3 Forms of Analysis for Binary Options Trading
The three main types of market analysis for trading are: fundamental analysis, technical analysis, and sentiment analysis. All of which can be applied to any market, but in this case we’ll refer to how each major form of analysis applies in binary options trading and a few different ways you can conduct analysis in binary options.
Trading the News
Fundamental analysis involves analyzing and monitoring micro and macro economic events, policies, speeches, reports and more to understand the current state of the markets, and more specifically, the current state of the two Foreign Exchange currencies you’re considering trading.
One of the most popular ways to trade binary options using fundamental analysis is through what is called ‘news trading.’ News trading simply means to open a trade right before–or during– the release of an important economic report. You can even take trades after the news has officially come out, but you better be quick and know what you’re doing, or you’re bound to take a loss.
In all honesty, news trading carries slightly less risk compared to regular Forex trading due to the fact that you can’t lose more money than you put into a trade. For this reason, news trading is very attractive to binary options traders of all skill levels.
Important news events usually bring an extreme rise in volatility, so if you’ve done your homework and have an idea of how a country’s currency will react to a news release, you have a chance to make some serious returns on your binary option investments.
There are a few things to be aware of before you go rushing off to trade news events on binary options.
First off, you only want to trade news events that are more likely to see heavy volatility, since this decreases the chances of you getting whip-sawed throughout the duration of a trade and increases your probability of winning, (if your economic analysis is correct.)
You also want to make sure you stick with trading Up/Down option trade types during news events. As mentioned in the earlier section of Binary Options 101, Up/Down options are the easiest for beginners and are the main option type you should consider using when trading off the news.
Another good option type to try during news is the Touch option. The upside to using this trade type during news events is that you don’t have to wait for the expiry to finish, as soon as your targeted level is hit, you win the trade.
For example, if you believe, based on your fundamental analysis, that a speech by the Chairman of the Federal Reserve is going to send the major dollar pairs plummeting downwards, then select a Touch option to the lower band.
You might also consider choosing In Range/Out of Range option types for news trading. If you believe price will have strong momentum upon a news release, then select an Out of Range option. It doesn’t matter which direction price goes, as long as it closes out of the given price range at the time of expiry, you’re golden.
If you’re new to trading in general, then you’re probably wondering what all those squiggly lines, dots, and boxes are when you look at other people’s chart set ups.
In binary options trading, and in any trading, everything that is placed on a price chart, including the price itself, falls under the umbrella of technical analysis. Specific chart indicators, most of which are mathematical formulas, are called technical indicators.
But before you get trigger-happy and start throwing every technical indicator under the sun onto your charts, make sure you actually understand what the indicator is and how it works before using it to look for trade set ups.
If you plan to trade binary options for the long run, then you absolutely need to study and understand technical analysis. While fundamental analysis is also important, your everyday binary options trading will come down to your technical analysis chops and your ability to read price on smaller time frames.
Understanding support and resistance, trend lines, channels, candlesticks, candlestick formations, price action and price action patterns are excellent starting points for technical analysis newbies.
Check the Resources page for trustworthy educational sources.
Sentiment analysis is somewhere in between fundamental and technical analysis. Sentiment analysis involves gauging current market conditions, of how the market is “feeling” in terms of investor’s risk appetite.
For example, are banks and major market participants confident in the market’s current bull run? Are investors investing in risky assets, in commodities, in cash? Sentiment analysis involves measuring the pulse of the market you’re looking at, and it’s an excellent way to hop on emerging trends and stay away from consolidating markets.
If risk appetite remains high and the markets don’t seem to be shifting towards a major sentiment change, then you can safely assume that current market trends will continue.
So how does sentiment analysis come into play with binary options trading?
Let’s say that current market sentiment is risk-on, or that investors feel like taking more risks with their investments, and you combine this with positive Australian employment numbers that recently came out and a rise in copper prices, (major Australian export), so based on this information it’s a good idea to start looking to place Call options on Australian dollar pairs: AUD/USD, AUD/JPY, AUD/NZD etc.
Combine Your Analysis
Just as with any type of financial speculation, each of these types of analysis are not exclusive, and as the investor you decide which one to use in your binary options trading strategy.
Many professional traders look at every type of analysis available to them before they make an investment, and in the case of binary options, taking this approach is a sound idea.
Using fundamental analysis can give you a direction that is economically biased, while technical analysis tells you up-front which price areas are most important, and which levels price might run into support or resistance.
Combine these two forms of analysis with market sentiment to determine the amount of risk investors are willing to take to gauge future volatility, and you have access to all the ingredients that go into placing profitable binary options trades on a consistent basis.