To become competent with binary options trading you will need to be able to correctly and accurately forecast price movements. This will enable you to identify opportunities and accurately time your entries and exits from the market.
There are two main schools of thought when it comes to analysing markets: fundamental and technical. These two approaches are not mutually exclusive. Both can be used to generate profitable binary options signals. Therefore tt pays to have at least a basic understanding and appreciation of both styles if you want to get the most from your trading.
At the core of fundamental analysis for Binary Options is the use of economic data. This is used to interpret price valuations. Included under this header are a wide range of economic and political factors and data such as interest rate statements, employment figures and earnings.
This information is analysed and subsequently used to forecast a form a valuation of an asset. A key principle is that the valuation of an asset will always reflect all information currently known.
From the binary options traders perspective, fundamental analysis is useful in building up a bigger picture of key themes and trends.
Economic events and data shape both the near and longer term valuations of financial assets and therefore they should be watched keenly by the trader. The good news is that most events are scheduled on the economic calendar in advance of being released to the market. This allows the investor to schedule their strategy around these events.
Data and reports on the economy can have varying effects on the market, with some have a far more profound effect on market movements. In particular key reports on the state of the economy including unemployment numbers, trade balance figures, inflation reports and interest rates are likely to case greater levels of volatility and more readily shape price trends.
Figures from these reports are speculated upon by both traders and analysts prior to their release and then further digested by buyers and sellers upon release. It is not just the figures themselves, but also the interpretation of the data and its perceived short and long term effects that will dictate price action. The task of the fundamental analyst is to try to anticipate whether the figures or data will be better than, worse than or in line with expectations. Any deviance from prior consensus can cause a rapid re-rating of price for the asset in questions.
Also encompassed under the heading of fundamental analysis is ‘unscheduled risk’ or ‘event risk’. This refers to anything outside of the normal data scheduled for release to the markets. Examples include anything from political events, wars, elections, natural disasters and even terrorism. Markets dislike uncertainty and the unexpected even less. Therefore when risk of this nature occurs, there can be a sudden and dramatic shift in sentiment.
While this type of fundamental risk cannot be ‘analysed as such’ it is good to understand how markets can react to key events as this can throw up potential trading opportunities. An example here is the correlation between the oil price and the Canadian Dollar (CAD). The direct correlation between these two assets means that any event which causes a spike or dip in oil prices is likely to see a similar movement in the currency.
While undoubtedly fundamentals are the driver of the wider market trends it doesn’t necessarily make this approach ideal when making financial investments with binary options, given the short trading windows. Also it is worth considering that markets do not always react to news in a rational manner. This again proves problematic in solely relying upon this approach to timing trade entries. It is for this reason that most traders of binary options tend to focus more on technical factors on the chart when timing their entries.