Fundamental Analysis in Binary Options

As we have established time and again, 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.

We have mentioned before that there are two kinds of analysis. The first being the elementary fundamental analysis, and the second being a more advanced technical analysis. Technical analysis refers to reading quantitative data to look out for trends and indicators that tell the binary options trader when is the right time to trade and what binary option to purchase. Technical analysis makes use of the different tools that binary options brokers provide in order to provide the trader with the right information.

Fundamental analysis, on the other hand, 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.

Global Landscape

The binary options trader needs to look into a global landscape. Countries that are regarded as major players in world economics and politics are to be considered. The economies of other countries are dependents on the performance of these countries. For example, in an effort to rebuild the global monetary system after WW2, the US came up with the Bretton-Woods system. This is a system of monetary management that established the rules for commercial and financial relations among the world’s major industrial states established in the late 1940’s. This is the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.

Since then, the US dollar has been the standard currency on which international trade is based. In the 2000’s, China has also started to become a big key player in the market. It has also assumed a similar role and its vast industrialization has placed a huge demand on certain assets such as oil. Countries in Africa have been dependent on China for a number of resources. In Europe, Germany has the strongest economy. This country has been dominant as far as bailing out troubled countries affected by the establishment of the Euro.

How does knowing the global landscape help in trading? Quite simply, periodic announcements from key players, countries and companies, in the market affect price change in the market. When they give out a statement concerning key economic and political events that have an impact on world economics, the binary options trader should always be an earshot away. The markets monitor these announcements very closely because they will impact the future of the world economy at any given point in time.

Depending on the outcome of a key announcement by a country or company, the market may react differently. It may either assume a positive sentiment or a negative sentiment on the economy and currency of the country making the announcement. This in turn will have a domino effect on the sentiment and outlook of traders in other countries whose economies are dependent to the performance of these major players. Once market trend has been formed based on a specific sentiment, binary options traders are now able to trade assets based on the trend and could either buy more of the asset or sell it off and move to safer investments.

This is the reason why the news has such a profound impact in the market. Human emotions play an intricate role in the movement of the market, and it is in the news where we find updates on these emotions.

High-Impact News

News announcements can be classified based on the extent of their global impact on the world economy and asset sentiments. News can be low-impact, medium-impact, or high-impact.

More often, binary options traders pay more attention to high-impact news. This is because high-impact announcements create a greater effect on the world market than low-impact news. But, it is possible for a low-impact news item to transition to high-impact news, depending on the prevailing economic factors. For example, the housing data and the GDP figures of Eurozone economies like Spain, Portugal, Ireland, Greece and Italy are low-impact factors. They hardly made impact on the markets a few years ago. But now, these data are now major market movers because the economic dynamics have changed and made these data very important in the assessment of the economic health of US and Europe.

Here are some things to look for in a country or company when doing fundamental analysis.

  • Gross Domestic Product (GDP)
  • Employment Data
  • Manufacturing Data
  • Country-specific Reports
  • Consumer sentiment
  • Retail sales reports

Analyzing Deviation

Fundamental analysis studies some component factors to help the binary options trader get a feel of market sentiment based on global news items. These factors are the following.

  1. Consensus or the Expected Number — This number is based on a poll of leading economists who will give an average figure which they expect the news to conform to.
  2. Actual Number — This is the actual figure mentioned in the news release.
  3. Deviation — This is the difference between the consensus figure and the actual figure.

Traders look into these figures when using the news to trade the markets. The binary options trader may specifically look into the deviation to look for market surprises. In this situation, the deviation is much higher than the expected figure, either to the upside or downside. For traders, this gives a very good and reliable, tradable signal.

There are ways to measure the deviation to see if a deviation is tradable or not. Generally speaking, the deviation benchmark is obtained by comparing the expected figure and the previous number. The difference now serves as the benchmark to the upside and downside, and depending on how far above or below the deviation is from the benchmark, the market will react accordingly.

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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