The Importance of Fundamental Analysis in Binary Options

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Fundamental Analysis in Binary Options

When we think about binary options, the first thing that comes to our minds is technical analysis. Surely, trading binary options is fast paced and traders are expected to act quickly in the short amount of time. It is clear that the majority thinks there is simply no use to doing a thorough fundamental analysis when you are dealing with trading binary options.

Yes, technical analysis is required when it comes to binary options since they are primarily dealing with short term trading, but fundamental analysis can be beneficial as well. The chances are an asset will be affected by an outside factor and you might be able to detect it before it happens if you take your time and make use of fundamental analysis.

What is fundamental analysis?

To put it as shortly as possible, fundamental analysis is a trading method that examines an asset and the way it is influenced by all external factors. Fundamental analysis focuses on the impact that is made to an asset and how it forms the future movement in the market. Traders who use fundamental analysis follow the events on a global scale, as well as various economic events, information releases, interest rates, and so on.

How to apply fundamental analysis to binary options?

There are many tools available, depending on what you are trading, and they are able to help you out and calculate a price of an asset. Those trading tools can be found in various trading platforms and they are ready for use. The makers of trading platforms are aware of the importance of fundamental analysis and they offer notifications about various news releases. But sometimes they lack the information and you need to go to outside sources to find out more about a stock or a share you are interested in.

Binary options are traded quickly and you might think that you simply don’t have enough time to do all the footwork that is required. But following the news or insider stories about let’s say stocks you are closely observing are the proper way to go. You might be the first one to get the news about a major event within a company and that turn of events might influence the general direction and you will be prepared to act before it starts changing on the charts.

I hope that you are seeing why combining fundamental with binary analysis when you trade binary options is useful. You will be capable of being more accurate in your predictions and you will have an advantage over traders who dismiss fundamental analysis altogether.

Considering all possible influences on a given asset, it can definitely make you more successful in binary trading.

Conclusion

Ignoring this type of analysis is one of the biggest mistakes traders are making. Yes, it might take you some time to do it well and following current events might not be a walk in a park, but it is effective, even in trading binary options. Fundamental analysis might be the key factor you are missing from your daily trading routine and trust me, it can make a huge difference on your performance in the market.

Binary Options Fundamental Analysis

There are two types of analysis when talking about the stock market – fundamental and technical. In this post we’ll talk about fundamental analysis for binary options trading. While performing such analysis, you’ll read the latest market news in order to get a better understanding of the market’s condition and how the price of specific stocks may change.

One of the most important things you must remember about fundamental analysis is that news about specific countries can have a huge impact on the market. The reason for this is that there are many countries which are major players on the market, and have a huge impact on it. Of course, their impact is influenced by the politics and economics in the area, so the news may help you determine the future price of specific assets. Every country is dependent on something and in the next few lines I’ll try to explain these dependences.

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Let’s take a look at the biggest player out there – the United States. They are considered as a key player on the market since 1944 when several countries had to adopt the US dollar as a national currency, because of the consequences that followed World War II. Despite the fact that nowadays there is no other country that used the US dollar, many nations are still dependent on the economic and political climate in the US.

Another major name on the market is China. The Asian country is very industrialized and constantly needs large amounts of stocks like oil and silver, and as we all know, the US controls most of the crude oil in the world. Therefore the economic climate in China can be seriously influenced by the latest events in the US.

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The market is dependent on this news and the condition of the major players, so it constantly follows the latest news and reacts to them. Almost every piece of news has an impact on the world economy, but some news is more influential than others. The market constantly monitors the latest announcements and news in order to adapt itself to the new world economy. These small changes give traders a chance to take advantage of the latest financial news, and use them to make money. Big political or economic events concerning one of the major players will have an impact on all countries dependent on it, and it is up to the trader to determine if the change will be negative or positive.

Keep in mind that meaningless how important the news are, their effect may be silenced by human emotions. Despite the news, traders can still change the condition of the market with their actions, so it is always important to keep a close eye on the charting data in order to avoid losing your money. News and events that influence the market are classified in three categories – low-impact, medium-impact and high-impact.

Naturally, high-impact news have the most influence on the market and are always welcomed by traders, because they give them an opportunity to make some serious money. Keep in mind that the importance of news can change depending on the economic and political climate – low-impact news sometimes end up having a huge impact on the market. The importance of news constantly changes, a good example for this is the housing data and the GDP figures for some Eurozone economics. These statistics weren’t considered important a few years back, but nowadays they play an important role and can drastically change the market.

The most important types of news you need to keep a close eye on are:
1. General employment data
2. GDP
3. Retail sales and consumer sentiment
4. Reports that are specific for certain countries
Components of Fundamental Analysis
Fundamental analysis has a more complicated side as well:
a) Expected Number: Leading economists will release the average figure which the news is most likely to conform to
b) Actual Number: The figure that comes with the news release
c) Deviation: The difference between the above two figures

The deviation is the thing that is most important for the trader. This figure is very likely to determine the market’s reaction, so make sure that you always get it right, and learn to read it properly. The deviation figure will tell you if the planned trade is either good or bad.

Why Binary Options Traders Must Utilize Fundamental Analysis

S ince the emergence of binary options in the financial markets, this new market has largely been viewed as a speculative way of making money online. This is primarily because of the short-term nature of trading binary options as compared to traditional vanilla options. Binary options have expiry periods ranging from 60 seconds to about two weeks in most cases.

This is why most traders tend to focus more on technical analysis than fundamental analysis disregarding the fact that the price of the underlying asset could significantly be influenced by the fundamental outlook of the stock/asset in in question.

Ignoring the potential impact of fundamental analysis in binary options is a huge risk, and traders should actually embrace doing thorough analysis before placing their trades. Jason Collins, a senior analyst at OptionsClick, agrees that in order to succeed in binary options traders must utilize both technical and fundamental analysis.

In a recent conversation he said, “While binary options are typically a short-term method of making money online, traders cannot ignore the role played by the intrinsic aspects of the underlying assets, [which are long term in nature], because price movements of stocks and indices are generally determined by the activity of traditional investors (exchange based trading activity), and these investors base their decisions primarily on fundamental analysis.”

In general terms, fundamental analysis is a method of evaluating an asset based on both the intrinsic and external factors that are likely to affect its price over a given period. Such factors include macroeconomic events, interest rates, financial and political policies, and environment, among others. In valuing stocks, items such as price to earnings ratio, profitability margins, earnings events and management changes as well as insider/institutional investor transactions can affect the price of the underlying asset.

Fundamental analysis in binary options

Now, in binary options, traders have the opportunity to trade currencies, stocks, indices and commodities via the same platform.

However, as many traders will find out, there are not many analysis tools to use when analyzing stocks and other assets. As such, wise traders try to use the trading platform in conjunction with third-party analysis tools and platforms such as the MetaTrader 4 platform to analyze the price of the underlying asset.

However, for some assets such as stocks, the MT4 platform may not be the ideal tool to use especially when attempting to analyze the fundamental aspects of the stock. In this case, traders have to turn to websites/platforms that provide financial data about stock trading and general investing. Some of these platforms also provide timely updates on market moving events such as insider transactions and guru picks which can be very useful in helping traders to make smart investment decisions.

For instance, if an insider takes a huge position in Twitter ( NYSE:TWTR ), the shares of Twitter are likely to react accordingly. Knowing this in time could help traders make the right call. While long-term investors are more interested in following what Gurus (institutional investors and hedge fund managers) are adding to their holdings, traders would be interested in following their activity as timely as possible because for them, the important thing is to determine what direction the price of the stock could move in the coming trading sessions.

This is particularly important for binary options traders because with many binary options platforms, it is now possible to trade the shares of Apple ( NASDAQ:AAPL ), Google ( NASDAQ:GOOG ) and Barclays ( ERO ), among others. Therefore, if a trader wants to have the right picture before making a trade, then it would be right to also understand what positions major holders are taking in a particular stock. This provides a signal of what is likely to be the general direction of the stock (i.e., upward or downward) given the sentiments shown by major holders.

Most binary options are short term in nature, but some of the top binary options brokers have option types that take months to expire. Some even have end-of-year expiries, while others have six-month period expiries.

This means that fundamental analysis such as P/E ratios, P/S ratios and earnings growth can be applied in trading these types of binary options, and most importantly traders are able to apply more than just the technical view when making their decisions.

As such, traders can make more accurate decisions because in this case it is not just about interpreting technical data to predict the next move. Utilizing fundamental analysis in these types of binary options is likely to yield more than trying to use just technical analysis because a lot of events are bound to happen before the expiry period elapses.

With binary options, you only need to get the direction of the price correct to make a potential return of more than 80% among most brokerage platforms and thus getting your prediction correct is the difference between you making an 80% gain on your investment, or losing everything. Therefore, it is important to consider everything that could affect the price of the asset in question and that involves doing through fundamental analysis.

Conclusion

The bottom line is that fundamental analysis is the cornerstone of investing, and any type of investor including binary options investors and exchange-based traders rely on this type of analysis in making the right investment decisions.

Therefore, traders should not overlook this type of analysis even when trading short term instruments like binary options. This could be the difference between making money and losing all of it.

About GuruFocus: GuruFocus.com tracks the stocks picks and portfolio holdings of the world’s best investors. This value investing site offers stock screeners and valuation tools. And publishes daily articles tracking the latest moves of the world’s best investors. GuruFocus also provides promising stock ideas in 3 monthly newsletters sent to Premium Members .

This article first appeared on GuruFocus .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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