Because binary options are short-term investments, a trading strategy for binary options must be based on technical analysis.
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Technical analysis uses indicators that predict what will happen to the price of an asset in the future based on what happened to the price of the asset in the past. There is an almost endless amount of indicators, ranging from mathematical indications such as oscillator values to indications based on pattern recognitions such as trend analysis. Fundamental aspects such as the economic future of a company are unimportant when you predict what the price of an asset will do over the next 15 minutes or one hour.
Clearly define which indicators you use for your system and when you invest. With this step, you have fulfilled half of each of the first two criteria — repeatability and comparability. For the second half, you need our second element: a money management strategy.
A money management strategy defines how much you invest in every single trade. A good approach uses a percentage value of your overall account balance, ideally between 2 and 5 percent. With this type of strategy, you trading becomes fully repeatable and comparable. You invest the same percentage of your account balance in every trade, which means that every trade bears the same weight. This is a problem because no two trades are completely alike.
Even with a clearly defined strategy, you will trade at different times of the day, in different moods, and in different market environments. You want all of these things to have the same effect on your overall success. Otherwise, you would sooner or later encounter a situation in which most of the weight falls on lost trades, and you could lose a lot of money.
The key to long-term success is not losing money. As long as you always make money, you will get continually richer. That is what it is all about, and why you have to accept that the worth of a trade to you is not measured in absolute terms, it is measured relative to your overall account balance. A good money management strategy reflects that.
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With this type of money management, you can survive losing streaks and continually grow your account balance when things are going right. Of course, you need a strategy that is good enough to make you money. The next element of a good binary options strategy will get you there. An analysis and improvement regime guarantees that you will eventually create a system that can make you money. It helps you identify the things that make you money and eliminate the things that cost you money.
An analysis and improvement strategy must be something that helps you understand the results of your past decisions. The precise form is up to you, but the thing that has helped the most traders is a trading diary. In a trading diary, you write down every characteristic of a trade.
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This includes such things as:. After a while, you can come back to your trading diary and compare your past trades. This analysis usually creates some interesting insights. Often, you will find that you are the most effective when you trade in a specific place, at a specific time, or in a specific mood. By simply always trading in this place, mood, or time, you can increase your winning percentage and your profit.
Similarly, you will likely find that a special type of asset, expiry, or binary option works better for you than others, and you will be able to identify the indicators that work the best for you.
Step by step, you can focus on your strengths and improve your trading. These reviews are so important because almost nobody starts out with a perfect strategy. At first, we all make mistakes or trade in ways that are a bad fit for us. Therefore, it makes sense to have a plan for how to get better. Eventually, you will be able to trade profitably.
Creating a free trading system is not straightforward, and as it develops, it needs regular reviews to keep it on track. The process that we laid out takes time. During this time, you will make rookie mistakes and encounter some losses.
To survive this learning phase without going broke, you can use a demo account. Most binary options brokers offer demo accounts that offer you all the features of a regular trading account but allow you to trade with play money instead of real money. They create the risk-free environment in which you can develop your free system without having to fear for your money. We recommend starting with a demo account to all newcomers. Even if you should find that binary options are not the right investment tool for you, you can learn this lesson for free with a demo account.
Either you find a great way to make money, or you will have some fun for free — either way, you win. To find the right broker and the right demo account, take a look at our broker top list. There, you can find all relevant brokers and their features in a comprehensive table. A good binary options system is repeatable, comparable, and improvable. Use a trading system, a money management strategy, and an analysis and improvement regime, and combine them into one system. Building your own system, free, gives you greater freedom than relying on another provider. Over time, the combination of these three strategies will help you to trade profitably.
With a demo account, you can accomplish this step completely risk-free. Toggle navigation. Compare brokers Reviews Binary. One of the choices that every new trader has to make is whether to be a discretionary trader or a system trader. Discretionary trading is decision-based trading.
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The trader decides which trades to make based on current market conditions. System trading, on the other hand, is rule-based trading. The trading system decides which trades to make, regardless of current conditions. Discretionary trading and system trading have the potential to be equally as profitable, so the decision should be made based on the personality of the trader. Some traders will instantly recognize which type of trading is more suitable for them, while other traders may need to experience both types before they can make a decision. In discretionary trading, the trader decides which trades to make based upon the information available at the time.
A discretionary trader may and should still follow a trading plan with clearly defined trading rules, but will use their discretion in taking the trade and how it is managed. For example, a discretionary trader might review their charts and find that all of their criteria for a long trade have been met, but decline to make the trade because the volatility for the day is too low, and thus it is highly likely the price won't reach the profit target for the trade.
The advantage of discretionary trading is that it is adaptive to current market conditions. You may have a great trading system but if you know that it tends to perform poorly when certain market conditions are present, then you can avoid those trades. Or if you notice your strategy has a tendency to perform very well in other conditions, you can increase your position size slightly during those times to maximize gains. The drawback of a discretionary system is that many traders are prone to second-guessing themselves. They may actually be very poor at deciding when to trade and when not to, and therefore a more systematic approach would be better.
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Discretionary systems are susceptible to the psychology of the trader ; being too greedy or fearful can destroy the profitability of a discretionary trading system in a hurry. In system trading, the decision to make a trade is based entirely upon the trading system. System trading decisions are absolute and do not offer the opportunity to decline to make a trade based on the trader's discretion. If the criteria are met, the trade is taken. A system trader might review their charts and find that their trading system requirements for a short trade have been met, so they will make the trade without any further decision-making process, even if their "gut" is telling them it isn't a good trade.
System trading strategies can often be automated since the rules are so clearly defined that a computer can implement them on behalf of the trader. Once a computer program has been developed to recognize when a trading system's requirements have been met, the program can make the trade including the entry, management, and exit without any involvement of the trader. The advantage of the system trading strategy is that it is not susceptible to the psychological whims of the trader.
The system takes all trades, regardless of the trader's feeling. The disadvantage is that a systematic trading strategy is not very adaptive.
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Trades are always taken as long as the conditions are met, even in unfavorable conditions. To help alleviate this problem, more rules can be added to the system, although this often results in cutting out some winning trades as well. Discretionary trading and system trading have the same goal of making money, even if they achieve it in slightly different ways. The two systems may even make many of the same trades, but each will likely be better suited to different personalities. Discretionary trading is most compatible with traders who want to be in control of every trading decision the entry, stop loss , and the exit.
Discretionary traders often feel uncomfortable when they think about giving complete control of their trading to a computer program. Discretionary traders often have backgrounds in artistic endeavors, such as writing and gardening. However, discretionary trading also appeals to traders who like to be in control in most aspects of their life.
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Discretionary trading is also for people who just want to adapt their trades to current market conditions. System trading, on the other hand, is most compatible with traders who want speed, precision, and accuracy in their trading. System traders have no qualms about letting a computer program make their trading decisions, and may even value the feeling of lessened responsibility that this allows.
System traders usually have logical personalities, and often have backgrounds in areas such as computer programming and mathematics.