaining that they no longer can make money. Does this mean that day trading is dead? Not even close. But the profession has changed. In order to be profitable today, every trader must take a modern approach.
Success over time in day trading requires the ability to change. The market is always changing. The laws governing trading are changing. The technology driving trading is changing. The global marketplace is changing how the world affects and accesses the US capital markets. Why would old traders think that their tired strategies will still work today? Obviously they do not. They key to trading today is to take a modern approach by following the new rules of trading.
Rule #1 Markets Are Choppy
For most of the history of the stock market, whether you were looking at a short term move or a long term move, the market was very directional for the duration of the move. If you could understand the direction of the market, you could make money relatively stress free without being out of the money. Today, markets are choppy whether you are looking at a 10 minute period or a 10 month period. Trades are often stressful, and the market appears to reverse direction often, only to continue in its original direction further and further.
Why Markets are Fast and Choppy
The reason for this is the high percentage of volume driven by algorithms and executed by computers. For various reasons (think RSI or Fibonacci retracement) a computer will take a trade in the opposite direction as the market moves. Different trading algorithms use different indicators and different math to find potential “oversold” or “overbought” conditions, while other algorithms will pile trades into the direction of the original move. Meanwhile, the original reason for the move (either a large order or a fundamental or technical change) will continue to exert pressure for some period of time. In addition, each stock and commodity has some level of correlation with the overall market, and the market will typically exert pressure in whatever direction it is moving. The result is a lot of “noise” or competing orders in almost every trade.
To combat this traders need to understand the reason a stock is moving in a particular direction and not be tricked out of good trades. Expect most trades to make it tough on the trader to hold, rather than moving in a straight direction. The market moves fast, and trading is not for the faint of heart. The best way to trade is to set your stop loss automatically when you take your trade, and don’t get tricked out of the trade.
Rule #2 Risk Management is Key
Any effective trader has always practiced risk management, but now more than ever this is crucial to separating traders who make money from traders who lose. Computerized trading can move a stock during times of high volatility 10% easily in a matter of seconds. If a big fast move goes against you, especially if you are leveraged, you could lose your entire trading account.
How to Manage Risk While Trading
How do you effectively manage risk while trading? Traders implement many strategies. One of the most popular ones is what is known as a stop loss. A stop loss is a pre-determined price at which your position will automatically liquidate. As long as enough liquidity exists for your position to fully exit at this price, you are guaranteed to not lose any more money than the amount you set. You can set your stop loss at any time, but ideally you will set it before or immediately after you take your position.
Another important technique is manage the size of your trades. This is especially important to a beginner. As a general rule of thumb, it is smart to never to place a trade with more than 1/10th of your total account value. This does depend upon the type of trading that you are doing, and where you set your stop losses. Remember that you always want to plan for a worst case scenario, and you never want your trading account to be completely depleted because of one random circumstance. Stocks can go bankrupt or have surprise good news leaked at any time. Things like terrorist attacks, fat finger traders, mergers and acquisitions, or an algorithm run amok can all move a stock huge amounts in just seconds of time. Computers can read news releases and take positions and can jump on existing momentum much faster than a human. You never want a random even to prevent you from trading in the future.
New Traders Take Heed
New traders have a tendency to take positions that are way too large. The large position creates extra stress, and make them deviate from the system that they are trying to follow. In order to be profitable over time, a trader must follow their system religiously. There is simply not any room to deviate for new traders who want to keep their account balance positive when it comes to managing risk effectively.
New binary option traders especially need to be careful because when they lose, they lose 100% of their entire position value. It does not take a lot of consecutive losses before an account is decimated when position size is too large.
Rule #3 Use Modern Tools
Traders today have unprecedented access to fast trading and liquidity. Market’s are segmented into many various ECN’s (electronic communication networks) and dark pools. Traders do not need to depend upon how good or fast their floor broker is any longer. The trade off that people make in this case is the speed in which prices and liquidity now moves.
Traders should always use a brokerage that provides a modern platform. Traders should have sophisticated “routes” to accessing liquidity, which means that they can access both dark pools and the public liquidity on various ECN‘s. Traders should always strive to get lots of liquidity, and access it fast. This gives them the absolute best price on all of their trades.
Binary Options Offer A Great Modern Tool For Traders
Some traders have moved to new security classes, such as binary options. Binary option trading does not rely on liquidity or access to certain dark pools. Traders get a market price, and they need to be in the money when the option expires. It does not matter how large them become, they can trade any stock or commodity they want equally effectively regardless of order size. Their orders do not move the price, and they always get their orders filled.
Regardless of a traders style or platform, they must be cognizant of how markets behave today. They are fast, computer generated orders represent most of the volume, and the way in which liquidity is spread across different ECN’s and dark pools present new challenges to traders. Traders need to fight back by being smarter, understanding the markets, managing risk and using modern tools.
There is still a lot of money to be made trading stocks. The key is learning to do it systematically.
For those who may have missed the article posted in February, I made a short call that BAC looked weak compared to the market, and that is was trending back toward the $15 mark, and maybe was heading even lower. Now, a little more than a month later, the (early) results are in.
Bank of America was in fact weak, and as of Friday’s close of business it currently sits at $15.54, having closed as low as $15.31 recently. Here is the chart of what has taken place since the day I published that article, February 24th 2015:
As you can see a short position taken the next day would have never been out of the money, with the price having trended downward the entire time. Those of you who followed us in should have made a tidy profit already.
Because BAC is sitting right above the support level right now, it is tougher to take a position here except as a small flyer position. I would be interested in shorting BAC lightly through $15, if it manages to break through I think we could see a pretty significant drop.
At this point I am exiting a good portion of my position so I guarantee that my trade was profitable. If it keeps going lower I won’t be surprised, but I am happy to take the money on a significant portion of my options position right now because this trade is at a spot where all profits could just as easily be lost. I’m keeping just enough so if there is a big drop, it will still be a nice little bonus.
We certainly don’t hit every trade right on the money, but it is nice to have a strong hunch be confirmed at times like this. The next time we see something like this in the markets we will let you know. Happy trading!
If you are just beginning to trade binary options, there are a lot of reasons why you should be very careful at first. Binary options are an extremely risk investment even for experienced traders. While day traders have the ability to make a lot of money with binary options very quickly, they also can lose a lot of money just as fast. Learn why you should take it slow, and how you should prepare yourself to trade with larger size trades.
When You Lose, It’s All Gone
A binary option is a very simple instrument. When you win, you win a high return pre-specified payout amount, and when you lose, you lose your entire position. The allure of scoring a huge trade causes many people to wager big amounts on binary option trades, especially right when they start trading. They may even take a position using their entire account value.
When you are trading your whole account value, it only takes 1 wrong trade to lose everything you put into it. More often than not, a loss comes quickly to those who try this ill conceived practice. When it does, they are left feeling depressed and dejected. This is a mistake that can easily be avoided.
Realize That You Will Lose
A big part of being a successful day trader is managing expectations. People who have been trading for a long time are under no illusions that they will be able to avoid losses. Having losing trades is an inevitable and unavoidable part of day trading.
They key to being successful trading is to manage your losses, keep them small, and realize that as long as your strategy is net profitable, you can simply increase your trade size over time and make a lot of money.
While there are different strategies to limiting losses depending upon what you are trading and your trading style, every trade must come to the conclusion that a dollar saved in a losing trade is a dollar earned. An equities trader may use a stop loss, an options trader may take positional hedges, and binary options traders must develop their own strategies.
Small Size Means Less Loss
A good way to limit losses when you are just starting to trade binary options is to keep your position size very small. While this may seem frustrating to the beginner who instantly wants to make a lot of money, they must keep their expectations realistic. Very rarely does a trader become rich over night, and when they do it is always luck. Since luck is out of your control, you should decide instead for the most optimal outcome.
No matter how well you think your strategy will work, unless you are using it with real trades and real money, it is not proven. The first step that any beginner needs to take is to prove that they are profitable with small positions.
Beginners Want To Stick Around
A beginner wants to stay in the game long enough to get better, improve their trading, and eventually make a lot of money. If you lose a lot of money quickly, you will not have enough time to develop and learn.
The name of the game for anyone learning to trade is longevity. Most traders fail very quickly because they do not allow themselves enough time to get skilled at the craft. Successful traders know that they will have a learning curve and they either have so much capital to begin with that large losses don’t stop them from trading, or they were smart enough (or lucky enough to be told by a teacher or mentor) to know that they need to trade for a decent amount of time before they will be skilled enough to be consistently profitable.
If you can not turn profits on a consistent basis such as weekly or monthly, you should only be taking the smallest positions. Only after creating a track record which proves your profitability do you have any right to take larger position sizes. This lesson is very expensive for most new traders. If you heed this advice today, you will save yourself a lot of money.
For those of you who like to trade Bank of America, right now it is trading very weakly compared to the market as a whole and the other banks. Today, Bank of America was down 1.1%.
While the S&P 500 was essentially unchanged (down .01%) on the day. The other banks were not down quite so much, JPM declined .75%, Citigroup was down .89%, and Goldman declined by .63%.
Even the late day rapid buying in the SPY had little effect on BAC.
I first noticed this on Friday of last week, when the SPY traded sideways and up for most of the week, while Bank of America was selling.
For those of you who believe in BAC as a short there are some interesting levels approaching. There is support at $15, and another support at $14.50.
I don’t know that BAC will make it through the support, but right now based upon the weakness it does look like it at least wants to re-test the support, possibly at $14.50.
Bank of America is also trading at P/E of about 45, which is way above the other major bank’s averages of about 11. When you look at the forward P/E it is more in line with the other banks, however.
Bank of America is a notoriously difficult trade, so keep this in mind before you take any positions, but it wouldn’t surprise me to see it test that support. If it gets below $14.50 you can be pretty confident that it will get to $14. I think if you want the trade the entrance is up here at this $16 level though.
Keep in mind that a great earnings announcement could completely change this picture.
Looking longer term, if earnings don’t disappoint and the market keeps going up, at some point BAC is going to re-test, and ultimately blast through this long term resistance level.
I don’t expect it in the immediate future, but keep in mind that if it does get through, this is going to be a trade that you want to be a part of.
If I was going to give my best guess right now we are going to see a short term test of the support, followed by the long term break of the resistance sometime this year or next depending upon the market and earnings.
Probably not. Day trading is extremely hard and computer generated algorithmic trades are making it tougher by the day. Does that mean it can’t be done? Absolutely not. There are day traders today who make a good enough living to support themselves comfortably, and some do much better. You may even consider some day traders to be rich.
The problem is that most people are not able to attain that level of success through trading.Over 90% of people who try to day trade for a living ultimately fail. In fact, as the markets have become more electronic, and more computer algorithm driven, fewer traders have been able to trade for a living. That doesn’t mean that they aren’t profitable, or that they don’t manage to have some big trades along the way. The simple fact is that to do it for a living, over a long period of time, a trader needs to experience a lot of success month in and month out.
If you know that obstacles, you may be able to overcome them. Read on to learn the biggest obstacles to day trading successfully enough to live off of, and learn how to give yourself the highest chance to succeed.
Obstacles To Making A Living
The lack of discipline applying a strategy. This is the number one cause of failure in the trading world. People are often able to develop strategies that are profitable, or would be profitable if they were applied strictly without the trader straying from the system. Unfortunately for a variety of reasons traders can rarely stick to a strategy. Probably the biggest reason why traders are unable to adhere to a strategy involves a lack of patience. Day trading is not as exciting all the time as some people would like it to be. That doesn’t mean that it isn’t very exciting sometimes, but a lot of trading involves sitting around and looking for the right trade setup. Depending upon your strategy, the right trade setups may come few and far between. New traders have a very hard time sitting idle, waiting for the setups to come. New traders think that to become successful, they need to make money every single day. This is simply not the case. Being highly successful on a low number of trades can make a trader rich.
Developing a strategy that isn’t successful enough. It turns out that it isn’t extremely difficult to create a strategy that is slightly profitable, but to create a highly profitable strategy takes some work/know-how. New and experience traders often fall into a trap where they are making money, so they don’t want to change their strategy, but they are not really making enough money to live on. A clearly defined successful strategy is the most important tool a trader needs to systematically make money over a long period of time. Unless you are perfectly disciplined, you need a strategy with a big upside or a high winning percentage (or ideally both).
Pressure to make money quickly. If you want to become a successful day trader who can live off day trading profits alone, the one thing you can’t have enough of before you start trading is money. This is not because you will necessarily lose a lot of money when you start trading (though you may), but because it can take time to get good enough at trading that you can pay yourself regularly. If you are under pressure with low savings and lots of bills or a family to support, you will have a hard time trading successfully. You almost certainly will struggle to maintain any discipline, and you will have a hard time sticking with trading long enough to get any good at it. You need to be able to survive for quite some time without income if trading is your only source of income. Even professional day traders go through a month here and there where they don’t make any money.
The stock market is extremely competitive. I would love to be able to tell you that anyone can become a day trader with a little hard work, but that is not reality. The truth is that the stock market is very, very, very competitive. Wildly competitive. As a day trader, you will be fighting investment banks, hedge funds, trading algorithms, and all sorts of very smart people, institutions, and machines for the same profits. If one person makes money, it means that someone else is losing money or giving up an opportunity to make money (opportunity cost). People who consistently lose money do not survive for very long in the stock market. To be successful as a trader you need to develop a niche, and become very good at what you do. Equity markets are so competitive that they are very efficient at reflecting the “right” prices. There is still opportunity, but there isn’t any “free money”. Being profitable takes intelligence and hard work.
Being unable or unwilling to adapt. The stock market is always changing. A strategy that has worked for a year or longer may suddenly stop being profitable. Laws are changing, and the market has seen the invention of electronic markets, dark pools, and electronic market makers. The way that the market moves will continue to change. For a trader to make a living day trading, an ability to adapt is crucial. Unless you can make a lifetimes worth of income before the market changes, you will need to adapt with the times.
The Keys To Succeeding At Day Trading
After hearing all the obstacles, you may be scared to try day trading. Not day trading may even be the best decision you ever make. Far more traders will lose time, money, and their sanity than than experience riches and success. Even so, day trading is exciting and potentially very lucrative. While fewer traders have been able to make a living in today’s fast moving electronic market, those who are able to make a living tend to do do very well. The odds are against you succeeding at day trading, but if you are able to succeed you will probably be well compensated.
The biggest key to success in day trading is to avoid habits that lead to big losses. Here are the important points to master if you want to earn your living as a trader.
Adhere to your strategy perfectly. By far, the biggest mistake that new traders make is that they are unable to stick to their strategy. Trading has narrow enough margins without wasting money on imperfect trades. Keep yourself profitable by keeping yourself disciplined. A good way to do this is by tracking and reviewing every trade with a trading journal, and by reviewing your trade blotter every day.
Manage your emotions. Negative emotions lead to reckless trading, an inability to properly manage trade size, and make it easier to miss good trades. To master trading you need to master your emotions.
Adapt. If your strategy no longer works, you need to go back to your demo account and either tweak it or develop a new strategy that will work. The market is certain to change, it is up to you to change with it.
Ultimately if you are going to succeed at day trading enough to make a living you are going to have to go through a big learning curve. Their are many resources, and many people willing to help you. You will have to learn to develop your strategies, and learn to control your trading so you adhere to them without wavering. You will need to spot opportunities, and be willing to act quickly and decisively to take advantage while they present themselves. The best day traders are willing to aggressively pursue any opportunity. Any day trader will tell you that the trade setup will not last for long, and if you wait, you will lose your chance.
If you want to make a living day trading you need to be aware that you have a long road ahead of you, but the rewards can be very sweet.
You can get rich trading binary options, but most people will not. Your ability to be successful trading binary options depends upon your ability to build and maintain a successful trading strategy.
Trading profitably over time ultimately comes down to discipline and your willingness to adapt as markets change. Most people do not have the dedication needed to get rich from trading or don’t use the right tools and strategies. Only through hard work and a systematic approach will you give yourself a chance to succeed.
If you are able to trade profitably in a systematic manner the sky is the limit in terms of how much money you can make.
Get Started With Binary Options Signals/Robots
If you don’t know how to get started with binary options trading, or if you have tried it and you haven’t made any profits yet, then you should try a binary options robot (it’s free). Basically the signal providers or binary options robots will give you up to 70-80% accurate prediction on whether the price of an asset will go up or down.
Follow these 3 simple steps to make more money with binary options trading:
The key to becoming wealthy from trading binary options is to have a high enough winning percentage to maintain profitability over a large number of trades. After you are able to trade profitably, you simply increase the size of your trades, and the size of your earnings will correspondingly increase as well.
Why It’s Difficult To Get Rich From Day Trading
Getting rich from day trading is one of the hardest things for people to do. There are a number of reasons why this is the case, and it is becoming increasingly difficult over time.
Computer algorithms have taken away a lot of short term inefficiencies in the markets. These are the same inefficiencies that day traders used to exploit for profits.
Stock market transactions occur in a fractionated marketplace. All transactions used to take place on the New York Stock Exchange, Traders knew the buy to sell ratios on the books, and could make relatively reasonable predictions based upon the inventory of orders. Today, transactions occur mostly over ECN markets and dark pools, and even the NYSE now uses an electronic order matching system.
If a trader is using binary options as their trading instrument, they need to win on more than 50% of their trades to be profitable (assuming all positions are the same size). Binary options are designed with the idea that a brokerage on aggregate will have 50% winning trades and 50% losing trades to contend with, thereby making them money over a large sample size. A trader needs a system that maintains a winning percentage closer to the 60% mark to remain profitable.
Because a trader needs a high winning percentage with binary options (or they need to keep losses small when they trade other securities) trading requires an incredible amount of discipline. This is extremely hard for most humans to maintain over the course of long periods of time. As any professional day trader will tell you, a small lapse in discipline can lead to a huge loss of money.
It’s Still Possible To Get Rich Trading Binary Options
Even though it is extremely difficult, it’s not impossible to get rich from trading binary options. Binary options often pay out 70% to 90% above the trade size to a winning trade. With that sort of potential, of course it is possible for people to get rich. In order to get rich, there are some important steps that you will need to take.
Build A Strategy Using A Demo Account
It is very important for traders to have a demo account so they can test and build strategies in a sandbox environment. With a demo account, a trader has the ability to experiment without losing any real money. Only after a reliable strategy is developed should the trader move the strategy from the demo environment to the real money environment. If you are struggling to build a strategy, consider that there are 3 main directions a trader can take.
Reading the market. This involves looking at the share inventories on the books and looking at the prints (or tape) of a stock and/or market. A trader tries to read the direction of the prominent order flow, and the way the market is trading each particular day (i.e. a stock is struggling to rise even if the S&P 500 is going up). To develop a market read you will need good data feeds showing prints across all ECN markets, dark pools, and all order books. You will then need to watch individual stocks, as well as the whole market very closely over time to understand how different factors affect how it moves.
Using technical indicators. This is a popular method with many traders. Many people start with using indicators such as MACD, Fibonacci ratios, the relative strength index, or moving averages. More advanced stochastic or Elliot wave indicators may also be used. Whatever you use, make sure that you are applying it to a stock where the indicator is a good fit (not every indicator works for every stock). There are also certain market conditions that lend themselves to certain indicators better than others. To make money with indicators you will still need to test and hone your strategy for using different indicators at different times.
Using a trade indicator tool. Some companies put software out that provides buying and selling signals for traders. Like any indicator, these do not work all the time, but may work well during certain times or market conditions. At How We Trade we recommend market club. You can sign up for a free trial by clicking the auto trade indicator on the menu.
Whichever method you ultimately use, make sure that you test and refine it in a demo account environment. Only after you can reliably win in the demo environment should you move your strategy to a “live” account.
Scale Up Your Size Steadily
If you are able to exploit a profitable strategy, you will need to increase the size of your trades steadily. It is important that you do not increase your size by large jumps (you don’t want a couple of losses to wipe out your whole account) but you want to make sure that you are consistently increasing the size of your trades. Every trader needs to accept that no strategy will be effective forever. If you have a strategy that is effective, you will need to take advantage of it as much as possible, for as long as it lasts. You will not get rich by taking small trades, but if you are able to increase your trading size enough you do have the ability to get wealthy.
Maintain A Positive Attitude Through Losses
Every trader is going to experience some losses, no matter how good they are. It is very critical to stay in a positive frame of mind even during difficult times. A positive attitude prevents you from missing winning trades that present themselves to you in the future. It also prevents self destructive behavior that a lot of trader allow themselves to engage in (reckless trading). For tips mastering your emotions while trading read here.
Recognize When Your Strategy No Longer Works and be Quick To Adapt
Many traders who used to have a working strategy make the mistake of sticking with the same strategy even after it no longer is profitable. A successful trader will realize when their strategy needs an adjustment and stop trading. Remember, losing money by trading is much worse than not trading at all. If your strategy is no longer profitable you will need to stop trading immediately and go back to the sandbox (demo account) and either adjust your existing strategy or develop a new one. Successful traders do not waste time trading with a losing strategy. Trade with a winning strategy only.
Will You Get Rich?
It is entirely up to you. While it isn’t easy, there are countless examples of traders become very rich from the markets. Binary option traders are no exception. The key is to exploit any security and every strategy as fully as you possibly can. Maintain strict discipline, a positive attitude through the ups and downs, and develop a winning strategy. If you do this, you can become wealthy.
Start trading with Tropical Trade, one of the most trusted binary options brokers, and get 5 Risk Free Trades:
You may have heard many traders say that large cap stocks are not a category that should consistently be traded. There are a number of reasons (some legitimate) that a trader may shy away from large cap stocks. These include:
Not enough volatility (especially in dividend paying large cap stocks)
Too crowded (there are too many algorithms and too much “smart money” transacting already)
Too much risk of a mutual fund or hedge fund with large orders changing the trade out of nowhere.
Too many competing interests for them to ever have a consistently readable direction (in the short run)
The price is already very efficient.
These are the most commonly cited reasons that day traders stay away from large cap stocks during the course of their trading. While these are all real concerns every asset class has its own set of difficulties. Like anything, the answer to whether or not you should trade large cap stocks depends upon your goals and strategy. Here are some times and reasons to justify when it may behoove a trader to dip into the large cap lake.
Recap, What A Large Cap Stock Is
A large cap stock is one of the largest stocks traded in the marketplace. Large cap is short for large capitalization (refering to the size of the market capitalization, or total value of all outstanding stock). For a stock to be considered large cap is must have a total market capitalization of more than $10 Billion dollars. Large cap stocks are mostly extremely well known companies such as Apple, Exxon Mobil, Proctor and Gamble, General Electric, Walmart, and Microsoft. Many large cap stocks are also “Blue Chip Stocks”, which refer to large financially strong companies that have been around for a very long time. Many blue chip stocks operate in manufacturing and consumer goods.
Now that you are clear what is meant by large cap stock, here are times when it can be profitable to trade them.
Your Strategy Doesn’t Depend Upon Large Fluctuations
Many large cap stocks do not experience a lot of volatility (as a percentage of their price) on a day to day basis, which can make them a difficult trade for some day traders who need a stock to make significant moves. This would be true of a trader who has a standard brokerage account and only trades with their own capital, buying and selling equities. There are many other ways for a trader to make money today.
Many day trading strategies do not need large fluctuations (in percentage terms) in order to be profitable. A prime example of this would be a binary options trader. In binary options, the trader only needs to end up “in the money”, even if only 1 cent, for the trade to pay out the pre-determined amount. The payout to him is the same regardless of the percent gain in the position. A binary options trader depends upon reliability much more than large movement.
Another strategy that may not need large moves in the price of the stock is if the trader is using large amounts of leverage. For instance if a trader is a proprietary trader trading for a brokerage. When a trader uses the house leverage in large quantities, their positions may be so large that even a movement of a few pennies can bring them large gains.
Another strategy that may not require large movements in price is a strategy involving stock options. Some people buy short term call or put options, and even a small movement in the stock’s price may correspond with a large fluctuation in the price of the option. Other people “write” option contracts. If a day trader writes an option contract, he is betting that the price will either stay the same or move in the opposite direction (down if he writes a call or up if he writes a put) from the direction the buyer would like the price to move. Someone who writes an option contract is creating a contract, and if that contract expires out of the money the trader does not need to deliver any shares of the stock at expiration (and their profit is the value of the option they sold).
If you do not need large movements in a stocks price, large cap stocks may be the trade for you. Reliability may be more important that size of price changes.
The Price Action Is Readable
If you do not need large price fluctuations but instead depend upon a stock being reliability, many large cap stocks will go through periods when their price action is especially readable. The dependability of the trade may be very attractive. These are examples of when (and how) a large cap stock may become a reliable trade.
Many algorithms (or traders) appear to be buying or selling at the same time (when the stock reaches a particular price, RSI, or moving average for example). While this will never always hold true, it may hold true long enough or often enough for a day trader to turn some serious profits.
The largest transactors in the stock may be mostly buying and selling (moving the price) in the same way on a particular day. This may be a result of news, industry changes, or re balancing of their large portfolios (usually takes place at the end of quarters). If the price direction for a day is very readable and the large transactors appear to be moving the stock in the same direction, it may be a trade to consider. Usually large transactors can be “sniffed out” by reading the prints.
A stock is either “hot” or mired in dismal performance. You may notice that a large cap stock appears to have increasingly worse and worse prospects, or a particular stock may be in the news a lot and may be generating more and more profits such as Apple (AAPL) has been doing for years. If you notice a real trend that you want to be a part of, large cap stocks often have long term trends that stay true for enough time to profit from a trade.
You May Want To Play Earnings
Earnings are an especially volatile time for a stock. Many times even a large cap stock stock can move 5%, 10%, even 20% after earnings are released. Because large cap stocks are stocks that consumers may have more knowledge about, and they may have a lot more news/analysis coverage, many day traders want to take part in the earnings trade. If you think that you have a feel that earnings may be better or worse than the street is anticipating, or what is priced into the stock already, this can be a very exciting trade to be a part of. Just be careful, as earnings release trades can move a stock’s price a lot for the better but it can also move the price a lot for the worse (depending upon the direction of your position).
Large Cap Stocks Are Still Good To Trade
You do not need to fear large cap stocks as a day trader. What is most important is that you recognize when they can be traded, and that they are most valuable either when your strategy depends upon their reliability or you do not need large price moves in order to be highly profitable. If you can develop a profitable trade in a large cap stock, you should work to exploit it to it’s fullest potential, as day traders make the most money when they are creative and aggressive in their trading.
Software is extremely important when you trade. There is not necessarily one software that is “best” but there certainly are software programs that are better than others. There are a few points to keep in mind when a trader chooses a software program to trade with, or chooses a brokerage based upon their trading platform.
Every trader wants a trading software or a trading platform that is “low latency”. This is a fancy way of saying that all of the quotes and information displayed by the software is extremely up to date, calculated to the microsecond. This is crucial for traders because the markets move so quickly. A trader needs the most up to date information possible, if they are to trade effectively. This is more true every day, as more and more computer algorithms make up a bigger and bigger percentage of the total trades. Computers act fast, and if a trader has a software that is not up to date, they will struggle, especially on short term trades, where pennies can make the difference between a profit and a loss.
At How We Trade we also recommend that you use the lowest latency software possible. We would not want a trader to have any disadvantage, as trading is hard enough by itself.
It usually makes a trader more effective if the software has a simple user interface. This is not to say that the software should be unsophisticated, or be lacking in formation or features. The key here is that the design of the software allows a trader to navigate intuitively. Not only does this allow a trader to move more quickly with less thought about how to interact with the software, but it also goes a long way to prevent user errors, popularly termed mistakes like “fat finger” trades.
At How We Trade we prefer a simple design. Good software programs for day traders include platforms like Tradestation, Thinkorswim, or Sterling. We also trade with Tradorax when we trade binary options, because they have a clean professional interface with their software.
Whatever choice you make regarding your preferred software, remember that it needs to be something that you are comfortable with, that you can navigate with ease and that you will not make order entry mistakes with. Remember, accurate orders are a trader’s best friend.
Your Software Should Have Advanced Charting Features
Depending upon your strategy, you may use advanced charting features when you trade. If your strategy depends upon charting moving averages, MACD indicators, Fibonacci signals, stochastic indicators, or something similar, you need to make sure that your software includes this. Software and online platforms from many companies do include these indicators today, but if you use one or more of these in your trading, or you think you may incorporate them into your trading at some point, you should have software with advanced charting elements included.
Alternately, you could also use a third party trade indicator software if this is more effective for you. There are a few of them out there. Most do require you to pay a separate fee, which may be worthwhile if they are profitable. As with any indicator, the key is in learning when it is effective and when it is not effective, because not all signals will be profitable and you will have to develop additional rules to using the indicators in most cases.
This may sound a little silly, but trading is very emotional. When you trade, you want to be focused and in an upbeat mood. Using a software with eye pleasing colors, layout, or a good looking scheme can help keep you in the right frame of mind for trading. When emotions play such a big role in determining your ultimate success or failure, every edge counts, just like every edge in your trading strategy counts. In fact we consider superior mastery of your emotions an edge when it comes to making profits. Remember, when you think successful thoughts you have a higher chance of achieving your goals. Software can play an important role in this area.
Most Software Packages Are Sufficient From A Mechanical Perspective
Today, most trading software and trading platforms are technologically advanced enough to provide trader with sufficient features and reliability to access the markets efficiently. What this means is that most software can “get the job done”. The best software packages do more than this though. To succeed, you want your software to be lightening fast, eye catching, have elegance in its sophisticated yet simple design, and to have the tools you need to consistently profit from the markets!
Emotions play perhaps the biggest role in determining whether a day trader ultimately succeeds or fails. Developing a working system is an ability that most traders ultimately develop. Some people even develop or find excellent trading systems that only need to be followed exactly as the system is intended to be followed, and the trader will make enormous profits. Unfortunately, most traders do not follow their systems exactly because their emotions get in the way. This leads to regret, anger, frustration, and ultimately failure. Trading is hard enough without bringing emotions into it. If you can learn to master your emotions, you will begin to master trading itself.
The Slimmest Margins Between Success and Failure
What many people may not realize is that the difference between success and failure in day trading is extremely narrow. Look at this chart showing the net profit a trader of a binary security will make depending upon the percentage of time that their trade is a winning trade.
If a trader is correct on less than 56% of his trades (assuming a binary payout of either 80% or 0 depending upon if the trade is a “win” or a “loss”) he will not make money. If he is correct on 65% of his trades, he will have a net return of 17%, and if he is correct on 75% of his trades, he will have a net return of 35%. A difference of 10% trade accuracy is the difference between losing money and making 17% return!
Because the margins between great success and failure are so slim, a trader can not let emotions cost him even a small amount. Put another way, a trader who masters his emotions has the ability to make a lot of money day trading!
Identify How Emotions “Hurt” Your Trading
The first step to overcoming emotions during trading is to identify the ways in which emotions are harming your trading. These are the most common ways that emotions hurt a trader, and cost him money, and steps to overcome them:
Being Reluctant to Enter A Position When the System Calls For It
This is one of the worst things that a trader can do, and unfortunately it is also one of the most common. Not entering a position when the system calls for it for any reason (burned previously on a similar setup, down on the day, up on the day and protecting gains, not recognizing the opportunity, ect) begets feelings of intense remorse most of the time, especially when the position would have been a big win. It also messes with the winning percentage of a system. If you are not taking positions every time your system calls for you to, then you are missing out on more money over time if your system works. You never want to miss a huge trade because your emotions made you too reluctant to enter into the position.
How To Overcome This
What traders need to realize is that no system works 100% of the time. Even when you do everything correctly, even if you feel like all signs are pointing to a winning trade, a certain percentage of time it will not work. Getting “burned” on a previous trade is a common reason that traders do not take a subsequent position. The problem is that a system is not a system if you do not follow it every time. If your system works, you need to follow it precisely, if your system doesn’t work, you need to shut your trading down and make adjustments in a demo or “sandbox” arena until you can systematically make money again.
A trader needs a short memory. Always stay in the moment. Do not pay attention to your profits/losses for the day, and forget about any prior trades. Treat each opportunity as an individual entity, as a part of a systematic way to make money.
Taking Too Large A Position After A Win(s)
This is the flip side of being reluctant to enter a position. Positive emotions can make you enter a position with much more size that your system dictates, because you are “feeling lucky”. This can lead to big losses, and can lead to reluctance to enter future positions at all, or it can lead you to enter future positions with too small of a size. Using too large of a position can lead to a loss that is nearly impossible to return from, or at best a loss that will ruin your profitability for a period of time.
How To Overcome This
The solution is similar to being reluctant to enter a trade. Remember that your system is in place because statistically over time, it works. If you feel that positive emotions are causing you to enter positions much larger than normal, stop yourself, and realize that you have to stay true to what has been proven to work.
Not Cutting Loses Quickly Enough
Amateur traders almost always make the mistake of being overly optimistic about a trade that goes “out of the money”. They think that if they hold their losses long enough, eventually the trade will become a winner. The problem is that oftentimes, the trader becomes a larger and larger loss. This leads to feelings of hopelessness and dejection. If the loss is large enough, it can also ruin your account balance, and make it very difficult to regain a profitable enterprise.
Always have a pre-determined “out point” or “stop loss“. If the trade reaches a loss of a certain size, cut your position or exit your position all together. You must stick to this religiously. If you have the point pre-determined before you enter the trade, it does not leave wiggle room for you to rationalize holding a loss and letting it turn into a bigger loss. There will be more trade setups in the future, endless opportunity is ahead of you. Cut your losses quickly and move on to the next one.
Letting Anxiety Take You Out Of Winning Positions Too Quickly
This is another very common mistake of new traders. They find themselves in a profitable position, but they become very anxious that it will turn around on them. They exit way to quickly, and take what would have been a big gain and make it a very small gain.
The best way to overcome this is to resist the urge to exit positions completely. Instead, exit a smaller percentage of your position (maybe 25%) and let the rest run. This locks in some of the profits and takes away a lot of the anxiety around holding the trade. Over time, you will train yourself to hold your winning positions longer. There is nothing wrong with taking profits, but you have to make sure that you are holding your winning positions for a long enough period of time.
Letting Any Feelings Surrounding Other Aspects of Your Life Prevent You From Following Your Trading System
Day traders are all people (except the algorithmic traders). People have good days, bad days, fight with spouses, have health issues, have other victories in life, and can have any number of things happen in their lives outside of trading affect their emotions. The problem arises when these emotions influence a trader’s ability to follow their system. If you are not following your system, you probably will fail to systematically be profitable.
If you feel like you have emotions (negative or positive) that could prevent you from following your system you need to identify them, and you need to clear yourself of the emotions. Some traders actually meditate, some sit quietly for a few minutes, others may take a walk. Find what works for you, but it is very important to clear yourself of any strong emotions prior to trading.
This is the emotion that no day trader wants to experience, but every trader on their journey to becoming a professional day trader experiences at some point. If you feel like you can’t make money, you probably are not going to follow your system very well (or do anything very well).
Dejection stems from a lack of trust of your system. Sometimes this lack of trust is not displaced, and your system is not working. Sometimes the lack of trust is simply a product of the up and down cycles of systematic profitability. The key is to regain faith that you can systematically earn money from the markets. Take a step back, and use your system in a demo account or with very small positions. If you need to change the system, change your system. Once you regain faith that your system will make money over time, resume trading as normal. You need to have faith in your system to follow it!
Controlling Your Emotions Leads to Success
Only with a clear mind, and a willingness to jump on opportunities quickly will you succeed as a trader. Ask any professional trader and they will tell you that the most important way that they grew as a day trader was by learning to control their emotions. Control in trading correlates strongly with success.
Binary option trades can take place for a range of times. The most common binary option trades are 1 minute or 5 minutes in length, but there are many other trade lengths available to suit different traders preferences.
Binary Options Trades Only Have Value Upon Expiry
Unlike traditional options, which have value before the expiration date, binary options trades are final (you can not sell them before expiration). A trader can not sell a position, and once a trade is taken it is considered a final decision. A trader must hold the trade until the option expires without exception. The time until expiration is different for each trade, and is determined by the brokerage. Always consider the time to expiration before entering into a trade, because a trade must be in the money at the precise time of expiration for it to be of value. If the trade is below the strike price at the time of expiration, the trade will expire worthless.
Most Binary Option Traders Prefer Short Trades
The binary option industry has carved out a niche based upon the human need for instant gratification. Most brokers dangle trades in front of traders as short as 30 seconds. This gives a trader the opportunity to make up to 80% profit in less than a minute! This sounds fantastic, and it can be, but unless you have a system or a read as a trader to make money in 30 second time frames, it is a losing proposition for you. If you do have a system or read which is capable of some degree of predictability on a trade on a very short basis, make sure that you are sizing your positions appropriately. If you are taking many positions in a short period of time, you have the ability to lose (or earn) a lot of money very quickly. While the ability to take short time period positions is useful, a trader must manage this carefully.
Most Trades Are 1 to 5 Minutes Long
The most common time period for binary options trades are between one and five minutes. The brokerage will display the time period on each trade, and it is up to the trader to monitor these and to ensure that they are entering into a trade for the desired period of time.
Other common time frames may be a half hour, or one hour in time.
Some Trades Are Available For Longer Periods
Some brokerages offer traders for a period of a month or longer. Before entering into this type of trade, be mindful that your capital is tied up until the expiration date. A binary option position can not be sold for value once entered into. This type of trade can be useful for someone who has very high conviction on the direction of a security over a long period of time. As binary option trading expands, more trades of longer time periods are likely to be made available to traders.
Longer trades are typically offered with foreign currency transactions. This is largely because foreign exchange traders rarely have a short term read on the direction of a currency, but based upon macro-economic factors traders may have more conviction on longer term trades. While foreign currency trades are most common for long term trades, they may also be offered in commodities such as oil, gold, and silver prices, or in some stocks.
Yes, you can make money trading binary options. There are two important elements that must be in place for you to make money first. Without these, you will certainly lose all of your money given enough time (and it probably won’t take very long). You need the right brokerage, and you need a system in place that allows you to make money consistently over time. You also need to take the appropriate steps to track your results systematically so that you can identify when you need to adapt.
The Importance of A Good Brokerage
When trading Binary Options, using a good reputable broker is probably the most important element to your success. While there are a lot of good brokers out there, a few dishonest brokers have really hurt the binary option reputation. Some brokers have failed to allow clients to withdraw their money in a timely manner, while others have manipulated prices to make what should be winning trades losing traders. These type of tactics are not only annoying and harmful to the industry, but illegal. A broker engaging in these practices will not be registered with any regulatory agency.
A reputable broker will be registered with a regulatory agency such as CYSEC, the Cypress securities and exchange commission. Make sure that your brokerage allows withdrawals easily and timely, and that they do not engage in any re-pricing schemes. Our brokerage does not engage in any of these illicit practices.
Make Sure They Use Modern Trading Software
You also want a brokerage that uses a modern platform. Quotes need to stream seamlessly and instantly. You don’t want any pricing disparities. You want to know that your broker is providing the exact correct price to you each and every moment. You want a website that loads quickly, and is easy to use.
Charting Tools are Useful
Most traders also want trade indicators and tools, and they want the ability to research. If you use a technical strategy, you will want advanced charting tools that provide the ability to look at indicators such as moving averages. You may also use more advanced indicators such as stochastic indicators, MACD, or Elliot Wave. Whatever strategy you use, you want a broker who gives you the option to apply a number of strategies to charts.
So is Mobile Trading
Mobile trading is becoming more and more popular as well. While we generally don’t encourage traders to trade from their phones, modern technology is reaching a level where this is becoming more feasible to do without sacrificing a trader’s ability to use his tools. If the ability to trade with a mobile platform is important to you, make sure that your broker has this functionality, and that it works well.
At How We Trade we use Tradorax. Tradorax has a top flight reputation in the industry. The allow clients to deposit and withdraw money easily, their pricing is true, and they have a modern platform that traders demand. We use them because we feel like they are the best.
You Need A Strategy To Make Money
Without a strategy it won’t matter how good your software or brokerage is. Binary options trades are mostly very short, often times 60 seconds to 5 minutes. Longer trades are allowed, but most people do not hold binary option positions for over a month. You need a “scalping strategy” to be effective in short term trades, and you need to stick to it when it works. You will have to adapt your strategy over time, but the important thing is to do it systematically.
Developing A Strategy
Some people develop a strategy based on trade indicators or charting tools, and other people base their trades on a market “read“. At the end of the day you need to be consistent. If you don’t have a consistent strategy, you will never be profitable over the long term.
To develop a trading strategy it is usually easiest to start with an existing strategy, and adapt it to fit your needs and observations. An example of a good existing tool available is a relative strength indicator. This indicator is easy to understand, most every chart includes it in its charting tools, and it works a relatively high percentage of the time. In order to be profitable consistently, you will need to develop additional triggers to open a trade, but an RSI is an excellent starting point for a new trader.
Stick With Your Strategy
Whatever strategy you choose you need to apply is consistently and stick with it. If you have a way to make money, advance yourself by taking progressively bigger trades. Discipline is the number one quality that day traders need to stay profitable. Never switch aimlessly between strategies. If your isn’t working you can make adjustments, but you should always practice any changes with a demo account before you implement them with real money.
Track Your Effectiveness
If you are not tracking the effectiveness of your trading style and strategy, you will not make money. Your bottom line is what counts, but if you are changing position sizes often you will not have a very good read on just how effective your strategy really is.
The best way to track your trading style’s effectiveness is to keep track of key pieces of information from every trade. The important points to track are: the asset that your trading, the time of the day the trade took place, the size of the position that you took, and the money that you made or lost.
With this information you can figure out the best time of the day to trade, the most profitable symbols to trade, the time of the day that works for each symbol, and how everything relates to your bottom line. You may find the highest efficiency happens in the morning on a particular stock with an 80% payout, and you may choose to take larger positions when these elements are met, rather than trading in the afternoon.
Only by analyzing your trades will you be able to maximize your profits.
You don’t need the stock market to go up to make money. There are a number of ways that you can bet on an individual stock or the stock market as a whole to go down. While this is a speculative strategy (as opposed to an investment strategy) it can provide a useful hedge if you have other long positions, or it can be a great way to make money when conditions are not favorable for a bull market.
When you are betting on an asset to decline in value, your position is known as a “short position“. You may also see a trader who has a “short position” referred to as “being short” or “shorting”. The most common ways to do this are by selling a stock short, by purchasing Put Options, by writing Call options, or by purchasing a Put binary option.
Ways To Profit From Short Positions
Purchasing A Put Binary Option
This is perhaps the easiest way for the average trader to take a short position. A binary option is extremely simple (it pays out a pre-set amount if the trade is in the money, or expires worthless if the trade is out of the money). Binary option accounts are easy to open, can be funded with a credit card, and do not require any special “margin privileges” like a traditional brokerage account that is option eligible.
High Risk High Reward
The trader takes a short position by purchasing a Put option contract and entering the dollar amount that they want to risk on the trade. The “strike price” is determined by the price of the security at the moment the trade is entered. The trade has a pre-set payout amount (usually between 60% and 90% of the amount risked). If the option expires in the money, the trader wins their money back plus the payout percentage designated for the trade. It does not matter how far in the money the option contract expires, the payout is always the same. If the trade expires out of the money, the trader loses 100% of the amount that they risked. In this way a trader can potentially make a lot of money from their short position, but they also will lose their entire position if it expires out of the money.
By using binary options, a trader can purchase put options for different time frames to place a bet that will pay if an asset declines in value. This is a viable way for an average trader to profit from a stock, a market, or other assets falling in price. There are various lengths of time available for binary option trades, usually ranging from 1 minute up to a period of a month or months.
Selling a Stock Short
This is the most common way that traders and investors, and especially day traders, can profit from a decline in prices. A short sale involves selling a quantity of an asset (usually a stock) that the trader does not actually own. The trader will sell at the current market price to the open market, and their brokerage will provide the shares to the purchasing party. The trader is effectively being loaned the shares from the brokerage.
The trader’s account is credited with the value of the sale. The trader is usually charged interest from the brokerage daily for the shares that are loaned to the trader.
When the trader decides to close the position, they purchase the shares back from the open market. If the price of the security has fallen, the trader will purchase the shares back (to payback the loaned shares to the brokerage) for less than what they were sold for. The trader can then keep the difference between the price it was sold for and the price it was bought back for.
Limitation On Profits And High Potential Risk
The highest amount of money that a trader can make from selling a security short is 100%. A 100% profit would be realized if a security becomes completely worthless (the trader would not need to pay back the loaned shares to the brokerage because they have no value). Most assets which are shorted do not go to a price of 0 though. In fact a decline in price of 20% for the most commonly traded securities would be considered significant.
It is important to note that if a position is out of the money when it is closed, the trader does not need to necessarily lose a lot of money. A position which is closed out for a slightly higher purchase price than the sale price, for instance, will result in a very small percentage loss.
That being said, there is no maximum to the amount of risk that a trader is exposed to. While their maximum return is 100%, the price of a security may double, triple, quadruple, or even go up higher in price. While brokerages have risk controls in place in the form of “margin calls”, this is not a perfect system and it does not necessarily limit the risk effectively. If for instance a security closed one day below a level which would result in a margin call, and opened the next day significantly above the price which would incur a margin call, the trader is responsible for paying the brokerage any losses, without limit.
Selling Short Takes More Capital
Because a short sale of a security typically provides the lowest expected return compared to the other ways discussed here to profit from price declines, it takes the most capital on the trader’s part to make money. Short selling can also only happen in a margin approved account, which has minimum balance requirements. While many day traders do engage in short selling, and some are very profitable from it, there are limitations and benefits unique to this form of short position. It is important for every trader to understand this completely before choosing their method of taking a short position.
Purchasing A Put Option (or Writing a Call Option) Using Traditional Options
A traditional stock option works by giving the owner the right to either buy (a Call option) or sell (a Put option) a security at a future date, for a specified price. The option has a value because it provides this right to the owner at a future date (and prices may change between the purchase time and that future date), and it may have a value because it is either above or below the strike price when the option contract is purchased.
Purchasing a Put Option
If a trader owns a Put option, it gives that trader the right to sell shares of that particular stock to the option writer for a specific price on a specific date. If the price is below the strike price, the trader will execute the option. This means that they will buy shares at the market price, and sell them for the higher agreed upon strike price. By owning a Put option the trader is making a bet that the price will decline, and that they will be able to purchase the shares on the open market for below the strike price (which the option writer is obligated to pay).
Returns are Potentially High and Risk is Capped
The benefit of a Put stock option is that they rewards are potentially very high, the highest of each of these methods. A trader has the ability to make multiple times the money that they purchase the option for. If the option expires out of the money, the option expires worthless, capping the risk to the trader at the amount they spend on the option contract(s). Some view purchasing traditional stock options as the most beneficial risk/reward profile of any type of position, for trading purposes. The caveat is that while the risk is capped, an option that expires even slightly out of the money has no value. An option that expires slightly in the money will have a small value, so while the upside has a lot of potential, the expected return may not be high enough to compensate a trader for the risk of losing the entire trade amount.
Every option has a time value, otherwise known as Theta. This is the value in the amount of time left between when an option is purchased, and when it will expire. Time has value because the price of a stock can move over time. The more time remaining, the more potential a stock has to move further into a profitable position for the option. Even if the price of a stock or underlying security doesn’t move, the time until the option expires is constantly reducing. As time passes, the time value of the option lessens. This reducing time value is known as option decay.
Writing a Call Option
A trader can also profit from a decline in an assets value by writing Call options. The trader sells the call options that they write on the open market, and if the price drops below the strike price, the trader will keep 100% of the money he earned by selling the options. If the option is executed in the money, the writer will be obligated to sell shares to the option owner at below market value prices, potentially resulting in a loss on the position.
No Cap On Risk
Because the price of a stock hypothetically has no limit to how high it can rise, the potential exists for very large losses when writing Call options. As an example of how writing a Call option can turn out especially poorly, let’s say a trader writes a Call option (100 shares) for stock XYZ at a strike of $50. Let’s say that the trader sells this option for $2 (taking in $200 of revenue). If the price of the stock rises to $60 when the option is exercised, the trader must sell the owner of the option 100 shares at $50. Because it costs $60 per share to acquire the shares, the trader will lose $8 per share ($10 a share on the price difference minus the $2 a share in revenues from writing the option). This position loses $800, and it only had a maximum potential gain of $200. Writing options can result in unfavorable risk/reward profiles in some circumstances, and traders should have extensive option knowledge before writing any options of their own.
The Best Method Depends Upon the Trader
There is no “best” method for profiting on a decline in prices. There are unique benefits and risks to each style. We use Binary Options because there is a high payout no matter how far in the money the option contract expires. This allows us to precisely control our risk/reward profile. It is also well suited to traders who do not want to put up substantial amounts of capital (as the other methods require).
The highest potential payout is using traditional Put options, but there is option decay, and an option that is executed a little bit in the money will only provide a small return to the owner (who also took a significant risk by purchasing the option and possibly losing 100%).
It is important for every trader to understand the workings of each type of short position, and to thoroughly understand their chosen method. For simplicity and for the predictable payouts on all winning trades, we use binary options. If you would like to become a binary options trader and you need to open a binary option account of your own please sign up for an account today.
Never risk more, than you can afford losing. Trading carries a high level of risk, and we are not licensed to provide any investing advice. Understand the risks and check if the broker is licensed and regulated. A percentage of the external links on this website are affiliate links and we may get compensated by our partners. We are not financial advisors. Do your own due diligence. This is an information website only.