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.

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

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  • 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.

Top 5 Binary Options Strategies for Beginners

If you are new to binary options trading, it may be wise to research what are the best binary options strategies available to you.

While there are several strategies available, not all of them are suitable for beginners in South Africa and not all of them will help you to achieve your investment objectives.

So it is always a great idea to take the time to research the different strategies to ascertain which ones are more likely to be appropriate for someone who is new to binary options trading.

List of 5 of binary options strategies for beginners include the Trend strategy, the Pinocchio strategy, the Straddle strategy, Fundamental analysis and the Hedging strategy.

The Aim of Binary Options Trading in South Africa

With binary trading in South Africa, the aim is to make an educated guess about the price that you think a certain asset or asset-pair will reach within a specific time period. As the word “binary” implies, with this type of investment, there are only two possible outcomes – gain or loss.

In other words, either you will gain everything or you will lose everything based on what you had predicted about the price of that particular asset or asset-pair. The two types of binary options are call options or put options.

A call option gives you the option of buying an asset at an agreed price on or before a certain date. A put option gives you the choice of selling an asset at a particular price (strike price) on or before a certain date (expiration date).

If you believe that the price of the underlying asset is going to go up within a certain time frame, then you would invest in a call option. By so doing, you would make a profit when the price goes up because you would be able to sell that asset at a higher price than you bought it for.

On the other hand, if you believe that the price of the underlying asset will fall within a certain time frame, then you would purchase a put option which gives you the right to sell that asset at an agreed price within a given time period. Now let’s briefly discuss some of the top binary options trading strategies for beginners.

The Trend Strategy – South Africa

As the name implies, the Trend strategy is based on price trends. Over time, investors will notice that there are certain patterns in how the price of an asset moves.

For example, you may note that in certain circumstances, there is a downward trend, in other circumstances the price may remain relatively stable, and in other circumstances, there may be an upward trend in price. The aim is to study the trend and to make your trade based on the change in direction of the moving average price of the underlying asset.

You look at the moving average of the price of the asset over a certain period of time and make your trade when you notice a change in the direction of the moving average, ensuring that the trade is for the opposite direction.

The Pinocchio Strategy – South Africa

This strategy is a simple one and is used whenever the investor expects the price of the underlying asset to increase or decrease drastically in the opposite direction.

If the price is expected to increase drastically then a call option should be purchased, and if the price is expected to decrease drastically, a put option should be purchased. In the candle bar diagram, the wicks are usually very long indicating that the market may be lying (Pinocchio’s nose grew longer when he lied) so we should trade in the opposite direction.

The Straddle Strategy to Use as a South African Trader

This also falls in category of top 5 binary options strategies for beginners. Straddle strategy is most suitable during periods of high market volatility and is based on the expectation that breaking news or other important event will cause a sudden change in the price of an underlying stock.

In this case, both a call and a put option are placed on the same asset. Place one option first (call or put) and then when the price change occurs, place the other option (call or put).

The Fundamental Analysis Strategy – Trading in South Africa

Fundamental analysis involves looking at the smaller entity to gain insight into the probable performance of an underlying asset. This is especially applicable to binary options trading of underlying stocks.

The fundamental analysis basically involves the scrutiny of the organization’s financial performance in order to make an educated guess about the most likely direction that that asset will take under the prevailing market conditions. This method requires that the trader understands how to read and interpret financial statements.

So, this is suitable for beginner traders who have at least a basic understanding of how to analyse financial reports.

The Hedging Strategy for Traders Beginners

Hedging is a method of trading that helps to protect the trader from excessive losses. It involves setting up accounts that will offset any possible losses that the trader may make.

This strategy is perfect for beginners who want the benefits offered by binary options trading, but who cannot afford to rack up huge losses.

Conclusion – Top 5 Binary Options Strategies for Beginners

No matter how new you may be to binary options trading, it is possible to make gains and to minimize losses by choosing the right strategy.

Although there are several binary options trading strategies for beginners, some of the most appropriate strategies include the trending strategy, the Pinocchio strategy, the straddle strategy, the fundamental analysis strategy and the hedging strategy.

All these strategies, except the fundamental analysis strategy, involve the use of technical analysis as a means of trading. Although it is possible to make sizeable gains from binary options trading, it is wise to remember that all investments involve a level of risk. Therefore, it is best to conduct some amount of research before embarking upon binary options trading.

Binary options trading strategies for beginners should ideally begin with the establishment of a demo account. This will help new traders to acquire a feel and a good understanding of how binary options trading works, prior to investing actual cash.

Binary Options Strategy

Welcome to our binary options strategy section. Here you will find a beginners guide to strategies, leading on to more advanced information about things like money management, and articles on specific strategies.

Basic Strategy For Successful Trading

Strategy is one of the most important factors in successful binary options trading. It is the framework from which you base your trade decisions, including your money management rules, and how you go about making money from the market. There is no one Holy Grail unfortunately, if there were then we’d all be using it!

The two most very basic categories of strategy are:

Fundamental strategies focus on the underlying health of companies, indices, markets and economies and while important to understand, is not as important to binary options as the technical aspect of trading.

Technical trading, or technical analysis, is the measurement of charts and price action, looking for patterns and making educated guesses, speculations, from those measurements and patterns.

Strategy simplifies your trading, takes guesswork out of choosing entry and reduces overall risk.

The text book definition reads like this; a plan of action designed to achieve a goal or overall aim, the art of planning and directing operations in order to achieve victory. When it comes to trading the goal is to 1) make money and 2) not lose money.

The number one method of achieving this goal is to use a rules based approach to choosing entries that relies on ages old, tried and true technical analysis indicators. There are dozens, possibly hundreds if not thousands, of ways to trade the market, all strategies. They can be categorized in terms of the tools used, the time frames intended, the amount of risk associated with and many other ways, these being the primary.

  • Price Action/Scalping Strategies – Price action strategies rely on the movement of the market to time entry. These can be trend following or not, long or short term and utilize bullish or bearish positions.
  • Trend Following/Directional Strategies – Trend following strategies target assets that are trending strongly to pinpoint a series of profitable entries with a high rate of success.
  • Range Bound/Short Term Strategies – 99% of the time the market, or an individual asset, is not trending but trading in a range within a high and low mark. These strategies focus on support and resistance levels, reversals within the range and short term trends as asset prices move up or down from support to resistance and vice versa.
  • Long Term/Momentum Strategies – These are the less risky of the strategies as they target stronger signals and longer term time frames. These signals have a higher chance of success but take longer to develop and longer to unfold than other types of signals.

A technical analysis indicator is, most often, a mathematical formula which converts price action into an easy to read visual format. Common types of indicators include but are not limited to moving averages, trend lines, support and resistance, oscillators and Japanese Candlesticks.

Money Management

Strategy is 1 of the 2 pillars of risk management, the other is money management. You control risk by targeting only good signals, weeding out obviously bad signals, and never putting so much money on one trade that it will wipe out your account.

Money management is the control of your overall trading fund. It should clarify trade size, and long term financial management – leaving you to focus only on trading. A well thought out money management structure should simplify:

  • Trade size
  • Risk management
  • Future growth
  • Stress

A trader with a clear financial plan should not need to be concerned with whether they can trade tomorrow, or if their trade size is correct or how they might grow investments in line with their progress. All those decisions are controlled by managing their overall capital with a clear plan.

Japanese Candlesticks

This is the most common method of viewing price charts. The candlesticks give an easy to read view of prices, open high low and close, that jumps off the charts in way that no other charting style can do. They are the basis of most price action strategies and can be used to give signals as well as to confirm other indicators.

Support And Resistance

These are areas of price action on the asset chart that are likely to stop prices when they are reached. Support is found when prices stop falling, this happens when buyers step into the market and are said to be “supporting prices”. Resistance is found when prices stop rising, this happens when sellers enter the market (or buyers disappear) and are said to be “resisting higher prices”. These areas, often represented by horizontal lines, are good targets for entries and possible areas where price action may reverse.

Trend Lines

These lines connect highs and lows formed by asset price as it moves up down and sideways. A series of higher lows and higher highs is considered to be an uptrend and a sign that prices are likely to move higher, a series of lower highs and lower lows is considered to be a downtrend and a sign that prices are likely to move lower. The trend line can be used as a target for support and resistance, as well as a an entry point for trend following strategies.

Moving Averages

Moving averages take an average of an assets prices over X number of days and then plots those values as a line on the price chart. Moving averages come in many forms and are often used to determine trend, provide targets for support and resistance and to indicate entries. There are dozens of methods of deriving moving averages, the most common include Simple Moving Averages, Exponential Moving Averages, volume weighted moving averages and many more. They can be used in any time frame, and set to any time frame, for multiple time frame analysis and to give crossover signals.

Oscillators

Oscillators may be the single largest division of indicators used for technical analysis. They include tools like MACD, stochastic, RSI and many, many others. These tools, in general, use price action and moving averages in a combination of ways to determine market health. They are displayed as a stand alone tool, usually as a line that ranges between two extremes or above and below a mid point, that can help determine trend, direction, support/resistance, market strength, momentum and entry signals.

Trading Psychology

With any form of trading, psychology can play a big part. A lack of confidence can mean missed trades, or investing too little capital in winnings trades. At the other end of the spectrum, over-confidence can lead to over trading, or increased risk – either of which could wipe an account very quickly.

So the trading psychology of the trader is very important. It can also be actively controlled or managed (at the very least, acknowledged). It is another often overlooked area of trading skill, but one well worth spending time to consider.

Read more on trading psychology and learning from experience.

A Basic Binary Options Strategy

Here is an example of some basic rules for a binary options strategy.

  • The trend is your friend, only take trend following entries.
  • In an uptrend only enter when prices are near support, in a downtrend only enter when prices are near resistance.
  • When prices are near support/resistance wait for a confirming candlestick signal.
  • When the candlestick signal appears wait for stochastic and/or MACD to confirm, a bullish crossover in an uptrend or a bearish crossover in a downtrend.
  • When rules 1 through 4 are met, enter the trade, only use 3% of account on each trade.
  • When choosing expiry use 2XCandle length. IE, if you are using 1 minute candles then 2 minute expiry, if 1 hour candles then 2 hour expiry.
  • If the trade fails examine why it did not work, make adjustment if necessary and move on to the next trade. If the trade works move on to the next trade.

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Strategies for Different Markets

Choosing a Trading Strategy

Developing a trading strategy for the binary options market requires a key understanding of how the market operates in terms of the trade contracts available, the various expiry times, and the understanding of the behaviour of the individual assets.

Unlike the forex market where the asset has to move in one direction or the other by an appreciable number of pips to the trader’s favour before profits are made, the binary options market is peculiar. Apart from the Up/Down trade which is based on direction and mimics the requirements of the trades in other markets (except the pip movements), other trade types in the binary option market operate in totally different ways. There are different trade contracts for different platforms. Some binary options contracts do not even require the trader to get the direction of the asset correct. For instance, trading the OUT contract will need the asset to hit one price boundary or the other for profit to be made. So it takes the trader being able to identify a suitable trade contract to be able to fashion a suitable strategy. What is used to trade the Up/Down contract is not the same as will be used for the In/Out contract. The contract type will determine the strategy.

For instance, trading the Up/Down contract will require a strategy that can determine if the asset will make a bullish or bearish movement. Trading the In/Out contract will require either a range trading strategy or a breakout trading strategy to identify a time when the asset stays in a range or breaks out of that range. If you are looking to develop a trading strategy for the In/Out trade, this is how your mind should be working.

In developing a strategy based on the binary options trade types to be traded, there are tools that can assist the trader. This is where chart patterns, signals services, candlesticks and technical indicators will come in. A simple tool like the pivot point calculator can be used as part of a TOUCH trade strategy with very effective results. Using tools like these will take us to the next part of choosing a strategy, which is how to understand and set expiry times.

Understanding Expiry Times

Expiry times are very important to binary options, because all trades in this market have time limits. However, not all binary options trades require time limits to be successful. Trades such as the Up/Down trades must reach expiry before the trade outcome is known. In contrast, trades such as the OUT component of the boundary trade or the TOUCH component of the High Yield Touch or Touch/No Touch trade contract must not necessarily reach maturity before the outcome of the trade is known. If a trader bets on a TOUCH outcome and the asset touches the strike price well before expiry, the trade outcome is already known and the trade is terminated as a profitable one.

So if the trader is not very good at setting expiry times/dates (and really, no trader in the market can boast of getting his expiry settings right all the time here), the binary options trading strategy will have to be tailored towards trade contracts which are not totally expiry-dependent.

Now when you identify and separate trades that are not so dependent on expiries from those that are, you can better understand what kind of strategy you would be looking at.

Understanding Asset Behaviour

The binary options market combines assets from different asset classes into one market. These assets do not behave alike. Some assets are very volatile with large intraday movements. A very clear example is gold. Some binary options assets are not traded round the clock but only at specific times e.g. the stock indices. The factors that may trigger a massive move in a stock index would obviously not be the same for a commodity or a currency. Even within the same asset class, no two instruments are exactly the same or behave alike.

An understanding of asset behaviour is therefore key to being able to develop a trading strategy for the market. It is up to the trader to study the behaviour of assets, understand the technical and fundamental indicators that will influence the behaviour and price movement of that asset, and then create a trading strategy that will work for that asset.

Demonstration

In this section, we will demonstrate the application of all the parameters we have mentioned above using a simple but effective trade strategy.

– The strategy we will use determines price bullishness/bearishness, so we will trade a Call/Put contract.

– We will trade the strategy on a one hour chart, so it will be have an expiry of one hour. We do this using our understanding that the effect we want to trade on the hourly chart, will happen in an hour.

– We want to use this on an asset that is liquid and responds to the strategy. So we will use the EURUSD.

The strategy has been used to create a colour-coded indicator, which shows a green arrow on bullish signals and a red arrow for bearish signals. It aims to trade the EURUSD because this currency responds very well to price stimuli during the London/New York overlap in the forex time zone, and the response can be delivered in an hour.

As soon as the red arrow appeared (as shown above), the signal was to trade a PUT option on the Call/Put digital option. Using this signal, the trade was executed on the binary options platform. The price of the asset (EURUSD) fell in one hour from the time the signal was generated to the expiry, producing a trade result in our favour.

This strategy (a custom strategy) fulfilled all our conditions:

a) It was suited to a trade contract on the binary options market.

b) It was a strategy that was suited to help the trader use a suitable expiry.

c) It was suited to the behaviour of the asset and above all, THE STRATEGY WAS A PROFITABLE ONE.

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