Prior to the execution of any trade, it is necessary to carry out technical and fundamental analysis of the asset you intend to trade. Binary options analysis is the practice of analyzing a binary options trade in order to increase the chances of success before taking on a trade in any market.
Three building blocks of market analysis are applicable for Binary options.
- Fundamental Analysis
- Technical Analysis
- Sentiment Analysis
Starting with Fundamental Analysis, have you heard of trade-the-news strategy? This strategy is best applied with unstable events. For binary options, this can be particularly effective when you trade simple Up/Down options. You simply need to get an idea how price may react to expected data and how strong the reaction may be.
In trade-news-trading, you have to be fairly confident that the event will spark enough volatility so that price can reach the strike price and stay above/below that level. If you try trading a report that rarely causes a ripple, you’ll be throwing money down the drain.
Take a look at the time component of binary options. Remember, for the simple Up/Down options, price must be above or below the given price at the expiration date.
Second is the Technical Analysis. Moving averages, Bollinger bands, and Stochastic are just a few of the indicators you can use on your charts when you plan to trade binary options. It could identify price dynamics. These are used across all sorts of trading markets and not just spot currencies. Just make sure you have a good understanding of how each indicator works before incorporating it into your analysis. Let’s take a look at this example on GBP/USD.
Price has just broken down from a double top. With this behavioral pattern, price normally continues to trade lower at a distance equivalent to the height of the double top. One-Touch trade could be of use for this kind of behavior. If the strike price that your broker offers is somewhere between 1.5450-1.5550, that is within the height of the double top, it is best to buy a “put” option.
Lastly, is Sentiment Analysis which proves to be particularly useful when trying to get on trends. It measures the market’s current stand with regards to broad risk flows. Are traders confident in buying up risky assets? Or buying safe-haven assets? Or cash? You can use sentiment analysis to gauge how the market is feeling. If you’re confident enough that market sentiment will favor a risk-on environment, purchase a “call” option on a risk currency or asset.
Finding things inadequate for analysis, you can always use a combination of these strategies. Fundamentals can help give you a bias as to what direction you want to take, while technical analysis will help determine the chances of the market reaching and finding support/resistance at a certain price. Meanwhile, sentiment analysis may let you know whether the market is in a risk-on or risk-off mood.
Binary options analysis is not about gambling or guesswork. You must be able to perform the appropriate analysis of the fundamentals of the asset you want to trade, look for confirmation on the charts and then execute the trade accordingly. With ample experience over time, this analysis can develop your trading skills.