Estimated reading time: 4 minutes
Over the years, Binary Options world of trading have seen a tremendous increase in the number of traders willing to take part in it. Generally, this is due to the fact that Options trading can generate an awesome ROI when compared to other forms of traditional trading like forex, bonds and stocks.
This has lead to traders seeking the best profitable strategies they can use in trading binary options.
There is no single “binary option strategy” per Se rather they can even be divided into beginner, intermediate and advanced strategies.
No matter the form, any one individual can still develop his/her working strategy and maintain it. Though there are many articles online stressing on the various types of binary option strategies, we’re going to deal exclusively on the most important and still the most popular trading strategies for both binary options and forex.
These are the fundamental and technical analysis. Note that this article serves as an introduction aiming to explain how fundamental and technical analysis can be used as a strategy for trading options.
Also known as News trading, fundamental analysis is the study of an asset using both the external and internal economic factors that influence the price or exchange rate of the asset. These factors could range from simple company data to a complex global events that affects the price of an asset.
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When trading using fundamental analysis, one should focus on the news concerning the asset being traded rather than putting interest in the whole lot of data encompassing other various assets.
In general, news concerning politics, natural events, economic releases, sentiments e.t.c may in one way or the other affect the price of an asset. For example, in Politics, during US presidential elections, traders often witnessed a high volatility in currency pairs like the EUR/USD, GBP/USD, USD/JPY with USD becoming stronger in value than most of them all during those times.
Presidential speeches and Central Bank Governors’ speeches can also have a high or medium impact on the current exchange rate of a particular asset.
Economic data releases can have an instant impact on the direction of an asset. This is why a binary option trader should have an economic calendar stating exactly when and what type of data will be released.
There are many types of economic data releases but the most important ones are the GDP, Interest rates, Retail sales and unemployment status of a country.
You can see why these data can have a high impact on the value of a country’s currency. Take for instance, the Nonfarm Payroll which accounts for about 80% of the total US workforce, is an important indicator of the GDP of the United States. When the Non farm Payroll data of US is low (signifying that most business workers are not paid) for the month of March, 2014, it means that this will negatively impact on US GDP thereby creating an opportunity for binary traders to stake on the USD currency pairs.
Also worthy of note is the interest rate. Interest rate is a kind of commission that banks pay people or organizations to save money with them. The higher the interest rate, the higher the currency price because the high interest rate attracts foreign investors to save in that particular country.
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During news releases, the reversal trading strategy is completely contraindicated.
I will explain further.
The reversal trading system is one of the popular strategies used when an investor observes that an asset has abruptly moved in a particular direction and is very unlikely to stay at that peak and will move towards its original position. In this case, the investor will stake a put or call depending on the direction of the asset.
As you can see, it’s very dangerous to use the reversal system during important, high impact news data releases because the asset price may continue in the same direction without moving towards it’s original position.
Also known as chart trading or analysis, technical analysis is the most widely used strategy for binary options trading. Due to the fact that technical analysis is not as simple as fundamental analysis and used mainly by advanced traders, we’ll only give a brief overview of how technical analysis is used in trading.
Like forex, technical analysis involves the studying of graphs and charts and the appropriate use of indicators to determine the future direction of an asset.
This type of analysis is purely based on Dow’s theory, a great financial analyst. The theory teaches that what happened in the market in the past has a high or medium probability of repeating itself today or in the future. In essence, the technical studying of past charts representing important financial events can give us a clue of what can happen in today or in the future.
In binary options trading, technical analysis is usually done using indicators like MACD indicator, Bollinger Bands, Fibonacci Retracement lines, Parabolic SAR, Simple Moving Averages e.t.c
Other less common binary option strategies are the Martingale, the Straddle, Double Trade and other personally developed systems.
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