The Fundamentals of Binary Options Market Analysis

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The Fundamentals of Binary Options Market Analysis

As a binary options trader or a newbie just stepping in this trade market, you must already be aware of the significance that a thorough market analysis holds. Market analysis, when done to perfection, would not only enable you to understand the market movements and trends but you would have a much higher chance of earning more profit. In this guide we are going to discuss all about different types of market analysis so you can incorporate one best suited to your needs and situation. There are three basic categories of market analysis; fundamental, technical and sentiment analysis. So, without further ado, lets dive right into the specifics of each type.

1. The Fundamental Analysis

As the name goes, it is one of the most basic types of market analysis and one of the ways to conduct a fundamental analysis would be to utilize news-trading strategy. Before we discuss ‘what this binary strategy is all about?’; you need to keep in mind when is the perfect time to implement this trading strategy.

Well, the best application opportunity for this strategy are the events that generate a lot of volatility. It is this increased volatility that gives rise to rapid movements in the market and elevates the price or absolutely depresses it. In binary options trade this would become a very effective strategy if you are trading simple ups or downs. At the end of the day, all you must do is to have a good idea of future reactivity of the price (whether it would be better or worse than the overall expected data) and strength of the reaction. In this scenario, the only things that would make or break the deal would be your confidence on the price movement that it is going to touch the option that you have purchased.

Let’s consider an example here…If you see a bullish bias in the results of a retail sales report that you are planning on trading; there is a good chance that the result could be better that what was expected and you would consider going for a “call” option.

Now, this is not to say that there aren’t any risk factors involved. While fiddling with this strategy, you must exercise caution or rely on the best binary options software. The first factor that you must consider and manage careful is the “volatility”. While playing any news report and purchasing some binary options you should be very confident that such an event would generate a much volatile response and the price movement may overlap the strike price (staying above or below that particular level). On the other hand, if you are trying to trade a news report that wouldn’t be able to generate any upheaval; you must be letting your money slip away.

Another important factor is the component of ‘time’ in binary options. It is a common understanding that the price must be near the strike price at around the expiration date, even for the basic up or down options. So, you may also give the one-touch options a try because in that scenario the price movement should only touch and not be specifically close at a certain level. You may also go for the ‘out of range’ options, if you are expecting the price movement to have a strong momentum leading it away from the previous range. Because with this strategy you wouldn’t need to select a direction; all you can do is decide about the market movement strength and direction.

2. The Technical Analysis.

If you have always been fascinated with Bollinger bands, stochastic and moving averages; then technical analysis is the right thing for you as a binary options trader. You must remember the fundamental purpose of such indicators; they help you understand the future movement of price in the market. This is a very widely used analytical technique, however, you must get yourself well-acquainted with the individual indicators before attempting to use this strategic analysis for your trade decisions.

3. The Sentiment Analysis.

It involves measuring the prevalent “feeling” in binary options market with reference to risk flows. So, the questions that might surface in such an analysis may address the confidence that traders may be feeling while purchasing risky assets or assessing if the traders might prefer adopting a risk reduction strategy by purchasing safe asset options or turning to cash! Sentiment analysis is very useful when a trader is struggling to hop on a trend and would help in assessing the feeling that prevails in the market.

Some don’t like to go by feeling or emotion, and these people rely on automated binary options robots.

Go for a Combination Analysis.

When it comes to binary options trading, every bit of insight counts towards making a good profit and a combination strategy can pay off in the long run. So, basically you are making use of all the different categories of analyses and making important decisions based on the results.

Moreover, all these different types of analytical techniques compliment and overlap one another. On one hand, the fundamental analyses enable you to perceive the possible direction that you may pursue, while the technical analysis helps to find out chances in the market breaking, reaching or finding resistance or support for a certain price. In addition to this, the sentiment analysis would give you useful insights about the overall mood of the market (i.e. whether it is risky or not).

So, the primary goal is for you, as a trader, would be to improvise and keep modifying your strategy as per your requirements (and learning from your mistakes).

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Share with us in the comments below; which of the analysis have you incorporated in your business decisions?

Market Analysis

Binary options analysis is the practice of analysing a binary options trade prior to execution. Before taking on a trade in any market, it is necessary to carry out technical and fundamental analysis of the asset you intend to trade in order to increase the chances of success. The binary options market is no different. Without binary options analysis, trade would be more of guesswork and nothing would distinguish it from the roulettes and other stuff that belong to the casinos of Las Vegas. In binary options, there is no place for gambling or guesswork in trades; leave that to the guys in Vegas.

Sometimes, binary options trades are referred to as bets. I really do not like this terminology, because trading is not something you pick up from the street. If one has decided to trade binary options, it has to be taken seriously and learning to perform binary options analysis is an integral part of the learning process.

Binary options’ trading is all about predicting the directions and behaviour of assets. Since the same assets that are traded in their respective markets are the same ones we will encounter in binary options, it is necessary to know how to analyse these assets technically and fundamentally. When the trader has mastered this, he will be able to carry out solid binary options analysis.

Let us take an actual trade example. This trade was a Touch/No Touch trade for the EURUSD taken on October 25, 2020, with a 24-hour expiry. We placed a No Touch binary option trade for the EURUSD, predicting that the EURUSD would not touch the price barrier of 1.4031 before expiry.

The trade was successful, as the EURUSD did not reach the price barrier before the expiration date. A total of $55.65 was staked in the trade, with a profit of $44.35, giving us a total payout of $100.

Now was this a product of guesswork or a trading hunch? No. This was a product of technical and fundamental analysis carried out on this pair prior to the execution of this trade.

The Binary Option Analysis for this Trade

The first step in performing a binary options analysis for this trade was to locate a chart for the EURUSD to analyse. Since most binary options brokers do not offer charting tools, we had to locate a forex broker whose trading platform had charts or us to use. We located one and started the analysis.

Fundamental Analysis

In the financial markets, the fundamentals of an asset always supersede the technicals. This is why we did a fundamental analysis first. At the time of analysis, there was a meeting of the Eurozone financial ministers to determine how to put together a rescue package for Greece, which was groaning under a sovereign debt crisis. At the same time, Italy was also on the radar as its debt reached a staggering 600billion Euros. These were indeed bad times for the Euro and the markets had responded accordingly. The meeting was due to end later that week with the issuing of a communiqué to announce measures to help these countries out. We knew that the markets would be range-bound as traders looked to the outcome of that meeting for direction. Thus, we did not see the Euro climbing past the 1.4000 psychological barrier before the end of the meeting.

Technical Analysis

We headed over to the charts to see what the price action was saying, and we got the confirmation we needed. A strong resistance had capped the EURUSD at 1.39605 for three days straight. Thus, we were able to set an appropriate price barrier that we felt that the EURUSD would not achieve in 24 hours.

The trade was then setup on the binary options platform, with a price barrier of 1.4031 and a 24-hour expiry. As at the expiration of the trade on October 26, 2020, the resistance cap was yet to be breached, putting us in the money.

Binary options analysis is not about guesswork, or trading on a hunch. You must be able to perform the appropriate analysis of the fundamentals of the asset you want to trade, look for confirmation on the charts and then execute the trade accordingly.

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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