In trading equities and derivatives speculatively, one of the biggest rules repeated constantly by successful investors is to take the emotion out of the process. This might sound a bit abstract, but it’s a real effect that happens – especially with those new to the game. People who open a new position tend to grow attached to it, remaining confident that their decision was right even if the market moves in the wrong direction. They end up rooting for their position instead of analyzing and adjusting to new information and market moves. Countless traders have been stop-lossed (or lost the upper limit of cash on the trade) watching their position, convinced that it will move in the way they thought it would.
Emotion is arguably the biggest roadblock to successful trading – a skill that requires complete separation from the securities or derivatives invested in. In binary options, emotion plays a slightly different role. Once a trade is opened, it usually cannot be exited before expiry. One might think that this takes care of the problem. But psychological fallacies still come into play when traders who have had success with a certain asset or entry time in the past might tend to repeat it, even if the data goes against it.
To combat the negative effects of human psychology on trading, mechanized binary options systems have been developed. Bigger financial firms use computerized systems with algorithms and models, but most retail traders define a system as a set of rules for trading. Binary options systems typically help investors screen for potentially profitable assets, find an entry position (or the proper strike price), and execute when the time is right. Systems usually use technical analysis tools to recognize these factors. A system might, for example, say that the proper time to buy a put binary option is when the chart breaks through the support line at the end of a “head and shoulders” pattern, which often indicates a downturn.
Like anything else that might give a binary options trader an advantage, systems don’t typically come free. It is recommended that an investor who is considering using a system do some research and read reviews before investing any money into a particular one. Also, investors should realize that no binary options system is infallible. Speculative markets are inherently unpredictable, so it’s important to keep management strategies (such as trade diversification) in place regardless of the system in use.