Analysis and its types in binary options
Profitable binary options trading is not possible without quality market analysis. It would seem, options trading is simple, just need to make a bet on whether the price of the asset will increase or go down. But how do you know which direction to choose: up or down? And when to open the option that it certainly closed with a profit? For this you need to understand which factors and patterns affect the price change. And market analysis of option will help in this.
- 1 Market analysis is and its purpose
- 2 Risk management
- 3 Which way of analysis to choose?
Market analysis is and its purpose
Market analysis is an analysis of the situation on the currency, stock or commodity market in order to predict the direction of prices or other market asset and find the best moments to open trades.
How to perform the analysis of binary options
Binary options is a derivative market instrument, which is based on a given underlying asset. It can be currency pairs, securities, stock indexes or commodity markets (for example, there are over 200 assets in Verum Option platform). Therefore, when talking about the binary options, the market analysis is meant on the specific underlying asset you want to trade.
For example, if you are trading options on stocks of Apple, you need to analyze the change of these shares, but if your underlying asset is gold, then you need to analyze the situation in the gold market.
There are two kinds of options analysis: fundamental and technical. Fundamental helps to predict the behavior of prices of market assets taking into account the influence of economics and politics, technical analysis is based directly on price chart data.
The basic idea of fundamental analysis is that every cause brings a result, and if the world economy or politics, something important happens, it will affect the quotes.
Latest and most vivid example: on 23th of June 2016, the UK held a referendum on exit from the EU, after which the quotation of the pound sterling plummeted by almost of 6%. The United Kingdom became politically and economically unstable, and it is unprofitable for large investors to invest in its currency. And those who bet on the decline of the pound earned on this.
Of course, not only such a serious and rare events have an impact on the quotes of market assets. It could be statistics that are published regularly and are marked in the economic calendar. For example: Central Bank meetings and speeches of their representatives, the data on the labor market, inflation, business activity, GDP. Typically, when data is better than forecast, an asset increasing in price, and when the data is worse than forecast, the price of the asset falls.
For example, you opened an economic calendar and see that in an hour the publication of Eurozone GDP is expected. You only need to wait for news and see how it meets the forecasts. If GDP growth exceeded expectations, it is possible to open a call option for a rise in the Euro against the dollar, and if the actual value is “not held” to the forecast, the Euro is likely to fall, and you can make money on its decline.
Technical analysis is based on the fact that the price behavior is always logical. And if you study the price chart and identify these patterns, you can predict that the price will rise or fall. Technical analysis can be carried out using only the graph (graphical analysis), or specific indicators (technical analysis).
Graphical analysis is good because it is the most obvious and logical. You just look at the price chart, find shapes that say about the continuation or reversal of the trend, and perform a trade.
Basic graphic shapes: triangle, rectangle, flag and pennant. They are all based on lines of support and resistance. To open a trade when the figure is fully formed, that is, when the support level or resistance level is broken.
Triangle – a figure of continuation of a trend, which is formed in a period of price consolidation. The triangle is ascending, descending, symmetrical and widening.
Rectangle — continuation or trend reversal, is formed after a strong price movement.
Flag and pennant — continuation patterns usually occur in periods of price consolidation, after which the trend resumes. First a “handle” of flag or pennant is formed — the price makes a sudden jump in the trend direction. Then price is either trading in a sideways pattern with parallel lines of support and resistance (the flag), or reduces oscillations, when the lines of support and resistance converge to a single point (the pennant).
Indicator analysis — chart analysis through indicators that help to determine the trend and to find entry points in the market.
Two main groups of indicators are trend-following indicators and oscillators. The trend are visible on the chart and indicate the presence and direction of a trend. These indicators are the most popular among traders as they are the least complicated for perception and interpretation. Trend indicators include Moving Average (MA), Alligator, Parabolik SAR, Bollinger Bands.
Oscillators or stochastics are used to determine the strength of the trend to tell when a reversal is possible. These are such indicators as MACD, Stochastic, Ichimoku, RSI. The oscillators are located below the main graph and are shown as curves, the intersection of which is the signal to open transaction.
However, it does not necessarily strain with the use of indicators. For example, in the Verum Option trading platform there is a tool for automated technical analysis – Strategy Advisor which is based on the trend indicators MA and Bollinger Bands, and RSI.
In order to achieve success, the trader should follow the rules of risk management:
- Open the transaction only when there is a market signal obtained as a result of fundamental or technical analysis.
- An investment in 1 option should be no more than 3-5% of the deposit.
- If you have three unprofitable trades in a row, stop and reconsider your trade.
- if you see that the option is in the negative, use the management tools of the transaction to minimize loss.
For example, in the Verum Option platform there are tools “Rollover” and “Sale option”. You can use rollover to prolong the expiry of the option to give the deal a chance to become profitable, or prematurely sell the option at the current price.
Which way of analysis to choose?
Each trader decides it for himself, but the professionals recommend to carry out both fundamental and technical analysis of binary options. In some cases the appropriate fundamental analysis (for example, during important news releases), and in other works technical is the best.
Of course, the analysis of the market should be studied, but it’s pretty simple. To trade binary options it is even enough to have basic knowledge, that every beginner is able to learn.
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