Technical Analysis vs Fundamental Analysis Of Binary Options

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Technical vs Fundamental Analysis in Forex

Understanding the differences between fundamental and technical analysis in forex trading

There is a great debate about which type of analysis is better for a trader. Is it better to be a fundamental trader or a technical trader? In this article we will explore what the difference is between these two types of traders and which pieces of information forex traders in particular tend to look at.

Technical vs fundamental analysis comparison

Technical Analysis Fundamental Analysis
Definition Forecast price movements using chart patterns Various economic data used to establish value/ target price
Data considered Price action (charts) Inflation, GDP, interest rates etc
Time horizon Short, medium and long term Medium and long term
Skillset required Chart analysis Economics & statistical analysis

Fundamental Analysis

Fundamental analysis involves assessing the economic well-being of a country, and by extension, the currency. It does not take into account currency price movements. Rather, fundamental forex traders will use data points to determine the strength of a particular currency.

A fundamental forex trader will analyze the country’s inflation, trade balance, gross domestic product , growth in jobs and even their central bank’s benchmark interest rate.

Below is an example of an economic calendar where fundamental traders will be able to keep up to date with the latest data releases. There are many data releases on any given day which is why traders should know how to filter the calendar to show relevant information only.

By assessing the relative trend of this and other data points, a trader is analyzing the relative health of the country’s economy and whether to trade the future movement of that country’s currency.

The table below summarizes the general effects that different economic data tends to have on the strength of a currency. However, this is not guaranteed as there are many factors that influence currency movements.

How economic data affects currencies

Expectations Effect on currency
Gross Domestic Product (GDP) Better than expected Positive
Consumer Price Inflation (CPI) Better than expected *Positive
Trade Balance Trade deficit (imports > exports) Negative
Central Bank benchmark rate Increase in interest rate Positive
ISM Manufacturing Index Better than expected Positive
PPI Producer Price Index Better than expected Positive

*Developed nations welcome moderate inflation as it is a sign of a growing economy. Developing nations view decreasing, or maintained, inflation as a positive statistic as this keeps price levels in check.

Technical Analysis

Technical analysis involves pattern recognition on a price chart . Technical traders look for price patterns such as triangles , flags , and double bottoms. Based on the pattern, a trader will determine the entry and exit points. Unlike fundamental traders, a technical trader is not as concerned about why something is moving because the trends and patterns on the charts are their signals.

Below is an example of a chart pattern – the double bottom pattern. The market makes the first low, rebounds slightly before creating a new low and subsequently gains upward momentum as the trend reverses. Technical traders will look to set a stop loss at the recent (lowest) low and wait for the market to produce higher highs and higher lows before placing the long trade.

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In practice, technical traders will need to identify the pattern as shown below on the USD/JPY daily chart where the “W” shape can be seen.

A technical forex trader will assess the price action, trend , support and resistance levels observed on a chart. Many of the patterns used in technical analysis of forex markets can be applied to other markets as well.

Additionally, traders make use of indicators and oscillators which are added to a price chart when analyzing foreign exchange markets. Moving averages , Bollinger Bands, MACD , Relative Strength Index (RSI) , and stochastic tend to be some of the more common tools in a technical traders tool box. Indicators are preferred by technical traders because they are easy to use and provide clear signals.

The benefits of technical analysis

Technical analysis does not include ‘black magic’ that many fundamentalists claim. Getting started in technical analysis can be done quickly by assessing the direction and strength of trends . Traders will use the trend analysis to help them determine which pair to trade and the direction to trade it.

Below, is an example of how a technical trader would notice this 6,000 pip trend where the AUD is very strong relative to a very weak EUR (which is why the currency pair is moving down). Furthermore, it is clear to see that the currency pair is trading in a strong downward direction. This is referred to as a tend and traders make use of key levels, levels of support and resistance, and indicators to identify trends as soon as possible and with accuracy.

Finding out how to identify strong and weak currencies will provide traders with an indication of which currency pairs are most likely to trend and therefore lead to higher probability trades. A trader would trade in the direction of this particular trend by selling the EUR/AUD pair.

Technical vs Fundamental Analysis in Forex: Conclusion

Fundamental and technical analysis involve very different strategies and approaches to trading; offering unique value and insights to support trading decisions, and when to enter or exit a trade. While some traders prefer to use these types of analysis separately based on their preferred trading style and goals, many use a combination of the two. The benefits of combining fundamental and technical analysis are wide ranging.

Further reading to discover which type of analysis is best for you

  • Fundamental traders monitor economic data releases, and many do so with the intention of trading the news . It is essential that traders adopt sound risk management when doing so as volatility can spike immediately after important releases.
  • Technical traders have different styles and strategies . Explore these thoroughly to find out if this type of analysis suits your personality.
  • And if you are just starting out on your forex trading journey, you can learn the basics with our free New to Forex guide.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

Fundamental vs technical analysis

There are some topics that spark never-ending debate and sow discord among people. What to buy – iPhone or Android? Which football team to support – Manchester United or Liverpool? You might have noticed that there is no clear-cut answer to these questions. As the old saying goes: tastes differ. Every man to his taste: the one man’s meat is another man’s poison. OK, there are many variations of this saying, we’d better proceed to our actual topic. What we wanted to say is that traders have their own eternal debate about the best way to make profits in the financial markets.

Technical

Some traders consider themselves to be “technical traders”. They rely on the price movement patterns and technical tools in their analysis and don’t pay much heed to the economic news flow. The only thing that matters, according to them, is the price of the currency/financial asset. Other things are just distractors.

Fundamental

Another team of traders disagrees with these “technicians” and advocates the fundamental way of market analysis. These guys scrutinize macroeconomic releases, pay attention to the news to unravel the future direction of the market – they are the adherers of fundamental analysis.

The first group of people is generally made of swing traders and short-term day traders who take positions for a day, several hours, minutes, or even seconds. Another group of traders acts more strategically; they prefer holding positions for days, weeks, or even months. They are the people of the virile, very strong character.

Comparison of analysis types in the table

Both fundamental and technical analysis have their advantages and drawbacks, so it’s best to combine these 2 methods. This way you will get the fullest view of what is happening at the market. While trading on the intraday use technical analysis first to determine the state of the market, trade entry and exit levels. Then use fundamental analysis to adjust your strategy taking into account events of the economic calendar. In the longer-term trade firstly determine the trend with the help of fundamental analysis and then look for an entry and exit point using technical analysis tools.

You will learn more about fundamental and technical analysis from this course.

Analysis and its types in binary options

Profitable binary options trading is not possible without quality market analysis. It would seem, options trading is simple, just need to make a bet on whether the price of the asset will increase or go down. But how do you know which direction to choose: up or down? And when to open the option that it certainly closed with a profit? For this you need to understand which factors and patterns affect the price change. And market analysis of option will help in this.

Market analysis is and its purpose

Market analysis is an analysis of the situation on the currency, stock or commodity market in order to predict the direction of prices or other market asset and find the best moments to open trades.

How to perform the analysis of binary options

Binary options is a derivative market instrument, which is based on a given underlying asset. It can be currency pairs, securities, stock indexes or commodity markets (for example, there are over 200 assets in Verum Option platform). Therefore, when talking about the binary options, the market analysis is meant on the specific underlying asset you want to trade.

For example, if you are trading options on stocks of Apple, you need to analyze the change of these shares, but if your underlying asset is gold, then you need to analyze the situation in the gold market.

There are two kinds of options analysis: fundamental and technical. Fundamental helps to predict the behavior of prices of market assets taking into account the influence of economics and politics, technical analysis is based directly on price chart data.

Fundamental analysis

The basic idea of fundamental analysis is that every cause brings a result, and if the world economy or politics, something important happens, it will affect the quotes.

Latest and most vivid example: on 23th of June 2020, the UK held a referendum on exit from the EU, after which the quotation of the pound sterling plummeted by almost of 6%. The United Kingdom became politically and economically unstable, and it is unprofitable for large investors to invest in its currency. And those who bet on the decline of the pound earned on this.

Of course, not only such a serious and rare events have an impact on the quotes of market assets. It could be statistics that are published regularly and are marked in the economic calendar. For example: Central Bank meetings and speeches of their representatives, the data on the labor market, inflation, business activity, GDP. Typically, when data is better than forecast, an asset increasing in price, and when the data is worse than forecast, the price of the asset falls.

For example, you opened an economic calendar and see that in an hour the publication of Eurozone GDP is expected. You only need to wait for news and see how it meets the forecasts. If GDP growth exceeded expectations, it is possible to open a call option for a rise in the Euro against the dollar, and if the actual value is “not held” to the forecast, the Euro is likely to fall, and you can make money on its decline.

Technical analysis

Technical analysis is based on the fact that the price behavior is always logical. And if you study the price chart and identify these patterns, you can predict that the price will rise or fall. Technical analysis can be carried out using only the graph (graphical analysis), or specific indicators (technical analysis).

Graphical analysis

Graphical analysis is good because it is the most obvious and logical. You just look at the price chart, find shapes that say about the continuation or reversal of the trend, and perform a trade.

Basic graphic shapes: triangle, rectangle, flag and pennant. They are all based on lines of support and resistance. To open a trade when the figure is fully formed, that is, when the support level or resistance level is broken.

Triangle – a figure of continuation of a trend, which is formed in a period of price consolidation. The triangle is ascending, descending, symmetrical and widening.

Rectangle — continuation or trend reversal, is formed after a strong price movement.

Flag and pennant — continuation patterns usually occur in periods of price consolidation, after which the trend resumes. First a “handle” of flag or pennant is formed — the price makes a sudden jump in the trend direction. Then price is either trading in a sideways pattern with parallel lines of support and resistance (the flag), or reduces oscillations, when the lines of support and resistance converge to a single point (the pennant).

Indicator analysis

Indicator analysis — chart analysis through indicators that help to determine the trend and to find entry points in the market.

Two main groups of indicators are trend-following indicators and oscillators. The trend are visible on the chart and indicate the presence and direction of a trend. These indicators are the most popular among traders as they are the least complicated for perception and interpretation. Trend indicators include Moving Average (MA), Alligator, Parabolik SAR, Bollinger Bands.

Oscillators or stochastics are used to determine the strength of the trend to tell when a reversal is possible. These are such indicators as MACD, Stochastic, Ichimoku, RSI. The oscillators are located below the main graph and are shown as curves, the intersection of which is the signal to open transaction.

However, it does not necessarily strain with the use of indicators. For example, in the Verum Option trading platform there is a tool for automated technical analysis – Strategy Advisor which is based on the trend indicators MA and Bollinger Bands, and RSI.

Risk management

In order to achieve success, the trader should follow the rules of risk management:

  • Open the transaction only when there is a market signal obtained as a result of fundamental or technical analysis.
  • An investment in 1 option should be no more than 3-5% of the deposit.
  • If you have three unprofitable trades in a row, stop and reconsider your trade.
  • if you see that the option is in the negative, use the management tools of the transaction to minimize loss.

For example, in the Verum Option platform there are tools “Rollover” and “Sale option”. You can use rollover to prolong the expiry of the option to give the deal a chance to become profitable, or prematurely sell the option at the current price.

Which way of analysis to choose?

Each trader decides it for himself, but the professionals recommend to carry out both fundamental and technical analysis of binary options. In some cases the appropriate fundamental analysis (for example, during important news releases), and in other works technical is the best.

Of course, the analysis of the market should be studied, but it’s pretty simple. To trade binary options it is even enough to have basic knowledge, that every beginner is able to learn.

Market Analysis For Binary Options

Remember back when you enrolled yourself into the School of Pipsology, we talked about “The Big Three” types of market analysis. In case you forgot, they are:

Fundamental Analysis

Trading the News

One way to make use of fundamental analysis would be to go with a trade-the-news strategy.

For binary options, this can be particularly effective when you trade simple Up/Down options.

After all, you would simply need to get an idea how price may react to better/worse than expected data and how strong the reaction may be. You just have to be confident that price can reach the strike price of the option that you bought.

For example, you plan to trade the Australian retail sales report. Let’s say you have a bullish bias on the results.

Chances are that a better-than-expected result will spur the Aussie to new highs, so you would look to buy a “call” option on AUD/USD.

Now let’s say that, as you expected, we saw a better-than-expected result. Luckily, AUD/USD also rose, rising above the strike price. Paycheck time, baby!

Of course, there are a couple of factors to take into consideration when playing the news.

First is the potential for volatility. When playing a news report and buying a binary option, you have to be fairly confident that the event will spark enough volatility so that price can reach the strike price and stay above/below that level.

If you try trading a report that rarely causes a ripple, you’ll be throwing money down the drain.

Second, you have to factor in the time component of binary options.

When trading binary options and implementing a trade-the-news strategy, you may also want to consider going with one-touch options since price would only have to touch and not necessarily close at a particular level.

You can also try the Out of Range options if you expect the price to move with strong momentum away from its previous range.

With this option you don’t have to pick a direction, just decide whether or not the market will move big time in one direction or another.

Technical Analysis

Love using those fancy-schmancy indicators like moving averages, Bollinger bands, and Stochastic?

Don’t be afraid to slap these indicators on your trading charts when you plan to trade binary options!

These are used across all sorts of trading markets and not just spot currencies.

Just make sure you have a good understanding of how each indicator works before incorporating it into your analysis.

Studying technical levels and inflection points may also prove helpful when you trade binary options.

Let’s take a look at this example on GBP/USD.

Price has just broken down from a double top.

With this behavioral pattern, price normally continues to trade lower at a distance equivalent to the height of the double top.

One way you could play this is by taking a One-Touch trade.

If the strike price that your broker offers is somewhere between 1.5450-1.5550, which is within the height of the double top, buying a “put” option might be a setup worth considering.

Sentiment Analysis

Sentiment analysis is the task of measuring the market’s current “feeling” with regards to broad risk flows.

Are traders confident in buying up risky assets or would they rather reduce risk by buying safe-haven assets or going into cash? This type of analysis will prove to be particularly useful when trying to hop on trends.

Will EUR/USD break for new highs? Or do you think the trend is overdone and there’s not enough momentum? You can use sentiment analysis to gauge how the market is feeling.

If you’re fairly confident that market sentiment will favor a risk-on environment, you could consider purchasing a “call” option on a risk currency or asset (e.g., Australian or New Zealand Dollar, Equities, Commodities, etc.)

On the flip side, if you think a reversal in sentiment is in play and depending on how overdone you believe the move is, you could consider purchasing a “put” option on those same risk currencies or assets.

Combination

Just as in spot forex trading, it’s not necessarily a case of choosing which type of analysis you’re going to use because they’re not mutually exclusive.

In fact, you can combine all of these types of analysis to form the basis of any trade that you take.

Fundamentals can help give you a bias as to what direction you want to take, while technical analysis will help determine the chances of the market reaching, breaking and finding support/resistance at a certain price.

Meanwhile, sentiment analysis may let you know whether the market is in a risk-on or risk-off mood.

In the end, the key is for you to learn from all your mistakes and gain experience. Over time, this process will help you fine tune your analysis and help you develop good trading practices.

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