Now that we have a basic idea on how binary options work, let’s take a look on how to do market analysis for binary options trading.
Like we said before, it sounds very easy to say the market will go up or down but it’s not easy to get it right.
When you do market analysis for binary options you will be able to study the behavior of the market in the current situation.
Then compare it with the past behavior so as to predict the future behavior of prices.
Market analysis for binary options is not any different from analysis in Forex trading.
So this means we shall still see candlesticks, bar graphs and line graphs, technical, fundamentals and sentiments, and economical news.
Am sure you remember this quite well in our Forex trading course.
Listing the 3 market analysis;
What is Fundamental Market Analysis?
Fundamental market analysis looks at all factors that influence the status of the economy.
These include; economic parameters, social news, political crisis and natural hazards.
Financial Markets are very sensitive to economic dynamic changes in away that a small rumor about any of the major economic news cause a big movement in the market.
This means you can rely on fundamental analysis or economic news release to trade binary options.
Trading news is a trading strategy where you use fundamental analysis to identify setups or expected future behavior of the market.
From our previous experience with fundamental analysis, we saw that different market news affect the market differently.
For example, the major news in the market tend to cause very high and fast movements. To mention but a few; Interest Rate adjustments, GDP, NFP, CPI and Crude Oil Inventories.
At the release of this news, price is likely to spike to further highs or lows due to increase in volatility in the market. However not all time. Some news may lead to small or no change in the market at all.
Never the less, trading news is the most challenging.
As a trader you always have to be confident about every single decision you make before placing a trade.
After all you are looking at all possible ways on how you can profit from trading.
In binary options, news trading strategy is more effective when trading up/down options.
Here you place a trade according to the direction you think the underlying asset will take.
How do you trade binary Options with economic news release
First,
You must know which news and how to interpret the news in relation the economies in question.
This helps you to know how the market will react and which direction the asset will take.
Let’s say you expect Interest Rate decisions news release from the Central Bank of Australia.
Suppose the economic calendar shows that interest rate will be adjusted from 1.5 to 2.
In case this happens as predicted, it means AUD will appreciate in value.
We expect a bullish market.
However, at the time of news release, actual news can come out as predicted or lower or higher or not change at all.
This simply means its better to wait to trade until the news is out.
How to interpret Economic news release
To interpret news, you compare the actual news release to the forecasted news and the previous. One of 3 things is likely to happen.
1. A rise in asset price;
When news release comes out higher than expected.
For instance, if the expected rate is 2 and actual is 2.5, AUD appreciates in value.
This attracts more buyers in the market hence bullish market. Good time to buy AUD. (CALL OPTION)
2. A fall in asset price;
Conversely, when the actual rate comes out as 1.5. This is less than the expected rate which is 2. It is an indication that AUD has lost value.
More traders and investors will sell AUD currency in exchange for higher yielding currencies.
As a result, the Market becomes more bearish therefore good time to sell AUD currency (PUT OPTION)
3. NO CHANGE IN ASSET PRICE
Otherwise, if the actual rate comes out as the expected rate.
Expected rate 2. Actual rate 2. You are likely to see a small change or no change in the market.
This simply means, when the forecasted rate is put on the calendar, traders and investors adjust their accounts in relation to that rate.
In this case,
The market is likely to stay in congestion for some time. Therefore wait to take action until there is a clear trend direction.
In relation to trading news, there are other things you must put in consideration.
Must Consider things When Trading News
1. You must know what news really moves the market.
Which news is likely to bring a spark that can keep you in money even when your target closes before your expiration time?
This reminds us that we can still trade touch/ no touch options or any other type of binary options.
2. Secondary, you must know how to interpret the economic news and which currency pairs to look at.
3. Last but not least, how to read the market sentiment. Sometimes the news may turn out positive but the market says otherwise.
Learn to trade what you see in the market. Buy when everyone else is buying and sell when everyone is selling.
Technical Market Analysis for binary options
With Technical analysis, you use indicators like Moving Averages, Bollinger bands, Stochastic, Support & Resistance, Trend lines to mention but a few.
Technical analysis can also give you a comparable measure of the past, present and future events of prices.
You can rely on this to gauge where price will go.
You can use moving averages to determine the direction of a trend and trend reversals. The bollinger bands measure price Volatility while stochastic show changes in momentum.
Example:
Moving Average Cross Over + Stochastics 10 minute Expiry Strategy.
There must be a trend. Wait for Moving Average Crossover with Stochastics showing Overbought/sold conditions.
With technical analysis you can also formulate or identify different patterns to study price behavior.
Technical traders believe that price tends to repeat the same patterns over and over again.
Example:
Triple Bottom Confirming Call Option entry
While trading binary options with technical analysis you will be able to tell what happens at certain levels when the same pattern appears on the chart.
This will help you to generate a profitable strategy that can increase your chances of getting your trades close in the money.
Sentiment Market Analysis
This involves measuring and understanding the market feelings and emotions in the current situation in relation to risk appetite.
Sentimental analysis helps you to Know how traders are responding towards different financial assets and foreign currencies.
Once you get to know other traders levels of confidence to invest in risky assets in relation to safe haven assets, you can gauge whether to buy the assets or sell assets in that period of time.
For example;
if you realize that the asset is testing its higher highs or lower lows. It signals overbought and over sold scenarios, so price is likely to spike.
This also indicate that the trend is coming to an end very soon.
So if you are confident about the current status of the market, it becomes easy to make a decision whether to take a call or put option.
If the market is in a continuation trend, you can work along and take its side. However, if you feel the market is at a point of changing direction, still walk a long and make it right.
Simply buy when everyone is buying and sell when everyone is selling.
Whatever choice you make, it should be able to lead to the right direction of your predictions.
Combination
Like in Spot Forex trading, the 3 major market analysis work best when combined together.
Since the market is unpredictable, taking one side of analysis to trade may at times disappoint. It may prove you positive when it is showing a different thing on the market chart.
The only way to be sure, is to use all the analysis as a basis of your judgment before you carry on any trade.
Meanwhile, the fundamentals will help you to know what is currently happening in the market. The major news likely to drive market prices.
Technical analysis helps you determine certain levels and points in the market where prices tend to hold.
These can be overbought and sold prices levels which include support and resistance levels.
And lastly, sentiment analysis tells you whether traders are investing more in risky assets or are selling them off running to buy more of less risk assets.
When you consider the 3 while doing market analysis for binary options, you can make clear judgments about the happenings in the market.
In addition, you become more familiar with the market therefore can quickly adjust to any new changes in the market .
So there will be no more surprises to sweep you off your feet.
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