One of the things that separates the binary options markets apart from what is seen in most other trading instruments is that price direction itself takes on a much higher level of importance in determining whether or not a trade ends in profits.
Positive sentiment (a bullish outlook) for an asset is expressed using CALL options, while negative sentiment (a bearish outlook) is expressed using PUT options. The central task of the options trader is to make an informed forecast for how a certain aspect is likely to perform over a given period of time. But how, exactly, do binary options traders make the decision to be bullish or bearish on a given asset? This, of course, is a complicated process and here we will look at some of the tools that traders use to arrive at their forecasts.
Analysis of Economic Data
One way of making price forecasts is to review economic data that has been released previously. Typically, traders that rely on this method tend to be called “fundamental analysis,” as these traders are analyzing the fundamental economic data that is related to the asset being traded. Of course, not all assets will relate to the same pieces of economic data.
For example, those trading stock binaries will want to look at factors such as the latest corporate earnings release, P/E ratios, and the proposed developments of new product lines. If a binary trader sees strength in any or all of these areas, it is generally a good idea to take a bullish outlook and begin to consider taking out CALL options for that company’s stock. Of course the reverse would be true (and PUT options would be preferred), if this data should potential weakness.
Trading Currency Binaries
Of course, when a trader is looking at currency binaries (such as the EUR/USD or GBP/JPY), information released by an individual company will not be particularly helpful when looking to construct a trading bias. To remedy this, traders tend to watch broader economic data that deals with nations as a whole. In these cases, traders might look at national GDP figures, monthly inflation rates, strength or weakness in Retail Sales or manufacturing and the current levels of interest rates.
When it becomes apparent that a country has a particularly strong set of data in these areas, it makes sense to take a bullish outlook (CALL options) on the currency of that nation. In contrast, if a country is posting poor GDP results or releases a piece of data that suggests manufacturing levels are in decline, it makes sense to take the opposing bearish outlook and to bet against the currency of that country using PUT options.
While it might seem difficult to make an accurate assessment of this data, it should be remembered that these numbers are released at scheduled intervals and a simple look at any good Economic Calendar will give you most of the information you need to make an informed trading decision.
Trading Commodity Binaries
When dealing with commodities, different factors come into play. Typically, traders tend to look at classic “supply and demand” when making trading decisions. Specifically, this means that if a commodity (such as Silver or Oil) is in short supply, prices tend to rise. On the other hand, when these commodities are seen in large supply (or with limited demand) prices tend to fall (creating an opportunity for PUT options).
To get a sense of supply and demand in the market, many traders look at releases like the Weekly Inventories report in Oil, which shows the level of oil supplies for the previous week. When supplies decrease, many traders enter into CALL options for oil, as prices are likely to rise. When inventories show increases in commodity supply,the opposing scenario is seen,and traders are more likely to enter into PUT options.
Conclusion: Know Which Data Moves Which Markets
When all of these factors are considered, traders are able to make more informed decisions about the assets being watched and traded. Having an understanding of these different elements can help traders to know when they should be bullish or bearish on an asset, and without this information it can be more risky and dangerous to actually place trades in an active market.