Options for dummies: what to trade in options and how you can do it
With binary options you have the opportunity to trade from one terminal on forecasts of stock prices, commodities, indices and currency pairs at a time, all you have to do is to predict the future direction of the asset movement.
Next, we will discuss what kinds of assets are available for trading, the types of binary options, as well as some universal methods of analysis to predict price movements.
So, what assets are best to use?
The first step is to choose the underlying asset that is the appropriate derivative. If you are used to trade in any one market, the choice is likely to fall on the foreign exchange contracts. On the other hand, a big advantage of binary options is the most variety of trading tools that allow not only diversifying risks easily, but also giving the opportunity to explore a new area and potentially increasing the revenues. In trading binary options there are four basic kinds of assets:
Compared to the stock exchange, trading binary options derivative from shares has its advantages.
Firstly, the risks at the conclusion of such contracts are always fixed, and therefore both profits and losses are known to the trader in advance and in full.
Secondly, the process of investing in stocks is not as trivial as trading binary options and requires much more effort in forecasting from the trader and control of trading portfolio. In the case of options the question usually goes something like this: Will the price of the contract rise or fall yet?
Finally, unlike the stock market, here you will get not the asset itself, but merely a contract that allows you to start with much smaller amounts and allows you to trade more expensive shares.
Depending on the liquidity provider which the broker uses you have the opportunity to trade shares of the largest stock exchanges such as NYSE or NASDAQ, which includes the shares of probably already known to you companies:
- Coca Cola and many others.
As the market for binary options trading is an aggregator of tools from different exchanges, which may be in different corners of the globe, or have different hours of operation, you have the opportunity to trade at almost any time of the day, even on weekends.
When trading binary options on stocks one should pay special attention to the company’s financial performance, as well as the fundamentals and the economic situation in the country in which the company operates.
Stock index is a convenient indicator, which reflects the dynamics of a group of tools, united by any common ground, as well as belonging to a particular sector of the market or a particular stock exchange as a whole.
As a rule, today the majority of indices is free capitalization-weighted and reflects the total capitalization of all companies included in the index. However, there is equally weighted index, where the number of shares is chosen so that the weight of each share in total capitalization is approximately the same.
Also sometimes the calculation of the weighted price index is used, which is considered as the sum of the prices of all the instruments, divided by a certain subgroup.
Commodity market primarily attracts traders for its tranquility and good predictability, which is explained by the strong dependence on the fundamental factors.
This class of assets describes the various types of raw materials and resources. It can be metals, food products or energy raw materials. An important characteristic of this market is its indifference to brands and manufacturers, so that a barrel of crude oil is not much different in price from a barrel of oil of other producers, as comparing the raw goods it is difficult to find many aspects of differences.
In addition to traditional methods of investing, commodity exchange is ideal for hedging strategies and arbitrage operations, due to the simplicity of the commodity market analysis and a large number of consistent patterns. Typically, at least a few tools of commodity exchange should take place in the portfolio of binary options trader.
A wide variety of tools on the market allows not only to choose the best and the most comfortable time to trade, but also successfully apply different trading styles to one and the same instrument.
For example, trading the yen in the Asian session makes more sense as a pair at this time is most active. On the other hand, at night a certain kind of channel strategies works much better, which ultimately gives you the opportunity to choose the most pleasant style of trading. Consider some of the popular currency pairs:
- EUR/USD – The most liquid currency pair. It is for this symbol you will find the largest number of analytical materials.
- GBP/USD – The second most popular pair among the beginners. The pair has sufficient liquidity and is more volatile by nature, which gives strong directed movements.
- USD/CHF/USD/JPY – This pair does not show large movements and are more suitable for quiet trade. This pair also has sufficient liquidity.
- GBP/JPY – This pair is generally used by more experienced traders, because of their variability and high volatility. You should be careful, as some news events can trigger sudden changes in course.
- AUD/USD/USD/CAD – The couples have little liquidity, so sometimes it is difficult to predict their further movement. On the other hand, the pair is strongly influenced by the price of oil and gold that allows predicting their movement taking into account the correlation with the market products.
That’s all for now. Got any questions? Just ask the expert!