Human beings are all social creatures driven by emotions. Everything that we do is in some ways as a result of our emotions or lack of emotions. Having said that, no two individuals have the same psychological makeup. Some people control their emotions better while others tend to be led by their emotions. This is one of the main reasons why we see some traders in binary options tend to be very successful while others struggle to even break to breakeven in their trades. In other words, for a trader to be successful, they must be able to master their psychology in binary option trading.
There are three (3) main emotions that a trader must overcome in order for him to be able to trade effectively. They are:
Fear is a natural innate survival instinct. When threatened, fear takes control over our mind in order leading to us confronting the danger or fleeing from it. In Binary Option trading, this fear is triggered by the fear of losses. We may feel threatened when confronted with losses due to the market forces or due to wrongful determination of how an asset price will move. Unfortunately for the majority of traders, when confronted with losses, their primary instinct will be hang on to their investment in anticipation of the market turning around. Some will even invest more in the hope that they can cover their losses when the market turns around. In short, we cloud our judgement as to when we should cut our losses and get out of the market.
We all have seen the movie “Wall Street” when the main character “Gordon Gecko” talks about greed being good. Unfortunately, that happens only in the movies. In real life, when it comes to trading in a fast paced market where the timeframe runs in minutes, greed can be a destructive emotion. Because of greed, a winning position can easily turn into a losing one when we fail to liquate our position before the market falls. The insatiable appetite to want more profits can easily blind us as to the opportune moment to exit the market.
Lemmings are animals that are known to blindly follow the crowd and charge off a cliff to their death and hence the metaphor “Lemming Effect”. Actually, human beings possess this psychological phenomenon as well. We can easily see the result of this behaviour at work in the dot com bubble bust and more recently in the crash of the real estate market in the U.S. We lose our sense of judgement because we want to “follow the crowd”.
Overcoming our emotions in respect of fear and greed is never an easy task. In addition, there is no hard and fast rule that we can actually follow because we are all different people. What works well for one person might not work at all for another. The best advice for mitigating the effects of these two emotions is perhaps, being aware of them during the heat of trading and then walking away from the trading. As for the “Lemming Effect”, the best way to counteract this is to do our own investment analysis before we take the plunge. Only if we feel for certain that it is a wise move then we invest our money into the options.