Fundamental Analysis in Binary Options Trading I Binary Options Guides

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Fundamental Analysis in Binary Options

As we have established time and again, binary options trading requires different kinds of analyses that pertain to market sentiment and price movement. These analyses are based from the ones used in traditional trading. Since binary options is a direct derivative of the market, these analyses techniques can easily be applied when trading binary options. The binary options trader should therefore look into these indicators if he wants to continue making successful trades.

We have mentioned before that there are two kinds of analysis. The first being the elementary fundamental analysis, and the second being a more advanced technical analysis. Technical analysis refers to reading quantitative data to look out for trends and indicators that tell the binary options trader when is the right time to trade and what binary option to purchase. Technical analysis makes use of the different tools that binary options brokers provide in order to provide the trader with the right information.

Fundamental analysis, on the other hand, is what binary options traders use to analyze market news and sentiment to predict the future value of an asset. Fundamental analyses of the market so “fundamental” in nature as far as using the news to trade the markets is concerned because unlike the quantitative nature of technical analysis, this type is a qualitative measure to analyze world market trends. Different sources and tools are used for fundamental analysis, and every binary options broker should know how to employ the data that they gathered to yield meaningful information for their trades.

Global Landscape

The binary options trader needs to look into a global landscape. Countries that are regarded as major players in world economics and politics are to be considered. The economies of other countries are dependents on the performance of these countries. For example, in an effort to rebuild the global monetary system after WW2, the US came up with the system. This is a system of monetary management that established the rules for commercial and financial relations among the world’s major industrial states established in the late 1940’s. This is the first example of a fully negotiated monetary order intended to govern monetary relations among independent .

Since then, the US dollar has been the standard currency on which international trade is based. In the 2000’s, China has also started to become a big key player in the market. It has also assumed a similar role and its vast industrialization has placed a huge demand on certain assets such as oil. Countries in Africa have been dependent on China for a number of resources. In Europe, Germany has the strongest economy. This country has been dominant as far as bailing out troubled countries affected by the establishment of the Euro.

How does knowing the global landscape help in trading? Quite simply, periodic announcements from key players, countries and companies, in the market affect price change in the market. When they give out a statement concerning key economic and political events that have an impact on world economics, the binary options trader should always be an earshot away. The markets monitor these announcements very closely because they will impact the future of the world economy at any given point in time.

Depending on the outcome of a key announcement by a country or company, the market may react differently. It may either assume a positive sentiment or a negative sentiment on the economy and currency of the country making the announcement. This in turn will have a domino effect on the sentiment and outlook of traders in other countries whose economies are dependent to the performance of these major players. Once market trend has been formed based on a specific sentiment, binary options traders are now able to trade assets based on the trend and could either buy more of the asset or sell it off and move to safer investments.

This is the reason why the news has such a profound impact in the market. Human emotions play an intricate role in the movement of the market, and it is in the news where we find updates on these emotions.

News announcements can be classified based on the extent of their global impact on the world economy and asset sentiments. News can be , , or .

More often, binary options traders pay more attention to news. This is because announcements create a greater effect on the world market than news. But, it is possible for a news item to transition to news, depending on the prevailing economic factors. For example, the housing data and the GDP figures of Eurozone economies like Spain, Portugal, Ireland, Greece and Italy are factors. They hardly made impact on the markets a few years ago. But now, these data are now major market movers because the economic dynamics have changed and made these data very important in the assessment of the economic health of US and Europe.

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Here are some things to look for in a country or company when doing fundamental analysis.

  • Gross Domestic Product (GDP)
  • Employment Data
  • Manufacturing Data
  • Reports
  • Consumer sentiment
  • Retail sales reports

Analyzing Deviation

Fundamental analysis studies some component factors to help the binary options trader get a feel of market sentiment based on global news items. These factors are the following.

  1. Consensus or the Expected Number — This number is based on a poll of leading economists who will give an average figure which they expect the news to conform to.
  2. Actual Number — This is the actual figure mentioned in the news release.
  3. Deviation — This is the difference between the consensus figure and the actual figure.

Traders look into these figures when using the news to trade the markets. The binary options trader may specifically look into the deviation to look for market surprises. In this situation, the deviation is much higher than the expected figure, either to the upside or downside. For traders, this gives a very good and reliable, tradable signal.

There are ways to measure the deviation to see if a deviation is tradable or not. Generally speaking, the deviation benchmark is obtained by comparing the expected figure and the previous number. The difference now serves as the benchmark to the upside and downside, and depending on how far above or below the deviation is from the benchmark, the market will react accordingly.

Using the news to trade the binary options market will depend on how the trader uses the information. No matter how the trader uses the news, global markets will still be affected by how humans in control of countries and companies move. This sentiment is what produces the greatest trading opportunities.

So, if you are a binary options trader, it would be wise to start watching financial news and subscribe to financial news websites. Meanwhile, we will. continue to provide you with help as you start profiting from binary options trading.

A Guide to Trading Binary Options in the U.S.

Binary options are financial options that come with one of two payoff options: a fixed amount or nothing at all. That’s why they’re called binary options—because there is no other settlement possible. The premise behind a binary option is a simple yes or no proposition: Will an underlying asset be above a certain price at a certain time?

Traders place trades based on whether they believe the answer is yes or no, making it one of the simplest financial assets to trade. This simplicity has resulted in broad appeal among traders and newcomers to the financial markets. As simple as it may seem, traders should fully understand how binary options work, what markets and time frames they can trade with binary options, advantages, and disadvantages of these products, and which companies are legally authorized to provide binary options to U.S. residents.

Binary options traded outside the U.S. are typically structured differently than binaries available on U.S. exchanges. When considering speculating or hedging, binary options are an alternative—but only if the trader fully understands the two potential outcomes of these exotic options.

Now that you know some of the basics, read on to find out more about binary options, how they operate, and how you can trade them in the United States.

U.S. Binary Options Explained

Binary options provide a way to trade markets with capped risk and capped profit potential, based on a yes or no proposition.

Let’s take the following question as an example: Will the price of gold be above $1,250 at 1:30 p.m. today?

If you believe it will be, you buy the binary option. If you think gold will be below $1,250 at 1:30 p.m., then you sell this binary option. The price of a binary option is always between $0 and $100, and just like other financial markets, there is a bid and ask price.

The above binary may be trading at $42.50 (bid) and $44.50 (offer) at 1 p.m. If you buy the binary option right then, you will pay $44.50. If you decide to sell right then, you’ll sell at $42.50.

Let’s assume you decide to buy at $44.50. If at 1:30 p.m. the price of gold is above $1,250, your option expires and it becomes worth $100. You make a profit of $100—$44.50 = $55.50 (minus fees). This is called being in the money. But if the price of gold is below $1,250 at 1:30 p.m., the option expires at $0. Therefore you lose the $44.50 invested. This called out of the money.

The bid and offer fluctuate until the option expires. You can close your position at any time before expiry to lock in a profit or a reduce a loss, compared to letting it expire out of the money.

A Zero-Sum Game

Eventually, every option settles at $100 or $0—$100 if the binary option proposition is true and $0 if it turns out to be false. Thus, each binary option has a total value potential of $100, and it is a zero-sum game—what you make, someone else loses, and what you lose, someone else makes.

Each trader must put up the capital for their side of the trade. In the examples above, you purchased an option at $44.50, and someone sold you that option. Your maximum risk is $44.50 if the option settles at $0, and so the trade costs you $44.50. The person who sold to you has a maximum risk of $55.50 if the option settles at $100—$100 – $44.50 = $55.50.

A trader may purchase multiple contracts if desired. Here’s another example:

  • NASDAQ US Tech 100 index > $3,784 (11 a.m.).

The current bid and offer are $74.00 and $80.00, respectively. If you think the index will be above $3,784 at 11 a.m., you buy the binary option at $80, or place a bid at a lower price and hope someone sells to you at that price. If you think the index will be below $3,784 at that time, you sell at $74.00, or place an offer above that price and hope someone buys it from you.

You decide to sell at $74.00, believing the index is going to fall below $3,784 (called the strike price) by 11 a.m. And if you really like the trade, you can sell (or buy) multiple contracts.

Figure 1 shows a trade to sell five contracts (size) at $74.00. The Nadex platform automatically calculates your maximum loss and gain when you create an order, called a ticket.

Nadex Trade Ticket with Max Profit and Max Loss (Figure 1)

Market Analysis For Binary Options

Remember back when you enrolled yourself into the School of Pipsology, we talked about “The Big Three” types of market analysis. In case you forgot, they are:

Fundamental Analysis

Trading the News

One way to make use of fundamental analysis would be to go with a trade-the-news strategy.

For binary options, this can be particularly effective when you trade simple Up/Down options.

After all, you would simply need to get an idea how price may react to better/worse than expected data and how strong the reaction may be. You just have to be confident that price can reach the strike price of the option that you bought.

For example, you plan to trade the Australian retail sales report. Let’s say you have a bullish bias on the results.

Chances are that a better-than-expected result will spur the Aussie to new highs, so you would look to buy a “call” option on AUD/USD.

Now let’s say that, as you expected, we saw a better-than-expected result. Luckily, AUD/USD also rose, rising above the strike price. Paycheck time, baby!

Of course, there are a couple of factors to take into consideration when playing the news.

First is the potential for volatility. When playing a news report and buying a binary option, you have to be fairly confident that the event will spark enough volatility so that price can reach the strike price and stay above/below that level.

If you try trading a report that rarely causes a ripple, you’ll be throwing money down the drain.

Second, you have to factor in the time component of binary options.

When trading binary options and implementing a trade-the-news strategy, you may also want to consider going with one-touch options since price would only have to touch and not necessarily close at a particular level.

You can also try the Out of Range options if you expect the price to move with strong momentum away from its previous range.

With this option you don’t have to pick a direction, just decide whether or not the market will move big time in one direction or another.

Technical Analysis

Love using those fancy-schmancy indicators like moving averages, Bollinger bands, and Stochastic?

Don’t be afraid to slap these indicators on your trading charts when you plan to trade binary options!

These are used across all sorts of trading markets and not just spot currencies.

Just make sure you have a good understanding of how each indicator works before incorporating it into your analysis.

Studying technical levels and inflection points may also prove helpful when you trade binary options.

Let’s take a look at this example on GBP/USD.

Price has just broken down from a double top.

With this behavioral pattern, price normally continues to trade lower at a distance equivalent to the height of the double top.

One way you could play this is by taking a One-Touch trade.

If the strike price that your broker offers is somewhere between 1.5450-1.5550, which is within the height of the double top, buying a “put” option might be a setup worth considering.

Sentiment Analysis

Sentiment analysis is the task of measuring the market’s current “feeling” with regards to broad risk flows.

Are traders confident in buying up risky assets or would they rather reduce risk by buying safe-haven assets or going into cash? This type of analysis will prove to be particularly useful when trying to hop on trends.

Will EUR/USD break for new highs? Or do you think the trend is overdone and there’s not enough momentum? You can use sentiment analysis to gauge how the market is feeling.

If you’re fairly confident that market sentiment will favor a risk-on environment, you could consider purchasing a “call” option on a risk currency or asset (e.g., Australian or New Zealand Dollar, Equities, Commodities, etc.)

On the flip side, if you think a reversal in sentiment is in play and depending on how overdone you believe the move is, you could consider purchasing a “put” option on those same risk currencies or assets.

Combination

Just as in spot forex trading, it’s not necessarily a case of choosing which type of analysis you’re going to use because they’re not mutually exclusive.

In fact, you can combine all of these types of analysis to form the basis of any trade that you take.

Fundamentals can help give you a bias as to what direction you want to take, while technical analysis will help determine the chances of the market reaching, breaking and finding support/resistance at a certain price.

Meanwhile, sentiment analysis may let you know whether the market is in a risk-on or risk-off mood.

In the end, the key is for you to learn from all your mistakes and gain experience. Over time, this process will help you fine tune your analysis and help you develop good trading practices.

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