14 Potential Trading Pitfalls

14 Potential Trading Pitfalls

pitfallsRecently I wrote an article talking about creating a business plan as a binary options trader, and some of the specific questions you can ask yourself when you are doing so. One of those questions was, “What are my likely pitfalls?” It is smart even before you ever place a single trade to figure out where you are likely to stumble as a trader. If you are able to spot these potential hazards before you trip over them, you may actually be able to prevent yourself from falling altogether. This is a question you can also revisit over time, as you learn more about yourself and start accumulating real-life trading experiences.

If you are actually at the point where you are thinking seriously about trading for real, you should hopefully have a few things worked out by now, including:

• A money management plan you will use to control cash flow
• A trading method you are going to follow
• A trading plan which includes a schedule, notes about your trading system, whether or not you will use auto-trading programs, and so on

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That is really just a start, though. It is easy to think about what will happen if things go right, for the simple reason that it is fun and encouraging. You might envision the numbers in your account gradually ticking up and up, and imagine what you will do with the hundreds of thousands of dollars you will earn trading. But you will actually do more to reach those lofty heights by thinking about what could go wrong and how you will respond. Those thoughts can be scary, but you need to tackle the pitfalls before you can ascend.

One trader’s potential pitfalls might not be another trader’s potential pitfalls. One trader might have no problems at all, for example, with money management, while another may struggle with it every single day. The pitfalls you will face will depend on a number of factors, including the resources you have (and the resources you lack), the specific nature of your trading system and plan, and your own human nature.

I recommend that you pull up your trading system and plan and set them right in front of you where you can look over them, and then do an inventory of your own personality. Get a piece of paper or open a new document and start making a list of the potential hazards.

To get you started, here are some common potential pitfalls I could see coming up for a lot of traders. These are based on my own experiences and those of other traders I have met online:

1. Impatience over slow profits
2. The urge to engage in addicting gambling behaviors
3. Going on tilt
4. Encountering slippage
5. Missing the best trades because of scheduling issues
6. Missing context in trades
7. Trading in the wrong market conditions
8. Taking “B” trades
9. Misunderstanding or misapplying system rules
10. Problems with price spikes or retracements
11. Struggling with indecision
12. Over-reliance on auto-trading
13. Your system suddenly “breaking”
14. Responding badly to a losing streak

Now I want to discuss each of these briefly in more detail. Maybe you will discover that some of these pitfalls are the ones that you need to watch out for.

1. Impatience over slow profits

This is a major hazard for any trader starting out with a small account, which of course you probably are as a binary options trader! You might be starting out with just $100. If so, you will have to accept that your profits in the beginning are going to be tiny! Actually, you probably cannot start trading with that little in your account and still manage your money properly at all, since 2.5% (a responsible amount) of $100 is $2.50, and most brokers will not let you trade less than $10. If you can deposit enough to trade $10, you will still only be making around $7-$8 per trade for a while! This period of slow growth can extend for months or even years. This can lead to growing impatience.

That impatience has destroyed many a promising new trader. The thinking (from personal experience) goes something like this: “Well, since my win/loss ratio is 80%, I really do not need to worry about huge losing streaks. How about I risk 10% on each trade instead of 2.5%? Then I can build up my account fast. In a few months, I could make a living trading.”

Think about it, though. Do you really want to make a living under that kind of pressure, knowing that just 10 bad trades could not only blow your account, but your living also? That thought should terrify you. You need to give yourself a lot more room for failure. This mistake is so common and has led so many traders with small accounts to bust that many pro traders with large accounts have gone so far as to say that traders with small accounts cannot become professional traders. That is simply not true, however. If you are patient enough for long enough, you can do it. If you are aware of the potential hazard your small account represents going in, you can respond intelligently to your growing impatience over time. You will be far less tempted by a really bad money management decision.

2. The urge to engage in addicting gambling behaviors

If you have an impulsive personality and tend toward addictive behavior, that represents a very real hazard for you as a binary options trader. It is very easy for trading to turn into outright gambling if you do not know how to restrain yourself. That does not mean you cannot learn how to do it, but you will have to be ready to follow very strict rules, and you will probably want to have a plan in place in case you violate your rules. My recommendation is to give an accountability partner (a spouse, for example) you trust the power to lock you out of your account if you star trading addictively. Some traders will never have to deal with this problem, but others need to be prepared for it.

3. Going on tilt

If you are prone to emotional decision-making and poor judgment calls, you need to be wary of the possibility of going “on tilt” and allowing pride, fear, anger, or even conceit to drive your trades. If you recognize this as a potential pitfall in your trading, you can again come up with a plan in advance for dealing with it. For example, you may decide that if you catch yourself trading emotionally, you will take at least a week off of trading, and only come back to it when you are calm.

4. Encountering slippage

Slippage is a phenomenon that happens when the market makes a major jump in price. It also happens quite regularly when markets return to trading after the weekend. You put in an order at one price and it gets filled at another. This may not be a big deal in trades with longer expiry times, but imagine if it happened in a 60 Second trade. You could lose all because of the lag between the time you placed your order and the time it got filled—at a different price.

Slippage is a potential pitfall that can impact any trader. You cannot always avoid slippage, but you can steer clear of it pretty well simply by not trading over or around weekends. Give the market a few hours to stabilize after a weekend before you trade, and be wary about getting into trades on Fridays before the market closes, especially if they are going to expire right around opening time. Also avoid holidays, and be cautious when trading around the times that financial reports are released or other major economic events take place (unless of course that is your strategy, or you have tested your system during these times and you are still profitable).

5. Missing the best trades because of scheduling issues

This is a potential pitfall you may identify while you are demo trading. If you are planning on skipping demo trading, you now have a great reason not to! Otherwise you will not find out about this potential pitfall in time to avoid it and avoid losing money. When you backtest your trades, it is hard to keep track of the times that trades would take place and whether you would actually be available to participate. You could well discover that a lot of the best trades take place overnight or while you are at work.

What do you do if this is the case? Trade alerts can help out, as can trading on a mobile device. You may need to test some slight changes to your strategy, or learn how to trade at inconvenient times.

6. Missing context in trades

A great example of missed context in trading that happens a lot is missing the bigger picture. It is common especially for novices to do this, but you can spot these problems before you start trading live by paying attention to why you lose trades in demo and backtesting. You might notice that you take little trends on smaller timeframes whilst ignoring a larger trend forming counter to your position on bigger timeframes, for instance, which then causes you to lose money when the market abruptly goes against you. In reality, the market was already against you. Being aware of a pitfall like this one allows you to avoid it simply by remembering to always zoom out a couple timeframes and check out what is going on at a higher level. I recommend adding this to a trading checklist.

7. Trading in the wrong market conditions

If you are still a beginner, and you are still learning what good and bad market conditions look like for your system, you may want to pay extra close attention to them. A lot of trades are lost simply because the market conditions are too choppy and unpredictable, which can make an otherwise good setup into a bad setup. If you think that you might be prone to this mishap, make another note in your trading checklist.

8. Taking “B” trades

There are all kinds of reasons that binary options take “B” trades, settling for second best instead of taking only “A” setups. Sometimes it stems from impatience, and other times it comes from misunderstanding system rules. Still other times it is the result of “on tilt” trading or addicting behavior. Look back over your tests and mark times you took “B” trades instead of “A” trades. What prompted you to take those setups? Make a list, and you will know what red flags to watch out for to avoid this particular danger!

9. Misunderstanding or misapplying system rules

Here is yet another snare you can avoid by creating a careful checklist that you use while entering and exiting binary options trades. It is not enough just to have a working system; you have to make your system work by using it properly. If there are aspects you tend to either ignore or misapply, make notes and integrate them into a trading checklist. That way when you sit down to trade, you will not make those mistakes. If your problems run deeper and you actually misunderstand your system rules, you probably will not realize it until you have been trading and losing for a while, but you can at least go into trading with the awareness that it is possible. And if you actively know you do not understand why your system works (or sometimes does not work), you need to remedy those gaps in your knowledge, or they will cost you.

10. Problems with price spikes or retracements

These are two events which can bewilder novice traders in particular. Price spikes are false starts which may look like the beginning of a trend, but which actually are nothing (except an opportunity to lose money). Retracements may look like the ends of trends, but actually are just brief movements in the opposite direction before price continues along its present course.

It is a challenge to learn to identify price spikes and retracements, but misidentifying them is an easy way to lose money. Even seasoned traders can have a hard time with this, so as a novice, it is something you want to be extra alert to.

11. Struggling with indecision

When you go live for the first time, you will probably be surprised at the increase in pressure that you feel. Trading live, even with a small amount of money, is a very different animal from trading in demo mode, which in turn is an entirely different experience from backtesting. When pressure come into play, so does indecision. A trade which you might have found quite simple in testing may suddenly seem confusing or unclear. You may struggle to read the markets or press the “up” or “down” button.

Indecision is an emotional pitfall that many new traders will encounter, though not all. If you are risk-averse, it is more likely you will have a difficult time with this aspect of the transition. If you embrace risk, you are more likely to struggle with addictive behavior than indecision. Indecision can cost you money, though, just as addicting trading can. It can cause you to miss out on good opportunities, which can drop your overall win/loss ratio. It may also prevent you from going live in the first place if you are anxious enough.

How can you cope with indecision? It depends largely on your personality and emotional needs, but just recognizing it is a great first step. Once you are aware that it is there and that it is influencing you, you can take additional steps to monitor your behavior and make intelligent choices that are based in logic, not emotion. A question that works for a lot of traders is to ask, “What decision would I have made testing?” If you can figure out the answer and then do the same thing live, you can move forward.

12. Over-reliance on auto-trading

If you are not going to be auto-trading or using signals, this is something you do not even have to think about. If however you will be using either, you should be aware that it is possible to over-use them. You can abuse these programs and services by taking yourself out of your trading and believing you can lean all of your weight on another person. It is never that easy to make money! If you catch yourself imagining all the time you will spend on the beach working on your tan while the profits stack up in your account thanks to your trading bot, you are on the wrong track. It is a nice thought, but not a realistic one. This approach to trading does not get you rich; it destroys your account.

13. Your system suddenly “breaking”

This is not just a potential pitfall—it is a very real hazard which you will eventually encounter sooner or later. There are no perfect trading systems, and all systems will eventually fail to deliver the results you are expecting. If you are unprepared for that hazard, you may react quite tragically when disaster seems to strike, and summon disaster through your own overreaction. You could think, “My system has failed me; this is the end. I have to go back to square one,” and then toss your trading method out the window and go on an endless quest for perfection which simply does not exist. This will waste time and money.

Or you could think something more realistic, like, “My system is failing me right now; something must have changed in the market or in my own trading behaviors. I need to take a break from trading live and figure out when it is. When I do, I can get back to trading and winning.”

Thousands of traders around the world make the mistake of turning a small failure into a big failure each year. If you begin trading knowing this danger exists, you are far less likely to join them!

14. Responding badly to a losing streak

This is closely tied to the point above, though a losing streak may not signify that anything needs to be tweaked with your system, especially if it is not an unusually large losing streak. Some people simply do not cope well with loss, however, especially when it is coupled with uncertainty, as it is in binary options trading. This is another way in which a small problem can turn into a big one. If you panic at a losing streak, you could assume your system is broken when it isn’t, and try to “fix” it, causing it to actually stop working. Or you could go on tilt and try and “get back” at the market.

If you are worried about how you will respond to a losing streak (or even a single lost trade), be sure to come up with a plan and include it in your overall trading plan. It could be something as simple as taking a few days off trading to clear your head, and then coming back to it. Only if the losses continue outside of your expectations (based on testing) will you revisit your trading method and consider making adjustments.

While your journey as a binary options trader will hopefully lead you to great wealth, it will not be without its mishaps and missteps along the way. You cannot avoid them all, but simply by being aware of the obstacles you are likely to encounter and the mistakes you are prone to making, you can avoid some of them entirely and reduce the rest. As you trade live, you will probably notice other pitfalls you are prone to, and you can add them to the list. Always have a plan of action (or inaction, if needed) for when these obstacles arise. That way you can get back on track as quickly as possible and get back to making money.

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