Binary options trading and the psychology that surrounds the market
When trading binary options you cannot just focus on the practice of analyzing numbers. Sure, this is a large piece of the puzzle. Analyzing charts and to sort out the statistical information is very important and key to your success in the binary options field. However, it is not all numbers. You also have to mind the market psychology. If you want to trust in mathematical formulas and ratios, Fibonacci retracement is your pick. If you’re more into market psychology, you will probably find success with the Elliot Wave Theory. How can psychology be part of an otherwise highly sophisticated market? When trading, you always have to recognize the human mindset involved in trading. People give in to emotions, which in turn affect the market with, usually, irrational market and price movements. Emotions that often can be found in a market are fear, greed, excitement and crazy expectations.
The financial theory does not always incorporate the large effect that psychology has on the market and this can be devastating to price movements. When you pick up a financial theory or formula for predicting price movements you usually build your assumptions on rational behavior. The reason why your predictions may go wrong is because you will still get human emotions as your joker. You need to mind the psychological effect that comes with trading a financial instrument or derivative.
To be able to make estimates and predictions, a lot of traders will turn to trends and patterns in a test to try and understand the current mood of the market. The market psychology is hard to determine but the goal is to evaluate if the price is in an upward trend or downward trend.
You will eventually find yourself facing your own, and other’s, worst enemy - the human emotions. However, it is critical to understand that you need to master your trading and not give in to emotions and market psychology. One way to do so is to understand how psychology affects market movements and how you can parry it when you make trades.
When you study financial theory and market movements you need to be aware that these may very well be an extension of human emotions. If you know how to weed out the movements of market psychology and it is easier to understand the price movements if you can plot psychology just like historical prices.