Technique and Analysis
Here you will find most of the existing methods used by professional investors and experienced traders to forecast if the value of a position will go in a specific direction, upward, downward or even sometimes with no change.
Well, the very first thing you need to understand is that this is not exact science … no matter all the technicalities or how well versed these traders or investors are on the matter, there is no way to be always right. … Why? … It is very simple; because the market is people … and even if you put all of them together and treat them as a bulk … like in the Theory of Chaos … people’s perception is difficult to predict … and it will always be.
As per www.businessdictionary.com, the definition of the “market� is “an actual or nominal place where forces of demand and supply operate, and where buyers and sellers interact to trade goods, services, contracts or instruments, for money�.
buyers and sellers … are people, and their perception of the “economy and business environment� is what drives supply and demand … and for our purpose of Binary Options what affects the trend of a position. A position could be currency, stocks, commodities, indices, etc.
But, before going any further let’s put together some definitions:
What are binary options?
Well, from their name they are options with two possible outcomes. In binary options trading, these outcomes are known as PUT or CALL trades. CALL trade is when the end value of a position ends above the current market value after a period of time, while PUT is the opposite.
- The position can be commodities, assets, stocks, shares, an index or currency.
- The current market value is the value at the time of making the trade
- The period of time could be minutes, hours, a week or a month.
If after the period of time the trade value matches the prediction, CALL or PUT, it is said.. that the trade is “in the money� and the contrary is “out of the money�.
Now, there is a risk … and this risk is known at the moment of making the trade … i.e., if the trade is “in the money� you will receive a PROFIT (typically between 50 to 80%, sometimes more) … but, if the trade is “out of the money� you will lose all or a big portion of your investment (typically you will receive only 5 to 10% of your investment).
As you can see Binary Options is a very simple concept and it is widely available on the Internet … but as I said, predicting the market is not a simple task.
There will always be a probability of losing your trade, but if you develop some knowledge you can lower that probability to a point where you can be in a good position to make good money.
As promised, in this section, I will provide the most important tools you will have to perform the technical analysis before making a position.
There are two (2) types of analysis:
1) Fundamental Analysis
This, more than analysis, it is information. It is the knowledge of the news and events in the market with the potential to affect the value of a certain position. For example, if there is news that oil inventories are down the price of oil will likely increase.
This news and events are happening every day, and it requires from the trader to actually be aware of them through different channels. These can be financial news, newspaper and investment sites on-line, etc. My preference is www.investing.com economic calendar or finance.yahoo.com.
2) Technical Analysis
This analysis is about prediction, and like any prediction in life … it is based on the past. Basically, with this analysis the trader makes a prediction of the future trend by identifying patterns seen in the past.
This analysis relies on stock charts, these charts is the variation of the stock or position value with time and in the absence of significant “trend changers events� these charts would show an erratic oscillation of the stock price around an upper and a lower value. These upper and lower values are normally referred as support (lower price) and resistance (upper price).
When the market value is close to its support, or its resistance, the value would likely, either go upward (if close to its support) or go downward (if close to its resistance).
Binary Options traders can benefit from Bollinger bands to identify the moment to buy put or calls options. We should only pay attention to the upper and lower Bollinger Bands. If the price is close to the upper band (i.e., resistance), likely the price will go downward indicating the moment to buy a put option or if the price if close the lower band (i.e., support), a call option could be favorable.
The standard interpretation of the Bollinger Bands is that while prices are staying between the middle Bollinger band and the Upper Bollinger band the market is trending to the upside and when price is moving between the Lower Bollinger band and the middle one, market is trending to the downside. Click on the chart below for more details to build your own market chart/Boillinger Bands for your technical analysis.
In stock charts, trends are not like the stock prices moving upward or downward following a straight line. Instead they are more like a series of highs and lows. In trend analysis, when there is a pattern of higher highs and higher lows, it is defined as an uptrend while a series of lower highs and lower lows would be defined as a downtrend.
I’ve been looking for playing around with the stock market for the last three years. I’ve made a tiny bit of money in the long run bun I feel that I need a way better system so that I can profit more. What does binary option have that the stock market does? Thanks Diaz for all the advice and good luck!
Binary options is a trade on the stock market behaviour. Thanks for your comment
Hi there Diaz,
That was a fabulous introduction and explanation of the techniques used in stock trading. I have been interested in dabbling in the stock market for a while now, but I have no idea where to start learning techniques and strategies. Is there any particular course that you would recommend for beginners and intermediate investors?
I recommend taking the free training offered by any of the brokers in my site. Thanks for your comment.
Very informative article. I have heard the terms PUT and CALL before but never really understood what they meant. You explained it very good.
Even with technical analysis and so on I’ve heard that it’s hard to predict the market right now. The markets are disconnected from reality.
For example not too long ago with a horrible jobs report came out the markets went up. The only reason people could see was because that means the Federal Reserve will keep easing.
Do you experience that it is harder to predict the markets today than it was for say, 10 years ago?
The market is like a “vital sign” of our society and it has been rocky for the last 10 years for us in the world.
This is truly awesome reviews and short explanation regarding the trading technique that can be applied in many trading platforms. I have studied the technique over the years, but until now I found this article help me a lot to understanding the market price behaviour in the basic term. 1 question, is pluss500 scam or legit platform for investment. I heard about it lot of times from my friends.
Dear Derek, I honestly do not know if plus500 is Ok, but I promise I will have a look. I can only tell is that I asked my partner and he told me that they have a demo account. You can try that first and see. Please remember to follow the recommendations in my site to keep yourself covered.