Since the advent of binary options in the financial markets, they have been seen as a speculative way to make money on the Internet. This is primarily due to the short-term nature of their trade, compared with traditional options. In most cases, binary options have validity periods from 60 seconds to 2 weeks.
That is why most traders tend to focus more on technical analysis than on fundamental analysis, ignoring the fact that the price of the underlying asset can significantly depend on the fundamental forecast.
Definitely, technical analysis for binary options is a very important component of successful trading, but it is extremely important to use it in conjunction with the fundamental one. Why do they play an equal role?
What is technical analysis?
In order to successfully trade an option, technical analysis is necessary. It is important to know the main technical indicators that you can use for trading. The assets offered in the binary options market are the same as in other markets. This means that traders have access to the same chart data, statistics and analysis strategies that are used in other markets. Each bidder must know how indicators can be used to predict market behavior.
The technical analysis of options is based entirely on chart data, identifying recurring trends and creating speculation based on the information gathered. It can be divided into three categories:
- Use and analysis of chart information (candles and samples).
- Use of price exposure.
- Use of technical indicators.
Using chart information
Chart data is relatively easy to read if you have some experience and knowledge of how it works. By reading the information provided by candlesticks, you can easily predict the future price movement of a particular asset. Candlestick analysis of binary options is the number one assistant for every trader, because he can create patterns and provide valuable information about past, present and future trends. There are many candlestick patterns that you can use to predict the movement of the price of an asset, so do not hesitate to look for additional information and get acquainted with all the templates.
Use of price action
The accuracy of technical analysis can be improved through the use of price action analysis. Of course, for this you need to have access to a level II pricing system. Unfortunately, this feature is not provided by many brokers, so you need to initially worry about this issue.
Using the analysis of options charts and the impact of prices, you can see the volume of trading that a certain asset generates. In addition to the total trading volume, you will also receive information about the actions of other traders - whether they are selling the asset or buying it. For example, if many people sell the same asset at the same time, then its price is likely to begin to decline. If you notice that a certain asset is being traded in one direction and in large volumes, it is very likely that its price will follow this direction. If an asset is bought, then the price will rise, and vice versa.
Using technical indicators
Technical indicators are not always necessary, but they can help you predict. Most merchants prefer to combine them with candles, because they either support or contradict the data that you receive from them. There are several types that fall into two categories - trend indicators and dynamics indicators. Both types are used in trading assets such as binary options. Analysis of the schedule must be carried out in combination with other indicators.
The relationship of the two types of market analysis
As already mentioned, it is necessary to simultaneously analyze the options market. Ignoring this poses a huge risk, and traders must actually conduct serious research before placing their trades. Analysts agree that traders must use both technical and fundamental analysis to succeed in binary options trading.
According to experts, binary options are a short-term method of making money on the Internet, so traders cannot ignore the role played by the internal aspects of underlying assets (which are long-term). This is explained by the fact that the price movements of stocks and indices, as a rule, are determined by the activities of traditional investors (exchange trading activities), and it is they who base their decisions mainly on fundamental analysis.
In general terms, a fundamental analysis of options is an asset valuation method based on both internal and external factors that can affect its price over a certain period. These factors include macroeconomic events, interest rates, financial and political policies, and the environment. When evaluating resources, positions such as price-earnings ratio, profitability, events and management changes, as well as insider / institutional investor transactions can affect the price of the underlying asset.
Fundamental Binary Options Market Analysis
Currently, in binary options, traders are able to trade currencies, stocks, indices and goods through the same platform.
However, as many traders are convinced, in the analysis of stocks and other assets there are few analysis tools. Therefore, professionals try to use the trading platform in conjunction with third-party analysis tools and advisers. Most often, MetaTrader 4 is used to analyze the price of the underlying asset.
However, for some assets (such as stocks, for example), the MT4 platform may not be an ideal tool, especially when trying to analyze fundamental aspects. In this case, traders should turn to websites or programs that provide financial data on stock trading and general investment. Some of these platforms also provide timely information on events related to market movements, such as insider transactions and news, which can be very useful, and as a result help traders make smart investment decisions.
What does it look like in practice?
For example, if an insider takes a top position on Twitter, Twitter shares are likely to react accordingly. Knowing this aspect on time can help traders make the right choice. As a rule, long-term investors are more interested in monitoring the actions of leaders (institutional investors and hedge fund managers), especially considering what they add to their holdings. At the same time, it is much more important for traders to monitor their activities as timely as possible, because it is important for them to determine in which direction the share price may change in the coming trading sessions.
This is especially important for binary options traders, because with many platforms it is now possible to trade Apple (NASDAQ: AAPL), Google (NASDAQ: GOOG) and Barclays (ERO) stocks. Therefore, if a market participant wants to have the right picture before making a deal, it would be right to also understand what positions the main holders in a particular stock take. This gives a signal of what may be the general direction of the resource (i.e. moving up or down), given the trends shown by the main holders.
Interconnection in practice
Most binary options are short-term, but some of the leading brokers have varieties that last for months. Some of them even have validity periods of up to a year.
This means that a fundamental analysis of options, such as P / E, P / S ratios and profit growth, can be applied when trading these types of binary options, and, most importantly, traders can use more than just technical opinion when accepting their decisions.
Thus, traders can make more accurate decisions, because in this case it is not just about interpreting technical data to predict the next step. Using fundamental analysis in these types of binary options is likely to do more than just use a simple technical analysis, because many events must happen before the expiration date.
What does trade boil down to?
With binary options, you only need to correctly determine the direction of the price in order to create a potential return of more than 80% among most brokerage platforms and, thus, the correct forecast is the difference between how you get 80% of the profit from your investment, or lose everything. Therefore, it is important to consider everything that can affect the price of the asset in question, and this involves a fundamental analysis.
The bottom line is that the fundamental analysis of options is the cornerstone of investing, and any kind of trading, including binary options, relies on this type of analysis to make the right investment decisions. Therefore, traders should not miss this kind of analysis even when trading with short-term instruments such as binary options. This may be the difference between making money and losing everything.
Output
One of the problems that traders encounter when they start working with binary options is that they may not have access to some of the most popular technical indicators and charting tools. That is why it is very important to check the trading platform of your broker and see if it gives you access to the most important functions. Make sure that you make full use of the tools provided by your broker, because with their help you can significantly increase your chances of successful completion of transactions.