ASEGURAMIENTO Y COLOCACIÓN DE LOS VALORES

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n this chapter we will be focusing on trader psychology—the psychological factors that can have an effect on your success or failure in the markets.

Psychology is hugely important in trading, but new traders totally underestimate it. It’s just as important, if not more so, than the actual technical method you use to find your trades. That may sound surprising to you at first but it is absolutely true.

You can take a group of a hundred people and give them a proven, profitable trading system to follow, but it’s absolutely certain that the majority of those people will lose money—and that’s because of their psychology.

Financial markets are ruled by emotions. It sounds strange but it’s true. There are two main emotions which control financial markets, and they are fear and greed. You get “bubbles” in markets where prices surge ever higher, usually without any real justification, and that’s down to greed. Look at the “dotcom” boom, or the recent run up to nearly $150 for the price of a barrel of oil. The moves shouldn’t really have happened, but there was a speculative boom, driven by greed, and that’s why they happened.

Similarly, when markets crash, it’s usually down to fear. Look at any stock market collapse in recent times; if the market participants had kept their heads and looked at the situation rationally, then those crashes would probably not have been so dramatic. But people panic, and they make trading decisions based on fear.

Greed and fear are two emotions that are always present in the markets.

In order to become a successful trader you have to master your emotions. It’s a simple fact. You’ll never be a successful, professional trader

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if you trade on emotion. The best traders are those who can effectively switch their emotions off, and not allow their trading decisions to be affected by them.

The first main emotion that you have to contend with as a trader is fear. There’s fear of losing a trade, fear of losing money and fear of being wrong. With greed, you’ll often find that inexperienced or unsuccessful traders make poor decisions based on greed for money and greed for success. It’s so easy to jump in to a bad trade because you were greedy for money. You have to learn to control these emotions if you are to be successful.

This book would simply not be complete without teaching you about these psychological aspects of trading and how to deal with them. They really are just as important as the technical factors in determining your success or failure.

The truth of the matter is that you’ll never understand psychology and how it affects you until you actually have a live position in the markets, and your money is at stake. When you’re trading on a “virtual money” demo account, you can’t really gain an understanding of how these factors affect you, but you can prepare yourself for it as much as possible and that’s what this book, and this chapter, are all about.

There are various factors which make this book, and this type of trading, different from others you might have seen, and should help you to overcome these psychological hurdles more easily.

Fear

When it comes to making a live trading decision, there are a number of things that can cause you to feel fear. Fear of being wrong is one. Fear of losing money is another.

The best way to overcome the fear of being wrong is to be sure about the trade that you are putting on. Obviously, if you’re uncertain about the trade, then you’re going to hesitate, and you’re going to be fearful about taking the trade, and fearful about the potential outcome. That’s one of the reasons why we provided you with the flowcharts. Quite simply, if you get to the end of the flowchart process, where it says “you have a trade”, then you can put that trade on without fear. That’s not to say that that trade is absolutely guaranteed to be a winner—there are no cast-iron guarantees of success in trading—but if you get to that point then you

Binary Options Profit Pipeline

at least know that the trade checks out, and that it meets the criteria of a proven, successful trading system. You can then put the trade on without fear, knowing that you’ve done your job correctly in identifying the trade.

Another aspect of fear comes from the fear of losing money. Unfortunately, losing trades do happen from time to time, even if you follow the rules exactly. The simple fact is that financial markets are not 100% predictable. The only way you can keep the fear of losing money under control is by having good money management. We’ve already outlined a proven, successful money management plan for you, and quite simply, you should stick to it. The biggest mistake that bad traders, novice traders—losing traders—make is to use a poor approach to money management.

If you’re risking 5% of your account on a trade, you’re going be a lot less fearful than someone who is risking 50% of his or her account. First of all, you’re going to have less hesitation about entering the trade because there’s less money at risk even if the trade goes wrong. Secondly, your psychology while the trade is actually running is less likely to be negatively affected.

Let’s say, for example, the trade begins to move against you. In that situation, a trader with too much of his/her account at risk might make a decision to exit the trade there and then, based purely on the fear of the potential loss, even though there was no logical or technical reason for exiting the trade. Of course you know what will happen then—the market will move back the right way and produce what would have been a winning trade!

If you only have a smaller amount of your account at risk, you’re much less likely to make these sudden, irrational decisions that are based on fear.

When it comes to dealing with the emotion of fear, there are a couple of great advantages that are built in to binary options trading. As we’ve previously discussed, when you’re trading in a more traditional way, you are putting yourself in a situation where the amount of money you can make or lose depends entirely on how far the market moves, either in your favour or against you. But with binary options, you’re effectively trading on a “binary” outcome—1 or 0—win or loss. The size, and even the direction of the market movement, is not important.

Let’s say, for example, a trader who is trading in a more traditional way has a trade on, which starts to move into profit. Every time the market moves another point in his favour, he/she makes more money. But let’s say that trade

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doesn’t quite hit its target, and then starts moving off in the other direction, and back towards the trade entry point. The trader might think, “I don’t really want to end up taking a loss on a trade that was nicely in profit, so I’ll take break-even if I get it”. Again, you know what will happen! The trader will take break-even purely because of the fear of taking a loss, and inevitably as soon as he/she does that the market will start trading the right way again and go on to hit the target.

With this style of binary options trading however, it’s not important if the market moves in our favour, or against us, or goes nowhere at all. All we’re interested in is whether or not the market hits our no-touch barrier. We are unconcerned with what the market actually does over the running period of the bet, provided of course that it doesn’t touch our barrier. And since we’re not concerned by the market’s movement, we are far less likely to make irrational, fearful decisions because of it.

Also—with binary options trading, you know the maximum risk you stand to take before you ever place the trade, so you can risk an amount that you’re comfortable with. And being comfortable with the monetary risk involved in trading is what takes away the fear.

Greed

What do we trade for? The simple answer is that we trade to make money. In the end, we’re here to make money. Although there are many other benefits to the trader lifestyle, no-one would trade if there was no money to be made. And because money is involved, greed is also inevitably involved.

There is a lot of money to be made from trading the financial markets. If you can trade the markets successfully, then they effectively become your ATM! That creates greed. You want more winning trades, more success and more money. It’s human nature, but you have to keep it under control.

The main mistake that unsuccessful traders make when they’re being influenced by greed is to take too many trades. They always want to be involved in the market, they always want to be making money, and they think, therefore, that they always have to be trading. But that is a recipe for failure. If you overtrade, you’ll end up taking bad trades as well as good trades, and over time, you won’t make any money, in fact you’ll most probably lose money.

Binary Options Profit Pipeline

Again, this is where our flowcharts come in handy, and should keep you away from the overtrading trap that a lot of people fall into. If you can get to the end of the flowcharts process, then you’ve got a trade, if you can’t, you haven’t. That should be enough on its own to keep you from overtrading. It’s tempting to always be in the market, and it can be frustrating to not be in the market, but patience, discipline and following your system will prevent you from over-trading, which is the main symptom of greed.

Once again, Binary Options trading has an advantage in this area over other types of trading.

Let’s say a trader puts on a trade at $10 per point, aiming for a profit of 100 points. The market hits the target, but the trader thinks the market might go further, and that he/she might make more money—so even though their system tells them to take the 100 point profit, he/she doesn’t close the trade. The trade then moves against them, back to only 50 points of profit. At this point the trader might think, “I had 100 points, I should have taken it when I had the chance, but I’m not going to just settle for 50 points. Inevitably, the market will continue lower and lower, eventually forcing the trader to take break- even on the trade—he/she could have had a healthy profit, but got greedy and ended up making nothing!

We won’t suffer from this problem, because with binary options trading we are not concerned about the market’s movement. We’ll make the same amount of money whether the market moves 10 points in our favour, as we will if it moves 100 points in our favour. When your potential profit/loss is not directly tied to the market’s movement, neither will your emotions be. That is a great advantage.

In document TDA IBERCAJA 4, Fondo de Titulización de Activos (página 35-39)