Here is the easy to understand market analysis guide for the beginners in binary option trading. There are three most important types of market analysis in binary options trading. They are Fundamental analysis, Technical analysis and Sentiment analysis. It is fairly good to study these types of analysis in order to enhance your chances of making profits. We will represent to you the most basic types of analysis which will serve as building blocks to your later endeavors.
Fundamental Analysis & Binary Options
The primary way of using fundamental analysis in binary options would be going with a trade-the-news strategy. Simply, when there are some good news for a currency, stock or commodity it prices will rise. If news are bad prices will go down. For example, if there are some bad news for UK economy, their currency GBP will become weaker in comparison to other currencies. That would be the moment to invest in PUT option on GBP/USD pair. This strategy is best applied when there is a lot of volatility during the events. The spike in volatility tends to lead to faster moves which can send price rocketing higher or plunging lower.
This strategy may be best used with up/down options. This strategy proves to be more effective with up/down options because you only need to get an idea if the price will react better or worse opposed to the expected data and how the reaction proves to be strong. The only thing left for you to do is to play it cool and be confident enough in the market reaching the strike price which you have purchased.
Let us illustrate it a bit more closer via an example. You are planning to trade on the Australian retail sales report. Chances are that better-than-expected news will be released and it appears that Australian dollar will rise. So in this case we would choose and buy the CALL option on AUD/USD. The result was as we expected – a better-than-expected news were released and the AUD/USD rose as well above the strike price. Meaning that we can cash in on this deal.
But when playing the news, one needs to consider various factors which may prove to be more than useful in bringing you extra information.
First we need to consider the potential for volatility. This means that when you take into consideration the news report you need to be certain that a single event can cause enough volatility for the price to spark beyond or below the strike price. So for instance, be careful when trading with news reports because an event which will cannot cause a single ripple and let alone a spike will only lose money.
Secondly, you need to take special consideration to the time given or the expiration date. So when considering news reports maybe it would be best to use one-touch options where the price does not need to stay within the strike price but only needs to touch it during the expiration period. Or on the other hand you can choose the out of range option where you will only need to pick a direction in where you think the spike is going to occur.
Technical Analysis For Binary Options
For your technical analysis of binary options market you can use such indicators as Bollinger bands, Stochastic or moving averages. These indicators will help you to gauge in which direction the market or the price is going to go next. These indicators are not only helpful in measuring spot currencies but all sorts of markets as well and with good and precise understanding of them you stand to get a great advantage put of them. Another great pointer with technical analysis would be inflection points and technical levels as well.
As always, we shall use an example to make it clearer. The price of the GBP/USD has just broken down from a double top. Particularly in these cases the price would normally continue to trade lower at a distance equivalent to the height of the double top. The best way of using this would be going with a One touch option. If the broker offers a strike price somewhere between 1.5450-1.5550, which is within the height of the double top, the best way for you to end up in-the-money would be buying a “put” option and is really a move that you should consider seriously.
Sentiment analysis is the task of measuring the market’s current “feeling” with regards to broad risk flows. This type of analysis has proven to be very useful when trying to hop on current trends. In more simple words, by using sentiment analysis you can measure how the market is “feeling” so to say. You can evaluate by using sentiment analysis if the traders like buying risky assets or if they like to buy safe or certain cash assets.
If the risk appetite is still at a high with no potential changes to the market, then the chances are we could see the trend continue. 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. Consequently, if you think a reversal in sentiment is going to happen and depending on how overdone you believe the move is, you could consider purchasing a “put” option on those same risk currencies or assets.
Just like in everything in life, and all-round tactic and a play which will consider a combination of more analysis can prove to be more effective than choosing only one. Who is to say that only one tactic can prove to be resourceful when a combination of all of them can give you an edge you need.
The basis of your trade which may result in you trading successfully with binary options my need that you incorporate all of the analysis in order to get a wining combination. For instance, 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 or resistance at a certain price. Meanwhile, sentiment analysis may let you know whether the market is in a risk-on or risk-off mood.
The result is that you take from each one of something which will help you achieve. You also need to learn from your mistakes and come back stronger. Experience is key and the only way to gain it is to start practicing and go and make risks and it will certainly pay off some day.