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Binary option Trading Fundamental Analysis

Binary options can simply be purchased by choosing whether the options in the underlying asset will close higher or lower than the current price. Since the emergence of binary options in the financial markets, this new market has largely been viewed as a speculative way of making money online. This is primarily because of the short-term nature of trading binary options as compared to traditional vanilla options. Binary options have expiry periods ranging from 60 seconds to about two weeks in most cases.

This straightforward, and potentially highly profitable, choice has been one of the major reasons why binary options trading is one of the fastest growing and most popular ways to trade multiple assets, from stocks to currencies and commodities. Whilst it may be tempting to simply guess whether price is likely to be higher or lower after a certain period of time, those traders looking to make consistent profits will generally use one of two analytical techniques in order to decide which direction to purchase the options.

Fundamental analysis

Fundamental Analysis is the study of an asset by taking into consideration all the internal and external factors that have the ability to influence its price. These internal and external factors can be varying levels of data, ranging from company data to global events. Many events are interrelated, affecting the price of different assets and the different asset classes.

Fundamental analysis involves assessing the underlying reasons for market movements and interpreting data and news releases which influence the value of financial markets. Many long-term traders consider the fundamentals which can range from a single company’s quarterly reports, national GDP or central bank decisions. This information is considered as the underlying driver of the market and controls the basic demand for the stock, commodity or currency over a period of time. Fundamental binary options traders use news and data release events to determine whether price is likely to move higher or lower which, if interpreted correctly, can provide very profitable trading opportunities.

Binary option Trading Fundamental Analysis

Now, in binary options, traders have the opportunity to trade currencies, stocks, indices and commodities via the same platform. However, as many traders will find out, there are not many analysis tools to use when analyzing stocks and other assets. As such, wise traders try to use the trading platform in conjunction with third-party analysis tools and platforms such as the MetaTrader 4 platform to analyze the price of the underlying asset.

However, for some assets such as stocks, the MT4 platform may not be the ideal tool to use especially when attempting to analyze the fundamental aspects of the stock. In this case, traders have to turn to websites/platforms that provide financial data about stock trading and general investing. Some of these platforms also provide timely updates on market moving events such as insider transactions and guru picks which can be very useful in helping traders to make smart investment decisions.

Fundamental analysis is a favorite of many traders who have traditionally traded stocks as it looks for underlying value in markets in order to formulate trading decisions. This type of analysis for assessing the value of a company will look at trading reports and earnings, whilst for currencies it will look at the major economic indicators in order to establish the general demand for a national or regional currency. Fundamental analysis is argued to be the most realistic, value-based way to trade binary options although for some traders this may not be entirely suitable. Since fundamental analysis relies on longer-term trends to move price this form of analysis may not always be suited to inter-day and short-term binary options. On the other hand, news and data releases are considered fundamental and can impact markets with very fast and volatile swings in price which make these situations perfect for short, and even 60 second, binary options trading.

Key economic events and news for fundamental analysis

It would be near impossible for a trader to know and understand every piece of data that is released. However after choosing a few assets to trade; it is possible with the advent of the internet, to really focus on the assets. Also to focus on the fundamental analysis and events which move them. It is still important to keep up to date with the more general financial and world wide headlines too so that you place information into a much larger context but areas to look out for when applying fundamental analysis to your trades include:

Economic Data

The release of economic data can have an instant effect upon the direction of the markets. Data that is released by governments, companies and research agencies have different degrees of importance but can have a noticeable effect upon an asset. This is where the use of an economic calendar is hugely important to the binary trader, as a good calendar will not just give the time of the release of important but it will also provide the background to the data release.  Key data released to look out for includes:

GDP

This measurement of the total value of goods and services produced nationally is a key indicator of a country’s economic health.

Interest Rates

The interest rate is the amount that the bank pays to people, organizations and businesses that save money in the bank. They are used by the central banks to change the economic situation by influencing inflation, spending and saving. As a rule, higher interest rates also mean higher currency prices as a rise in a country’s interest rate makes it more worthwhile for foreign investors to buy and hold onto that currency.

Retail Sales

This is a measurement of retail sales which can include sales from stores, catalogues and even vending machines but always directly to individual consumers. The numbers come from a sampling of retailers which are then calculated to represent the entire economy. In the U.S. for example, 12,000 companies are used as part of the model.  The data is split into a number of categories such as food, clothing and electronics but excluding cars which is seen as a volatile market and can distort the total trend. Consumer spending makes up about two thirds of a country’s total production so can be very important indeed. It is one of the key leading indicators which should be watched carefully.

Unemployment

If you want to see how good or bad economies are doing then look no further than the unemployment rates. In the US the Non-Farm Payroll is one of the most important economic indicators accounting for 80% of the US total workforce. The NFP tells the change in the number of people employed outside of the government, private households, farms and non-profit organizations. Economies that are doing well have low unemployment but when firms stop hiring and start shedding jobs then this is normally seen as a bad sign for the economy. A good example of this is in Spain where a staggering 48% of all 16-24 years are currently unemployed.

There is a veritable wealth of data being released all over the world all the time creating market movement and profit opportunities. A good economic calendar will keep you informed of all the important events. Events like a central bank leader speaking, or the latest economic sentiment in the Eurozone, but what must be remembered is that fundamental analysis and trading the news is used to best effect when in conjunction with technical analysis. However, for the beginner trader, using an economic calendar to make your trades can be a very profitable strategy.

Non-financial events for fundamental analysts

Fundamental analysis can be used beyond the release of economic data within a region or economy. Indeed, many fundamental traders also watch non-financial global events in order to support their trading decisions. Stocks, currencies and commodities all react to global affairs and political decisions can be highly influential in dictating the underlying trend in a market. One clear example of this is the effect that political tensions in the Middle East have on the price of oil. The price of oil is sensitive to the regions stability given that the area supplies a very large part of the world. If this supply is threatened, through war or global terrorism, it will push the price of oil higher. Similarly, the recent rise in the value of gold was largely attributed to the economic crisis causing investors to buy gold as a safe-haven for their money. All of these large events can be seen to drive market direction and provide excellent opportunities for both long and short-term binary options traders.

Natural Events

At a very basic level, assets like Corn, Soya and even Oil can be heavily influenced by natural disasters and weather events. Like with any asset, the laws of supply and demand apply meaning that severe storms wiping out the corn fields in the US will mean a shortage in the supply of corn, pushing its price higher.  Some natural disasters are easier to predict than others – a rainy summer season in the UK or Europe will mean that the tourism money received is reduced which in turn hurts consumer spending and unemployment. The flooding in Thailand in 2011 had a major effect on the Japanese Yen, as Japan was unable to export its goods through its favoured export route through Thailand.

Politics

Political events can have a huge impact on the prices of many different assets and that includes war. The tensions in Iran over the last year or so have meant increased volatility for the commodity Oil. Iran controls the Strait of Hormuz which accounts for 33% of all oil transportation and as the world’s 4th largest oil and gas producer, when there is a change in the production and supply of oil by Iran because of increased tensions or economic sanctions; this has a direct effect on the price of crude oil.

The effect that politics can have on an assets price movement extends to governments too. Different governments have different polices which effect key areas like public spending, public borrowing and growth methods.

Sentiment

The financial markets are often driven by sentiment with a pessimistic market reflected in a downward economic trend. When sentiment amongst consumers is high, they generally spend more boosting other areas of the economy. Fear drives the markets – investors fearing for the future of the Eurozone and the Euro will find other areas to invest in – such as the USD or Gold. It was Spanish debt inspired fear in July 2012 which saw the value of Euro plummet over 1% in one day and pushed the EUR/JPY down its lowest level since the year 2000 and the EUR/USD down to its lowest in 2 years. The reverse of that was when the people of Greece voted in a Euro-friendly government and the Euro rose nearly 2% in one day.

What’s the Influence of Fundamental Events?

A fundamental event can change the direction of a pair, a stock and even a commodity because the economy of a country is what fuels its currency and has a high impact on its stocks and indices. Needless to say that you must be well informed about what happens in the world and especially in the countries whose currency or stocks you are trading. Let’s assume Mario Draghi (President of the ECB) makes some comments about the bad state of the European economy saying that more member states will soon be in need of monetary aid. This will almost immediately weaken the European currency and it will directly affect the EUR/USD pair by taking it lower. Of course, this will probably bring your EUR/USD Put into profit territory and your Call in negative so you can see why it’s important to be aware of such events. However, speeches of the heads or Central Banks are not all that matters; there are other important fundamental events such as Retail Sales releases, Consumer Price Indexes, Manufacturing Indexes, Non Farm Payrolls, Unemployment Rates and of course, Interest Rates.

 Although we have no way of knowing the result before the data is released, we can at least prepare for it and create a plan about how we are going to act once the news is out. To do that, we must know the exact time of the announcement and the way to do it is byfollowing a Financial/Economic Calendar. A lot of websites offer this type of calendar so it will be pretty easy for you to find one. But not all these Calendars explain the impact of each event and you may get lost in abbreviations such as CPI, PPI, PMI, NFP and others; even if the events are not abbreviated, it’s hard to know for each one if a higher number will take a pair up or down and that’s where BOTS can lend a hand.

How to implement Fundamental events in trading

Being aware about when the next potential market moving event is released is mandatory because it will give you the possibility of creating a plan for your trading. You will be able to choose whether to trade or to stay on the sidelines, giving you more control. However, all the knowledge required is sometimes overwhelming and it’s acquired over time. That’s why we don’t want you to trade alone and we try to explain all the major events before they happen (or immediately after if something unscheduled happened). This way you can benefit from our accumulated knowledge while you learn to interpret Binary Options events on your own.

The bottom line

The bottom line is that fundamental analysis is the cornerstone of investing, and any type of investor including binary options investors and exchange-based traders rely on this type of analysis in making the right investment decisions.

Therefore, traders should not overlook this type of analysis even when trading short term instruments like binary options. This could be the difference between making money and losing all of it.

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Binary Option Collage

All Lessons in Part 2: Fundamental Analysis
Lesson 1: Binary option Trading Fundamental Analysis
Lesson 2: Currency Stock Indices and Commodities Fundamentals
Lesson 3: Binary Options News Trading
Lesson 4: Binary Option Trading Economic Calendar

About the author

David Richard

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