The Anatomy of a Perfect Trade: 5 Essential Criteria
If you so found this article by querying “perfect trade,” as opposed to skimming through our archives, there is a good chance that you are searching for the holy grail of binary options trading—a perfect trading system which will act as an ATM for the rest of your life. In the past, I have written a few articles on the concept of a trading Holy Grail, and why searching for one will never lead you to success—only to more failure and disappointment. There are no perfect systems. There isn’t really even such a thing as a perfect trade. But one thing you can do is look for trades which are as close to ideal as possible, and take only those trades.
Let’s talk about what makes a trade as ideal as possible. There are 5 prime ingredients:
1. Takes place at the right time
2. Fits with your trading system rules
3. Fits with the market context
4. Works with your capital
5. You are in the right mindset for the trade
A binary trade which is “ideal” is one which most closely fits within each of these criteria, and affords you the very best chance at winning. I refer to these trades as “A+” setups. Anything shy of an A trade should be avoided. Taking B trade after B trade will eventually cause you to lower your standards too far, costing you more and more money. Before you know it, you will start taking C setups and D setups. Now let’s take a closer look at each of these criteria.
1. It takes place at the right time.
This is the starting criterion when you are looking for an ideal trade. You want to avoid trades which take place at times of unpredictability, unless you have tested those times with your trading system and found you can trade through them. Weekends and holidays are dubious times to trade. Trading when reports come out may be perfect for you or may be something to be avoided, depending on your trading system.
Something else to consider here is your own personal schedule. Even if a trade comes up in the middle of the week, say on a Wednesday, and everything else about the setup is great, you may not want to take the trade if you cannot be there to monitor it because of work, an event, or even sleep. Before you take any setup, ensure that you will be able to monitor it and make important decisions (like getting out early) if necessary. Traders who fail to manage their trades personally do not last long—even if they are doing everything else right.
2. It fits with your trading system rules.
This is probably the most vital criterion for picking a “perfect” trade setup. Your system provides you with the main measure of perfection. The closer a trade setup is to the ideal setup offered by your trading system, the more ideal that trade setup is. The details will depend on your system rules for trade entries. When you test your trading system, you should take careful notes on all of your trades: those which went to win, those which went to fail, and those which won spectacularly or lost spectacularly. From those notes, you should be able to figure out patterns pertaining to your setups.
If you use technical analysis, you should develop an eye for the ideal state of all of your indicators. Depending on what type of system you use, you may have only a couple of indicators on your chart, or you may have many. Some traders steer away from systems with many indicators for just this reason. The more indicators you have, the more likely they are to conflict and give you mixed signals. If you only have a few reliable indicators that work well together, then you get confluence when all of them are showing up in an ideal pattern—but if even one of them is off, you know to avoid the trade.
If you use fundamental analysis, you are looking for a situation where a report is coming out or another event is taking place in conjunction with a market context where you are likely to profit. Some fundamental analysis traders may also place technical indicators on their charts. If you do, you will need those to be in line with your trade setup as well.
Last but not least, there is price action. If you use price action, you let the bars themselves tell you what to do based on their formations. Over time, based on your experiences, you will learn to recognize a perfect price pattern from an imperfect one. You may also put technical indicators on your chart (or not). If you do, the A+ trade will have an ideal pattern surrounded by ideal indicators.
If a trade doesn’t fit ideally with your setup, you shouldn’t take it, no matter how much you might want to. Impatience has no place in a binary options trader’s life. More on that when I talk about mindset in a bit.
3. It fits with the market context.
This is a tough one even for traders who have been around for quite some time, and it is extremely common for newbie binary options traders to simply skip this step outright or even not recognize its existence. Market context is all about having the “big picture” when you make a trade. The simplest example of using market context effectively is to “trade with the trend.”
For example, let’s say you have found a binary options trade setup at an ideal time to trade, and the indicators on the chart look beautiful. You may think that you have found a model trade, an A+ trade. So you sell, only to lose. Only later do you realize that if you had zoomed out a level on your charts, you would have noticed that the asset you were trading was in a huge uptrend, and the setup you tried to use was against the trend. After a brief correction, the asset continues upward, and you lose your trade.
It can be harder than you might expect to recognize market context in the beginning, and it involves more than just recognizing up and down trends. You will have to experiment with this aspect of trading as well (deciding for example how many chart timeframes to look at). Over time you should learn how to “read” the market like a book, in much the same way that you learned to recognize ideal trade setups without context. Once you add in context, you become a much more powerful trader.
4. It works with your capital.
With some types of trading, this is not something you have to worry about, because you are given full control of your investment amount, but with binary trading, it is. This is however mostly a problem for very poor traders getting started with the bare minimum, and shouldn’t be an issue if you choose a broker that allows you to trade within your money management constraints.
You do not want to place a trade for example that requires you put down $25 as a minimum investment size if all you have in your account is $100. You really should not trade more than $5 at that level, which would confine you to 60-second trades. If you are good at 60-second trades, by all means, go for it. If not, though, you really need a trading system for longer trades, as well as more capital, or a broker that will let you trade less. As you build up your account, this will cease to be a problem, since you will eventually be able to trade more than the minimum investment size and still stay within your trading plan rules.
5. You are in the right mindset for the trade.
In general, the trades you take should fit with your personality. Again, if you feel extremely uncomfortable with really fast trades, you probably do not want to focus on a system for 60-second traders. And if you cannot handle long-term position trades psychologically, you probably should trade faster binary options.
Mindset encompasses both the long term and the short term. In the short term, you have to deal with your acute emotions. These may include anger, vengeance, guilt, fear, mania, pride, excitement, and more. Both negative and positive emotions that escape your control can ruin even the most ideal A+ trade setup. If you are not emotionally in the right place to trade, you might take setups which are less than ideal, or ruin setups which are ideal by making foolish decisions after you enter the trade (like closing early when you should hang on, refusing to close early when you ought to, or doubling up or rolling over when you should simply let the trade close naturally).
There is no perfect trading system which will deliver money to your account effortlessly and without a hitch every time. An excellent, well-tested trading system can however maximize your winnings and help you to win as consistently as possible. Ideal trade setups are those which most closely fit within your system parameters as well as the other criteria discussed. Trade only at the best times, do not invest more than you can afford, make sure you are in the right mindset, and do not forget about market context. If you follow those guidelines, you will discover that how you trade is as vital for success as what you trade!