Although binary options trading differs from traditional trading in that you are trading against the price of an asset, rather than buying or selling to make the best profit from the price itself, understanding how to carry out analysis of financial markets remains a crucial part of being a successful trader.Traders who do not learn about understanding the financial markets or how to carry out analysis reduce binary trading to little more than a gamble. We must be clear that binary option trading in and of itself is not a form of gambling, but as with any investment, if you haven’t dedicated the time and effort to understanding how best to trade it and analysing your chances of success, then you are simply blindly placing your money wherever you deem most attractive.One of the most confusing aspects of getting started with binary trading or indeed with any type of finance-based trades is that there are so many ways to analyse things. Conducting a search on Google of financial analysis methods will lead you to some useful tools as well as a number of blogs that contradict each other. Although this can be difficult for new traders to understand, it communicates an important message: the way you conduct analysis is down to you, there is no truly defined right or wrong way to analyse a financial market. Yes, there are ways to misinterpret the data, but if you are carrying out thorough analysis it comes down to whatever method you find is easiest for you to understand, and whichever one, over time, leads to you making the highest profits.Elsewhere on Bank of Trade, we cover how beginners can gain a basic understanding of finance markets and technical analysis of trading charts, and how you can build these into your binary option trading strategy. Here, we cover fundamental analysis, what it is, types of fundamental analysis, and ways in which you can build it into your overall strategy plan.
What is Fundamental Analysis?
Whereas technical analysis involves spending time looking at the hard data presented in front of you in financial charts and using a number of techniques for spotting trends and binary trading opportunities, fundamental analysis looks at the “bigger picture” for factors than can influence trading conditions. Intangible factors, such as what you feel to be the true value of something, or predictive analysis and news reports that you have read, could also be considered fundamental analysis.If you wanted to sum up fundamental analysis in one sentence, you would say it is a means of considering every factor, both directly and indirectly related to the financial markets that can influence them.At this point, you are probably thinking carrying out such a level of analysis is impossible. When will you have time to trade if you are looking at so much depth and detail? Your concerns are understandable, and many traders have battled with this conundrum themselves. The answer for many of them is to use an economic calendar, which highlights when big announcements are going to be made, whether this be company results or government economic policy updates. Even those with a very basic knowledge of financial markets know that they will shift both in the build up to and in the aftermath of such announcements. All that is then needed is to couple what we know with some technical analysis of previous times, to see what happened and to what extent we can perform binary trades and make a healthy profit.Fundamental analysis can be broken down into two main sub-categories that, when put together with what you have learned already, give you a clear picture of what, where, and how to trade: quantitative analysis and qualitative analysis.
Quantitative analysis uses mathematical and statistical modelling techniques to create a prediction of how the price of an asset will differ from a certain point. Although with binary trading you do not need to work out the high or low price in terms of profitability, it is worth knowing so you can continue to place call or put trades – forecasting a price is going to increase or decrease – with a high level of confidence.Individuals who prefer making statistic-based decisions will often employ quantitative analysis, although it is mainly a technique used by experienced brokers and traders in high-value trades and transactions. While as a beginner with binary trading you need to know what quantitative analysis is, you should ideally stay away from doing calculations yourself until you have become experienced. Working with a binary options broker and getting expert advice from Bank of Trade will enable you to learn about quantitative analysis and become competent at carrying it out.The easiest way to look at quantitative analysis is as a measurement of the price. Traders of foreign currency and stocks and shares would often use quantitative analysis to decide whether an asset was worth buying. As a binary trader, you only need to use it to work out at what point you should stop trading against a particular assets’ performance. From this perspective, quantitative analysis can be an excellent risk management method for binary traders.
Qualitative analysis can often be controversial, as unlike quantitative analysis there are no statistics to back up what you believe you see. This type of analysis is what you do when you carry out fundamental analysis based around external events. It is important to note that qualitative analysis is subjective. This means you probably won’t do a lot of it at the start of your binary trading career, but as you get to know binary options, understand the financial markets better, and build up a pattern of trading that leads to profits, you will start to do your own analysis without even thinking about it.The easiest way to define qualitative analysis is as anything that is related to a financial market that cannot be seen in the numbers. We separate this from bona-fide fundamental analysis by only looking at things directly involved with a specific market. For example, say you were looking at a business called “My Example Company.” Your quantitative analysis of My Example Company tells you that the price of something is likely to rise, therefore meaning you should be able to confidently place call binary trades on the share price of this company. However, your qualitative analysis might tell you that the CEO or a key stakeholder of My Example Company has a history of growing companies’ share price before presiding over a crash. You wouldn’t know this from just looking at the raw data related to a particular market, but it would be something valuable to factor into your decision making.Another form of qualitative analysis is to use what you believe the price of something to be as a guide. For example, if you think a company’s share price should be $20, but it is currently $10 following a period of sluggish trading, you might take out a longer-term binary option where you forecast the price will rise back to the level it should be at. You can blur the lines of qualitative analysis with such examples, by looking at previous history using financial charts.
Which Analysis Works Best?
As already alluded to, no type of analysis works spectacularly better or worse than another. All you need to understand is that carrying out analysis is better than not carrying out analysis, as this reduces binary options trading to little more than a careless gamble. Speak to binary traders from around the world and they will all have a different take on options trading strategies that work. Most of the time they will be talking directly about what has worked for them, which is why you will encounter a lot of conflicting information and contradictions.Over time, you will discover which forms of fundamental analysis, coupled with technical analysis and knowledge of the general financial landscape shapes market performance and works best for you. At Bank of Trade, you can use our tools to carry out all of this analysis and discover the best binary option trading strategy for you.