Most binary options traders swear by technical analysis when it comes to securing a long-term edge in their “trade”, more or less ignoring market fundamentals.
The bias is indeed obvious: most binary option traders only incorporate fundamentals into their trading to the extent of simply staying away from the action when economic news are due to be released.
While in itself this approach is indeed a healthy one considering a trader who is overly reliant on the technical aspects of strategy, beyond that it results in a plethora of missed – and potentially good – trading/profit-reaping opportunities.
Those trading indices, Forex, commodities or stocks have long resorted to news trading to secure an edge and indeed, there are traders out there who have turned this approach into a sort of art-form.
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Binary option traders can adopt similar strategies too and they too can be successful at news trading.
The first step (although this isn’t an actual part of binary option news trading strategy), is to find a tool that will help one make heads and tails of the news-flow. There are indeed trading tools out there thatwill organize the data, creating a virtual economic news calendar, that will have the importance of various news-releases graphically illustrated, together with the actual, previous and forecast values of the variables involved.
Such a tool is a must for everyone looking to trade the news, and that goes double for binary option traders.
As it’s usually the case in trading, there aren’t any rules etched in stone when it comes to trading the news with binary options. There are however a number of measures one can adopt to radically impact his/her chances of success.
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There’s nothing particularly deep or technical about these “strategies” either. They’re all quite straightforward and depending on the sort of news they’re aimed at exploiting, quite self-explanatory as well.
One of the simplest ways to trade the news is through the breakout strategy. This approach requires quite a bit of pre-planning, but its execution is simple and straightforward as are the signals that call for its application.
This strategy should only be used with news which are likely to elicit a highly predictable movement in the price of an underlying asset. With currency pairs, announcements regarding the increasing or decreasing of the interest rate are potentially such news.
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Usually, when the interest rate is raised, the targeted currency gains. When it’s lowered, it drops.
In addition to that, one can of course analyze the ever increasing highs and lows as well as the increasing moving averages associated with the asset price to confirm the general trend (which in this case would be an uptrend). The critical points of this strategy are the entry point (which is when the trader actually places the Put/Call trade) and of course the expiry.
In a hypothetical scenario, the entry signal can be the actual announcement.
The trader may also wait to see what sort of effect the announcement has, entering shortly afterward. The expiry time can be anything from 1 hour to a day.
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Two options can in fact be bought: one with a one hour and the other with a one day expiry. This strategy calls for simple, Put/Call contracts.
Most of the time though, the problem with news trading is that while one knows a certain announcement will indeed produce a massive swing in the price of an asset, it isn’t clear in which direction the swing will occur.
An announcement on the part of the US Federal Open Market Committee (FOMC) is a good potential example in this respect. Such a situation obviously calls for a range trade, with an “Outside” option purchased.
This way, regardless of whether the swing happens upward or downward, as long as the price ends up outside of the range, the trade is a winner.
This method is called trading on volatility, because that is indeed exactly what it does.
In conclusion: when it comes to binary options news trading, what we’re looking at are a handful of rather straightforward strategies, each of which effectively covers a well-defined scenario:
– the Put/Call trade on assets the price-movement direction of which is relatively easy to predict (the currency interest-rate change announcements offer a good example in this respect).
– trading the volatility (a technique which calls for a range/outside approach, and which works with news that induce volatility but no clear direction in the asset-price)
– price-rebound trading.
Often, economic news will create volatility in an asset-price, which will later settle. Such asset-price rebounds can obviously be exploited through binary options as well.