§4 Fundamental analysis
When trading Binary Options you are essentially buying and selling an underlying asset (commodity, shares and currencies) and can therefore borrow the principles of analyzing the market situation from the stock market or the Forex market, where such assets are traded directly. At the present time there are two basic ways to analyze the market, namely:
- Fundamental analysis which is based on the study of economic and other events in the world to draw conclusions on how the asset’s prices will change.
- Technical analysis. It is more attractive and available for beginners just because it requires a chart only. Very little talent for geometry will allow you to make more reliable forecasts of the events that will happen in the near future to the quotes of the assets which you trade. This analysis is based on the fact that the future is predetermined by the past (and therefore you can predict the “picture” that is displayed on a chart in the near future through the current chart). It is also based on the arguments of experts in the sphere of trading in the world markets, that a chart reflects everything, in one way or another, – all events, trends and movements in prices. If you learn to understand all of these events, then you’ll undoubtedly become a good trader because most good traders in the world still pay much attention to the chart, irrespective of what exchange they trade on.
Fundamental analysis is regarded as more difficult than technical analysis, because it requires a good understanding of what is happening in the world. If you are new to options trading, it would be better for you if you don’t apply its techniques. This is because if you didn’t master the subject, you shouldn’t think that you really understand the balance of forces in the world economy. At the same time, if you take some efforts to polish up your knowledge in fundamental analysis, it can do you a good service. You can also make use of events that happen in the world to place useful bets.
Theoretically fundamental analysis covers all events because most of the events are reflected in the price anyway and are of several types:
- Expected events which include the majority of economic events such as annual report on growth rates and information about indexes of a large company. It also includes political events – elections, speeches by officials and heads of states. Typically, when traders are going to make use of these events, they have already decided in advance what they expect to do. For example, if it is announced that Apple’s growth rate for this year is high, then you can easily try to profit from it and buy an option with the appropriate underlying asset. It will be the same for political news – truly speaking, in this case you need a good understanding of how, for example, the reaction to the ascension to power of any leader and how it will affect currency rates.
- Force majeure events. It includes natural disasters, state upheavals, terrorist attacks and many other events which are better not to be used by a beginner because the market often gets out of control as a result of these situations and can make the market unpredictable. Although it is clear that those natural disasters, for example, in European countries tend to have a negative impact on the exchange rate for the euro.
If you use such methods
If you use such methods, then don’t forget that the trick is to “catch” the right moment to enter the market. If an event has happened a few hours ago, then the market most likely has already reacted to it, and now the event is no longer relevant or (as it always happens after any movement) a reverse trend has started which represents a correction. That is why it makes sense to focus on more predictable events, have a clear understanding of what you are going to do after it happens and then do not change your decisions.As for technical analysis, it represents a comprehensive and different subject. Therefore the next chapter will cover it.