1. Fundamental analysis
Fundamental Analysis covers the study of economic indicators, social factors and international government policies which binary options traders forecast price movements and trends.
Fundamental analysis is a method that attempts to predict the intrinsic value of an investment. It is based on the theory that the market price of an asset tends to move towards its 'real value' or 'intrinsic value'.
Fundamental analysis in trading entails predicting the price valuation of a currency and its market trends by analyzing current economic conditions, government policy and societal factors within a business cycle framework.
Traders gauge a country's economic state by examining macroeconomic indicators covering:
- Interest Rates Announcement
- Gross Domestic Product (GDP)
- Consumer Price Index (Inflation) and Spending
- Employment Indicators
- Retail Trade and Consumer Confidence
- Balance of Trade Surplus or Deficit
- Government Fiscal and Monetary Policy
MAIN MACROECONOMIC INDICATORS
Macroeconomic indicators are statistics that indicate the current status of the economy of a state depending on a particular area of the economy (industry, labor market, trade, etc.). They are published regularly at a certain time by governmental agencies and the private sector.
Our financial experts will suggest you economic calendar for the dates of critical fundamental announcements and events. When properly used, these indicators can be an invaluable resource for any binary options trader.
In truth, these statistics help binary options traders monitor the economy's pulse; thus it is not surprising that these are religiously followed by almost everyone in the financial markets. After publication of these indicators we can observe volatility of the market. The degree of volatility is determined depending on the importance of an indicator. That is why it is important to understand which indicator is important and what it represents.
Interest Rates Announcement
Interest rates play the most important role in moving the prices of currencies in the foreign exchange market. As the institutions that set interest rates, central banks are therefore the most influential actors. Interest rates dictate flows of investment. Since currencies are the representations of a country’s economy, differences in interest rates affect the relative worth of currencies in relation to one another. When central banks change interest rates they cause the forex market to experience movement and volatility. In the realm of binary options trading, accurate speculation of central banks’ actions can enhance the trader's chances for a successful trade.
Gross Domestic Product (GDP)
The GDP is the broadest measure of a country's economy, and it represents the total market value of all goods and services produced in a country during a given year. Since the GDP figure itself is often considered a lagging indicator, most traders focus on the two reports that are issued in the months before the final GDP figures: the advance report and the preliminary report. Significant revisions between these reports can cause considerable volatility.
Consumer Price Index
The Consumer Price Index (CPI) is probably the most crucial indicator of inflation. It represents changes in the level of retail prices for the basic consumer basket. Inflation is tied directly to the purchasing power of a currency within its borders and affects its standing on the international markets. If the economy develops in normal conditions, the increase in CPI can lead to an increase in basic interest rates. This, in turn, leads to an increase in the attractiveness of a currency.
Employment indicators reflect the overall health of an economy or business cycle. In order to understand how an economy is functioning, it is important to know how many jobs are being created or destructed, what percentage of the work force is actively working, and how many new people are claiming unemployment. For inflation measurement, it is also important to monitor the speed at which wages are growing.
The retail sales indicator is released on a monthly basis and is important to the foreign exchange trader because it shows the overall strength of consumer spending and the success of retail stores. The report is particularly useful because it is a timely indicator of broad consumer spending patterns that is adjusted for seasonal variables. It can be used to predict the performance of more important lagging indicators, and to assess the immediate direction of an economy.
Balance of Payments
The Balance of Payments represents the ratio between the amount of payments received from abroad and the amount of payments going abroad. In other words, it shows the total foreign trade operations, trade balance, and balance between export and import, transfer payments. If coming payment exceeds payments to other countries and international organizations the balance of payments is positive. The surplus is a favorable factor for growth of the national currency.
Government Fiscal and Monetary policy
Stabilization of the economy (e.g., full employment, control of inflation, and an equitable balance of payments) is one of the goals that governments attempt to achieve through manipulation of fiscal and monetary policies. Fiscal policy relates to taxes and expenditures, monetary policy to financial markets and the supply of credit, money, and other financial assets.
Conclusion: There are many economic indicators, and even more private reports that can be used to evaluate the fundamentals of binary options. It's important to take the time to not only look at the numbers, but also understand what they mean and how they affect a nation's economy.
2. Technical analysis
What is technical analysis?
Technical analysis is a technique used to forecast the future direction of prices through the study of historical market data, primarily price, volume and open interest. Technical traders use trading information (such as previous prices and trading volume) along with mathematical indicators to make their trading decisions. This information is usually displayed on a graphical chart updated in real time that is interpreted in order to determine when to buy and when to sell a specific instrument.
The ideas of Charles Dow, the first editor of the Wall Street Journal, form the basis of modern technical analysis. They are based upon three main premises:
1. The price is a comprehensive reflection of all market forces. At any given time, all market information and forces are reflected in the prices.
2. Prices move in trends that can be identified and turned into profit opportunities.
3. Price movements are historically repetitive.
Advantages of Technical Analysis
It requires much less data than fundamental analysis. From price and volume, a technical trader can obtain all the information he needed. As it is focused on identifying trend reversal, the question of timing to enter a trade is easier to address with technical analysis.
Technical and/or Fundamental Analysis
Technical Analysis is one of the most significant tools available for forecasting financial market behaviour. It has been proven to be an effective tool for investors and is constantly becoming more accepted by market participants. When used in conjunction with fundamental analysis, technical analysis can offer a more complete valuation, which can make the difference in executing profitable trades.