Binary option trading is a professional activity that requires you to be able to correctly and accurately forecast price movements or at east formulate market scenarios based on fundamental and technical indicators related to the underlying asset. Binary options trading is thus not comparable to gambling. Fundamental and technical indicators will enable you to identify trends and opportunities to accurately time your entry and exit points on a specific asset.
Fundamental analysis explained
When it comes to analysing the market and asset prices movements, there exist two main tools: fundamental analysis and technical analysis. Technical analysis is best defined as the use of charts and historical prices in order to study market price activity and evolution. The ultimate objective is to use this information in order to attempt to forecast future price trends. Fundamental analysis is best defined as the study of macro and micro economic data in order to attempt to forecast their impact on future asset price movements. It is extremely useful to gain at least a basic understanding of both these tools if you want to get the most from your trading and increase your chances of making money.
The analysis of macroeconomic indicators
Fundamental analysis is the study of fundamental and economic data. There exist a large range of data and indicators that may vary according to the asset class you are trying to study. Major indicators include interest rates, employment figures, GDP growth and inflation figures. For the forex market, more specific data include the variation of Central Banks’s forex reserves, monetary policy stimulus, consumer price indices evolution… For the equity stocks and index market, more specific data include earnings, dividend policy, merger announcements and Purchasing Manager Indices (PMIs). Eventually, for the commodity market (oil binary options for instance), more specific data will include weather conditions, producers’ reserves and importing countries’ expected consumption.
Fundamental analysis for binary option trading
From the binary option traders’ perspective, fundamental analysis is useful in building up a bigger picture of key themes and trends. Most economic data are scheduled in advance on the economic agenda and economists are freely providing estimates of these incoming data. It is thus not so much the data in itself that matters but the deviation of the released data from the consensus estimates and its evolution compared to the previous periods. This allows binary option traders to schedule their strategy around these events, when the volatility is expected to pick up.
Fundamental indicators are the drivers of wider and longer market trends. This is why most binary option traders prefer to base their strategies and entries timing on technical indicators that are more short-term focused.