The Importance Of Market Psychology In Trading

Binary options trading is never simple, and often newcomers lack success not because they lack the essential fundamental or technical preparation but because they do not have the psychological ability for trading. The key to success in a trade is to overcome the enemy, and when trading, the enemy is actually the trader himself. Emotions must be controlled when trading and this is key when taking trading decisions.

The financial market is a sum of human behaviour. A key element of trading is the interpretation of the market’s actions in the past and the prediction of what they are likely to do in the future based on the actions of the past. One of the psychological levels in trading is round numbers, as these attract traders to either enter or exit a trade. When these levels are reached, the market is much more likely to move quickly than at other times. Being aware of this in advance enables traders to trade in a contrary manner as virtually every time the market approaches an important level, it fails to break that level on its first attempt.

Why are Round Numbers Important in Market Psychology?

Human nature has a role to play in the importance of round numbers in binary options trading, as round numbers tend to attract buyers and sellers. However, there is also importance to be placed on the fact that ordinary options are generally set to expire around round numbers. It is most likely that a trader will find that an option which is set at a round number will have a price that will not break through its level until the option has expired, yet traders will find it emotionally testing, finding it virtually impossible that the round number will not be broken within the expiry period. This leads to the major trading mistake of overtrading (i.e. taking more options that intended), and this mistake will often lead to failures and losses.

The Role of Emotions in Market Psychology

Emotions often play tricks on traders after they have purchased an option – if it remains in the money right up to its expiry date, the trader will no doubt be thrilled and have increased confidence. However this often leads to overtrading, and again, this can lead to losses in the end. Conversely, if an option stays out of the money right up to its expiry date and then the trade is lost, the trader will generally lose faith. While remaining neutral is desirable, most traders find that easier said than done and struggle to eliminate the element of emotion from their trading experience. Although the principles of binary options trading are centred around choosing the correct expiry date and striking price, discipline and self control also have a major role to play. Being self-aware and in control of one’s own mind is often more important than the trade itself as the financial markets never behave rationally. This is especially vital when trading the news as in this event, traders are actually buying and selling based on a comparison between a forecasted view and the actual figures released, and often, the first reaction of traders will be invalidated. For example, if the outcome of a report releases figures that are lower than those forecast, it may be logically assumed that the market would move to the downside and therefore traders would consider placing put options. However, frequently, this first reaction will be swiftly retraced as the algorithms involved are about breaking and hitting stops at the key levels of support and resistance.

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