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Currency Stock Indices and Commodities Fundamentals

Binary options trading requires different kinds of analyses that pertain to market sentiment and price movement. These analyses are based from the ones used in traditional trading. Since binary options is a direct derivative of the market, these analyses techniques can easily be applied when trading binary options. The binary options trader should therefore look into these indicators if he wants to continue making successful trades.

Fundamental analysis is what binary options traders use to analyze market news and sentiment to predict the future value of an asset. Fundamental analyses of the market so “fundamental” in nature as far as using the news to trade the markets is concerned because unlike the quantitative nature of technical analysis, this type is a qualitative measure to analyze world market trends. Different sources and tools are used for fundamental analysis, and every binary options broker should know how to employ the data that they gathered to yield meaningful information for their trades.

1. Binary Options Indices Trading

The concept of index (plural indices) in trading refers to a statistical measure of change in the overall performance of a given control group formed by individual companies. Before you start throwing eggs and rotten tomatoes at me, let me assure you that I will explain it again, this time using normal English because the first sentence makes my head spin too. Ok, one the most known, traded and talked about indices is the S&P 500 (Standard & Poor’s 500). This index contains 500 large and publicly traded American companies and its value is derived from the stock prices of each one of those companies. Each company has a different weight in the overall index value and this weight is determined in our case by Standard & Poor (S&P). The index value will fluctuate up and down based on the performance of the companies contained and it serves as a measure of short term overall economic health for its respective country. When I say “for its respective country” it’s because there are different indices for different countries: the most prominent ones for the USA are S&P 500 and Dow Jones; FTSE 100 for the UK, the DAX in Germany, CAC in France and Nikkei for Japan. These are just a few examples and because they are one of the most frequently traded assets, Binary brokers offer an impressive variety of indices for trading. The trading hours can be different from broker to broker and it’s always better to check with your broker’s Asset Index to find out the exact times.

Effects of Binary Options Indices Trading

Trading indices through vanilla options or futures contracts would require huge amounts of capital and unfortunately for the regular guy like most of us, that is not always available.  As a result, brokers started to offer Binary options on indices which are a much less riskier ways of profiting from their fluctuations. And speaking of fluctuations: what affects their movement? Like I said, indices are based on the performance of several large companies and all these companies are publicly traded. If they are publicly traded, then they have stock prices, right? That’s exactly what influences indices: the stock price of the companies in it. Then going even deeper, a company’s stock price is influenced by its overall performance and also Supply and Demand. Indices are also a measure of the overall state of the economy so in periods of an expanding economy, the indices in that country are likely to go up and vice versa for periods of economic regression. From a Binary point of view, the actual steps for a trade are the same as for any other asset. The principle is also the same: if according to your analysis the asset will go up, you will select Call and if you think it will go down, you will select Put.

The information about popular indices is widely available and almost every time you hear talk about the financial market, S&P, Dow Jones or FTSE are probably mentioned. Any reputable broker will provide you with live news, keeping you updated on the major headlines. When trading indices we must pay extra attention to events like powerful storms, hurricanes, earthquakes or even terrorist attacks because these kinds of events have a great impact on a country’s economy and consequently on indices.

Advice on Binary Options Indices Trading

We all have trading stories and today I am going to tell you one of my own… it’s rather a small discovery I came across by accident. One day I was trading the S&P… nice Call after a big drop that resulted in a bullish divergence. I’m not a big fan of trading reversals and I prefer to go with the trend, but this divergence was too good to miss. Once I place a trade I don’t like to watch it and bite my nails until expiry time and according to my habit, I selected the Call on S&P and started looking at other charts to see if I could spot another good opportunity. The first chart I looked at was EUR/USD… and then it hit me: the EUR/USD chart resembled a lot like the S&P chart. It had almost the same drop and bullish divergence was forming, but while my Call on S&P was already moving into profit territory, this chart was looking like it was just getting ready to go up, following the movement of the S&P. I don’t know if it was a rushed decision, but I decided to place a Call on EUR/USD as well. Fifteen minutes later it proved to be a good decision as both my trades closed In the Money. So in this case, EUR/USD followed the movement of the S&P, I doubled my profit and I was now sitting on my couch with a big grin on my face thinking if it was just an isolate occurrence or something that I could repeat in the future… well, time to wipe the smile off my face and start to back test the phenomenon.

High Profile Indices Info and Trading Tips

S&P 500

Trading Exchange: NYSE, NASDAQ, NYSE Amex

Trading Hours: Five days/week, during the trading hours of the above mentioned exchanges (9.30 am – 4.00 pm ET/EDT usually). Your binary broker might have different trading hours for this asset so check with them for the exact times

Brokers offering Binary Options on S&P 500: Almost all Binary brokers offer binaries on S&P 500

 The index is affected by the common stock performance of the 500 companies contained by it, but different importance is given to different companies. When trading S&P 500 it would be wise to keep an eye on extremely large companies like Apple, Google or Microsoft. Their performance will most likely affect the index more than a less known company.

Dow Jones

Industrial Average Overlook

Trading Exchange: Components of the Dow can be traded on NASDAQ OMX and NYSE Euronext. Other Dow derivatives can be traded on the Chicago Board Options Exchange

Trading Hours: Five days/week, during the American session. Check your broker’s Asset Index for the exact trading hours

Brokers offering Binary Options on Dow Jones Industrial Average: Most Binary brokers offer binaries on Dow

2. Binary Option Currency Trading

We know that Binaries are derivatives and that means that their value and consequently their movement are derived from the value (movement) of the underlying asset. But what influences the movement of currencies? They are traded in pairs, but the pair is never perfectly balanced. Think of the two currencies in a Forex pair as two athletes on the track, both with similar capabilities: they will constantly shift places and overtake each other. Now let’s think of the EUR/USD pair: when the Euro is stronger than the US Dollar, the pair will go up and when the Dollar is stronger, the pair is going down. The balance of power between the two changes constantly and that is what generates price fluctuations, trends, retracements and reversals. Incidentally, the word “retracements” is a financial term meaning: A temporary reversal in the direction of a stock or currency price that goes against the prevailing trend. A retracement does not signify a change in the larger trend.

Although a very large number of currencies can be traded in the Forex market, the most frequently traded ones are called the Majors. A characteristic of the Majors is that they all contain the US Dollar. These pairs constitute about 85% of the Forex market volume. The remaining 15% is composed of currency crosses (pairs that do not involve the US Dollar) and exotic pairs. The Majors are: EUR/USD, GBP/USD, USD/JPY, AUD/USD, USD/CHF, USD/CAD and NZD/USD. These pairs are so often traded that traders even gave them nicknames and the most interesting one for me is “Cable” for the GBP/USD pair. The pair got its nickname from the time when an actual communications cable under the Atlantic Ocean synchronized the quote for GBP/USD between New York and London. Good thing we have wireless technology now, right? Most Forex pairs can be traded 5 days a week, 24 hours a day and usually brokers offer Binary Options trading on currencies according to this schedule, but it would be a good idea to check your broker’s “Asset Index” to make sure. Trading hours can differ from broker to broker.

effects of Binary Option Currency Trading

The charts are in constant turmoil, with each currency trying to get the upper hand on its counterpart. But what drives them and how can we benefit from that? Well, a country’s currency is strongly influenced by the overall state of the economy, important political and financial news, central bank rates, speeches by bank chiefs, natural disasters, geopolitical events and sometimes even rumors. Based on these factors, but not limited to them, a currency can strengthen or weaken but we must also take a close look at the influencing factors for the other currency in the pair. For example, if good news is released about the Euro and worse than expected numbers come out on the US economy, we can expect the EUR/USD pair to go up, because now the Euro is stronger than the US Dollar. And finally we get to what matters to us Binary Options traders. If we expect the underlying asset (in our example the EUR/USD currency pair) to go up, then it’s time for a Call on EUR/USD. The Binary Option is a derivative instrument, and its value will go up, making our Call profitable, assuming the currency pair did the same and our analysis was correct.

News and all the events we talked about in the last paragraph constitute the fundamental part of currency movement, but there is another type of analysis that plays a big role in the financial markets: Technical Analysis. This type of analysis is done by identifying trends, support and resistance levels and using different technical indicators or tools. A trend is basically an extended move in either direction and good profits can be achieved by trading in the direction of the main trend. Support and resistance levels are potential turning points. Resistance can be identified above current price and it is a zone from where price returned on several occasions in the past. Support is always lower than the current price and the same principles apply. Support and resistance levels and trends are the main ways of applying technical analysis to currency trading. You can read more detailed explanations in my other articles.

Advice for Binary option Currency traders

One of the most important financial events is the announcement of the Official Interest Rate by the European Central Bank (ECB), followed by a press conference where Mario Draghi, the President of the ECB gives a speech and then answers journalists’ questions. Usually volatility is crazy during the press conference and Draghi’s words are immediately analyzed (and sometimes misinterpreted) by traders. This can generate a lot of whipsaws, and false moves, especially on the EUR/USD pair, but other pairs are affected as well. One minute you can get the impression that the price is going up and the next minute it reverses and moves furiously down. I went into some bad trades, receiving some false signals from the market during the ECB press conference and then I decided (and I recommend it to you too) to stop trading when Draghi is speaking at the press conference. All currencies have specific news that has a great impact on their movement. Usually all Central Bank Rates announcements have great impact on their respective currencies and one of the most important financial events for the US Dollar is the Non-Farm Payrolls (NFP) release. You should let the market cool down during these events and start trading afterwards. Also, don’t forget to check out a Forex calendar to be aware of the major events of the pair that you are trading.

Major Currency pair Info and Trading Tips

EUR/USD

Trading Exchange: EUR/USD is traded on a decentralized, worldwide and around the clock market for exchanging currencies, known as the Forex market.

Trading Hours: Around the clock, 5 days/week. Check with your broker for exact times

Brokers offering Binary Options on EUR/USD: Almost all Binary brokers offer binaries on EUR/USD

It is highly volatile during news announcements so you should stay away from this currency pair at least 30 minutes after the release. False moves and whipsaws are frequent at those times and that makes technical analysis very difficult and unreliable. One more tip: if Mario Draghi (Current President of the E.U. Central Bank) or Ben Bernanke (Current Chairman of the U.S. Federal Reserve’s) is speaking, let them finish before trading. The reason is the same as the one mentioned above.

USD/CAD

Trading Exchange: USD/CAD is traded on a decentralized, worldwide and around the clock market for exchanging currencies, known as the Forex market.

Trading Hours: Around the clock, 5 days/week. Check with your broker for exact times

Brokers offering Binary Options on EUR/USD: Almost all Binary brokers offer binaries on USD/CAD

Canada is one of the largest Oil providers for the United States. Due to the large volume import – export business, the economies of the two countries are highly interconnected and this makes their exchange rate to be pretty stable, having a low Daily Range. Oil price can affect the rate.

USD/JPY

Trading Exchange: USD/JPY is traded on a decentralized, worldwide and around the clock market for exchanging currencies, known as the Forex market.

Trading Hours: Around the clock, 5 days/week. Check with your broker for exact times

Brokers offering Binary Options on USD/JPY: Almost all Binary brokers offer binaries on USD/JPY

Binary Options Commodities Trading

One of the best things about Binaries is that you can trade them on a lot of underlying assets and in a way they merge all the important financial markets together. By using a single platform, you can trade Binary Options on Currencies, Stocks, Indices and Commodities. Today we are going to focus on Commodities as a tradable asset. Let’s start with the basics: what is a Commodity?  The term “commodity” is used to describe an item produced to satisfy certain needs, but has almost no qualitative differentiation in the market. Ok, I am going to use examples: Rice is a commodity, but we cannot tell where or by whom it was produced just by looking at it or by tasting it. Copper, Gold and Silver are commodities, but they are almost the same all over the world and their respective prices are universal. For you to better see the difference between commodities and other types of products, think of cars or mobile phones; they have very different characteristics and prices.

Other examples of commodities are Coffee, Tea, Wheat, Corn, Coal, Soybeans and one of the most traded, Oil. Although there are a lot of commodities, most brokers offer Binary Options just on Oil, Gold and Silver and these can be traded around the clock starting Monday morning and ending Friday evening. Because the trading hours can differ a little from broker to broker, you should check your broker’s Asset Index section.

Effects of Binary Option Commodities Trading

Now that we know what Commodities are, we must find out what makes their prices fluctuate. The answer is Supply and Demand. Think of it this way: if everybody needs oil (Demand is high) but if there isn’t enough for everybody (Supply is lower), than the price of oil will go up. On the other hand, in times when Demand is low and there is enough oil to cover all the needs and then some, the price will go down because the buyers are not willing to pay a high price for the commodity. These are the basic principles behind Supply and Demand and the balance between them can be influenced by many things. Let’s assume that a new electric car is invented with extraordinary characteristics, similar to a Ferrari and it costs just about $15,000. Now that would be nice and I bet everybody will rush to the nearest car dealer to get one. I know I would! But if that car doesn’t use oil anymore and the whole world now owns one, who will be left to buy oil? No one or very few. This means that the Demand for oil suddenly dropped, but there is a lot of Supply. The result can be seen in the price of oil:  it will drop like a wingless airplane.

This is of course a fantasy scenario and it will probably not happen; at least not very soon, but I hope you get the whole Supply and Demand idea. Any event that influences the Supply and Demand of a certain commodity will have an effect on the price of that commodity and consequently, on the Binary Option price which fluctuates the same way as the price of the commodity.

Advice on Binary Option Commodities Trading

Commodities like Oil, Gold or Silver can sometimes have stronger moves than Currencies or other assets so we need to be more careful not to get caught on the bad side of a trade. I consider a strong move to be one that covers a big distance in a short amount of time, or one that stretches over a longer period of time without having a significant retracement. To better understand what I mean, just look at an oil or gold chart at the time of the US Election’s Official Results and then compare it with the movement of any of the currency pairs that contain the USD. You will see that oil and gold moved a lot stronger.

The thing about commodities moving stronger makes me think about a time when I was working for a trader who was so sure of himself and his trades that he would not get out of a bad trade even if the market was screaming to do so. During an important event for oil that was expected to drive the price higher, he placed a Buy trade, but the price soon started to drop hard, disregarding what market participants “wanted” it to do. His trade was closed at a loss… and I thought his next trade will be a Sell as price continued on its downward path. But his stubbornness kicked in and he continued to Buy oil… constantly increasing the amount traded. Unfortunately, just two hours later, the oil price dropped about 300 points and he was down more than $11,000. In case you are wondering… yes, this is a real story, but he can afford the loss; most of us can’t, so whatever you do, don’t try to prove to the market that you’re right, or take revenge on it because it will come back to bite you hard. Try to keep a balance between the fundamentals and technical analysis and even if a financial event makes you think that the price will go in a certain direction, always try to confirm it from a technical point of view.

High Profile Commodities Info and Trading Tips

Oil

Trading Exchange: NYSE, NASDAQ, NYMEX and other important exchanges

Trading Hours: Monday – Friday but your binary broker might have different trading hours for this asset so check with them for the exact times

Brokers offering Binary Options on Oil: Almost all Binary brokers offer binaries on Oil

Its price is highly influenced by wars (during times of war more Oil is used for the Army) and by Oil spills: if a sea platform owned by a leading Oil extracting company is hit by disaster, that company will extract less Oil so the Supply will go down, making price to go up.

Gold

Trading Exchange: Most of the important stock exchanges, including London, New York, Paris, Mumbai and Zurich.

Trading Hours: Monday – Friday but your binary broker might have different trading hours for this asset so check with them for the exact times

Brokers offering Binary Options on Gold: Almost all Binary brokers offer binaries on Gold

Gold was always regarded as a good back up reserve and in times of economical instability, people buy Gold to compensate for inflation and lower wages because its price goes up during those times. Also keep in mind that XAU/USD is positively correlated with EUR/USD.

Coffee

Trading Exchange: New York Mercantile Exchange, New York Intercontinental Exchange, London International Financial Futures and Options Exchange

Trading Hours: Differs depending on broker. Check their Asset Index

Brokers offering Binary Options on Coffee: Most of the leading brokers offer binaries on Coffee

Brazil is the world’s largest Coffee producer, followed by Vietnam, Indonesia and Columbia. Since it is an agricultural product, grown in the open air, the quantities harvested are closely related to meteorological conditions in the countries mentioned. A year affected by drought will lead to less coffee being produced so less Supply and a consequent increase in price.

Binary Option Stocks Trading

Apple, Microsoft, Exxon, Mobil, Facebook or McDonalds are all companies that influence our everyday lives. There’s a big chance that you are reading this article on a computer that uses Microsoft or Apple operating systems, you probably have a Facebook account and if you drive a car, you know what Exxon is. All these companies have one thing in common: we can buy their stocks and even better, we can trade Binary Options with their stocks as an underlying asset. The term of “Stock” refers to the initial capital invested in a company by its owners. The whole stock of a company is divided intoshares (usually the plural form – stocks – is used as a synonym for shares) and owning a share means owning a fraction of that company. However, when we are trading Binary Options we are not buying stocks; we are just placing a Call if we think the price of a certain stock will go up or a Put if we think it will come down. Binary Options can be traded on stocks of major companies that are listed on the stock exchange. Of course, another basic condition is that your broker offers Binaries on those companies, but usually a wide variety of stocks are available for trading through most of the Binary brokers. Other frequently traded stocks besides the ones already mentioned above, are Google, Vodafone, British Petroleum, Coca Cola and Intel. Binary Options on stocks can be traded only when their respective stock market is open, unlike Binaries on currencies or commodities that can usually be traded around the clock during the working days of the week. Your broker will inform you about the exact trading hours in the Asset Index section of their website.

Effects of Trading Stocks

I talked about a stock going up or down, but let’s see what makes a company’s stock price fluctuate. And the answer is… Supply and Demand, just like in the case of commodities and many other financial assets. If Demand is high for the products made by a company, this will lead to more income and profit for that company and given that share prices are directly influenced by the company’s economic situation, they will go up. To simplify, if a company performs very well the price of its shares will probably go up. If the company is in financial trouble, the share price will go down. The way for us retail traders to gauge how a company performs is by keeping a close eye on their Earnings Reports and also any news that can affect that company. Hypothetically, let’s assume that Apple announces that they will release a new iPad with 3D capabilities. Nice thought, I know. Once the new iPad is released and it is indeed a competitive product, a lot of gadget lovers will rush into the Apple stores to get their hands on one. But what do you think that will do to their stock price? It will most likely bring it up because now everybody is interested in Apple and buys their products which will eventually be positively reflected in their sales numbers and earnings reports and a well performing company has a high share price.

Of all the assets available for trading Binary Options, probably stocks are the most appealing to the new trader because usually brokers offer for trading the stocks of big, well known companies. Since almost everybody has heard about those companies, you don’t need to be a financial wizard to find out if and when Google launches a new smart phone or if Facebook accounts will require paying a monthly fee.

Advice on Binary Option Commodities Trading

Keep an open mind and don’t let your trading be influenced by your own opinion of a certain product or company. I am going to make it clearer: like I said, it is very probable that we are using some of the products of the companies we are trading. Without question, we have different opinions on different products: if I chose to buy an iPhone, then I consider it better than the Galaxy phone from Samsung. And here comes the unconscious mistake that we must avoid: never allowing yourself to become biased towards a certain stock just because you use and love the products of the company. It might seem like something that is not worth mentioning and you could say “Yes, of course I am not going to place Calls on Apple just because I like the iPhone”. Your subconscious can make you do weird things; if you already like a product and on top of that you earn some money from trading that company’s stock – so only good things came from your “relationship” with that company – you will somehow become emotionally involved and you will potentially give unnecessary importance to a small but positive event related to that company.

High Profile Stocks Info and Trading Tips

Apple

Trading Exchange: NASDAQ

Trading Hours: Five days/week, during NASDAQ trading hours (9.30 am – 4.00 pm ET). Your binary broker might have different trading hours for this asset so check with them for the exact times

Brokers offering Binary Options on Apple: Almost all major Binary brokers offer binaries on Apple

Apple had their share of mistakes and defective products. Remember the iPhone problems with the antenna or the horrible blunder with their Maps app? Since they are a world leader in consumer electronics, all eyes are on them and even a small mistake can lead to a drop in share price.

Google

Trading Exchange: NASDAQ

Trading Hours: Five days/week, during NASDAQ trading hours (9.30 am – 4.00 pm ET). Your binary broker might have different trading hours for this asset so check with them for the exact times

Brokers offering Binary Options on Google: Almost all major Binary brokers offer binaries on Google

Although Google is the world leader when it comes to search engines, any new developments coming from their direct competitors like Yahoo or Bing will affect Google’s stock price. Competitors are also looking to “steal” some of their employees and these transitions can be detrimental to their stock price. For example Marissa Mayer, Google’s Vice President of Search Products and User Experience left in July 2012 to become Yahoo’s CEO. Ouch, that’s a low blow.

The bottom line

Using the news to trade the binary options market will depend on how the trader uses the information. No matter how the trader uses the news, global markets will still be affected by how humans in control of countries and companies move. This sentiment is what produces the greatest trading opportunities.

So, if you are a binary options trader, it would be wise to start watching financial news and subscribe to financial news websites. Meanwhile, we will. continue to provide you with help as you start profiting from binary options trading.

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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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