Technical Analysis vs Fundamental Analysis Of Binary Options

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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.

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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.

Fundamental Analysis

Damyan Diamandiev
Contributor, Benzinga

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Investing in stocks becomes more and more accessible every day because of the technological progress we witness on a daily basis. Approach every stock trade with due diligence. Your analysis is what helps you decide whether a stock is a good investment or not.

There are 2 types of analysis related to stock trading — technical analysis and fundamental analysis. We’ll give you the best research tools to conduct fundamental analysis and show you how to use them.

Main Takeaways: Using Fundamental Analysis

  • Technical analysis and fundamental analysis are the 2 main types of analysis-related stock trading. Fundamental analysis evaluates certain securities to create forecasts about its price in the future.
  • This type of analysis uses specific indicators. These include EPS, P/E ratios, beta and more. We explore what each of these are, and the role they play, below.
  • A great company to use for technical analysis is Amazon. We break down an example below as well.

What is Fundamental Analysis?

Fundamental analysis is the process of evaluating security for creating forecasts about its future price. Fundamental analysis includes estimations based on many components related to stock, including:

  • The global industry
  • Company financial statements
  • Company press releases
  • News releases
  • Domestic political conditions
  • Trade agreements and external politics
  • Competitor analysis

If some fundamental indicators of a company show data that has a bad impact, this is likely to negatively reflect the share price. On the other hand, if there’s a positive data release, like an outstanding earnings report, for example, this can boost the stock price of the respective company.

Here are some examples of key performance indices that are commonly used to analyze stocks fundamentally:

  • Earnings per share (EPS)
  • Price-to-earnings (P/E) ratio
  • Price-to-book (P/B) ratio
  • Return on equity
  • Beta

Each of these key performance indices gives information that is helpful for conducting a price analysis. You can buy the stock on the assumption that the price will increase if your analysis shows that the price of the stock is about to increase.

A Detailed Example of Fundamental Analysis

There’s no right way to do fundamental analysis, as stock trading is not as accurate as a math problem. The same information in different industries and different stocks will never mean the exact same thing. Here are a few of the most important fundamental indicators.

Earnings Per Share (EPS)

The earnings per share relate to the portion of profit allocated to each of the company’s shares. The EPS is an indication of the company’s profitability. The higher the earnings per share, the better it is for the investor. A higher EPS is a symbol of a healthy company.

At the same time, if the earnings per share are unusually high, this could mean one of the following things:

  • Earnings can decrease and get back to normal.
  • The price of the stock can increase to normalize the stock price compared to the earnings.

Price-to-Earnings Ratio (P/E Ratio)

The price-to-earnings (P/E) ratio shows the company payouts compared to the price of the stock. In other words, the P/E ratio shows whether a share of stock pays well compared to its price. We calculate the P/E ratio by dividing the price per share by the earnings per share.

For example, imagine that the price per share is $30 and the stock pays $2 earnings per share:

The lower the P/E ratio, the higher the earnings compared to the stock price.

At first sight, the lower the P/E ratio, the more attractive the stock. But if we think carefully we will realize that unusually low P/E ratio could show extra potential.

If the P/E ratio is too low, below 10 for example, this means that the price per share is low compared to the earnings. This might mean that the stock is undervalued in price and it can increase its price. The opposite is in force for the high P/E ratio.

Price-to-Book Ratio (P/B Ratio)

The price-to-book ratio is an indication that shows how much the stock worth compared to the book value of the company. If a company worth $10 million and has 500,000 shares outstanding, it will have a book value per share of:

10,000,000 / 500,000 = $20 book value per share

If the stock trades at $80 per share, then the price-to-book ratio is:

80 / 20 = 4 P/B ratio

The P/B ratio = price per share divided by the book value per share.

If the P/B ratio is more than 1, this means investors believe that the stock will grow at a faster pace, which is the reason why its price is higher than its book value. In some cases, you can even see P/B ratios of 100 and more. This could be a common parameter for the growth stocks.

Return on Equity (ROE)

The return on equity is a measurement that determines how efficient a company is when using the shareholders’ equity. You calculate the ROE by dividing the shareholders’ equity by the company’s net income. If a company has generated $5 million this year and the shareholder equity is $50 million, this means the ROE is:

50,000,000 / 5,000,000 = 10%

Note that you should calculate the ROE result as a percentage.

The higher the ROE, the more efficient the company is. If a company generates a less than $5 million income this year (say $2 million) with the same shareholders’ equity, this means it is less efficient:

50,000,000 / 2,000,000 = 4%

Here, the company has a lower ROE with the same shareholder’s equity, meaning that it is less efficient.

Beta (β)

The beta gives information about the stock price’s correlation to the industry it operates in. This happens by comparing the stock to a benchmark index. The beta usually varies between -1 and 1. Sometimes values can go much lower than -1 or much higher than 1.

Values above 0 mean that the stock correlates to the benchmark index. The higher the beta, the higher the correlation. But the higher beta also means that the volatility is higher as well, meaning that the risk of the asset increases.

Values below 0 mean that the stock is inversely correlated to the benchmark index. It won’t be as a mirror image, but the ticks are likely to match. The lower the beta, the higher the inverse correlation. However, the lower the beta, the lower the volatility.

Fundamental Analysis of Amazon

Amazon is the ultimate symbol of the tech sector. The company has shown exponential growth, revenue and earnings over time.

Another important fundamental indication is that Amazon has beaten the EPS estimates in the past 4 years, and the outreach is exponential.

This earnings data shows that Amazon is healthy and aims for growth every year. And the best is that they are succeeding for now.

Earnings per share: $17.85

Notice that earnings per share of Amazon are very low compared to the stock price. This leads to the extremely high P/E ratio.

P/E ratio: 98.1

This tells us that a very small part of the earnings actually goes to the shareholders. This is totally normal for an IT company of Amazon’s rank. They constantly expand and reinvest funds in research and development. Some of the fields Amazon is currently working actively is robotization and artificial intelligence. Since the company spends a lot there, there’s not much left for the shareholders.

This offers up further information, however. Since Amazon invests a lot and aims to expand more, we can expect the company to grow even further, dragging the stock price up. After all, during the past 4 years, Amazon has grown in stock price by more than 40% on average.

P/B ratio: 19.88

A P/B ratio of nearly 20 is very high. This means investors are currently paying nearly 20 times higher price for an Amazon share compared to the book value of the company.

ROE: 26.7%

The return on equity of Amazon is high for the sector. Here’s a general comparison with other top tech companies from the S&P 500:

  • Facebook ROE: 25%
  • Microsoft ROE: 23.1%
  • Google ROE: 11.6%
  • PayPal ROE: 13.8%

Amazon is more efficient financially compared to the 4 companies above. Note that this doesn’t mean that Facebook, Microsoft, Google and PayPal are not efficient. It means they are efficient but less so than Amazon. In comparison, Apple has an ROE of 48.7%.

Beta: 1.63

Amazon is a stock that is very correlated to the benchmark and the beta confirms this. Not only is it correlated, but it’s also one of the top 10 stocks of the S&P 500. A beta of 1.63 means that the stock is very volatile, which isn’t unusual for a huge multinational corporation that dynamically reinvests its funds.

Fundamental Analysis vs. Technical Analysis: What’s the Difference?

Fundamental analysis relies on the company’s parameters as you saw in our analysis above. Technical analysis, on the other hand, takes into consideration only price action and past price data.

Investors perform technical analysis on a chart. The goal of the technical analysis is to make assumptions based on past stock price performance. Pure technical analysts don’t rely on company data and fundamentals. They analyze charts and try to find patterns for recognizing future behavior.

At first sight, the technical analysis might sound unreasonable. However, there is a strong psychological correlation between price action and the psychology of market participants. Since the price of a stock formulates based on supply (sell) and demand (buy), turning points related to the price of a stock are likely to have an impact on the attitude of the market participants.

An example of this is the round number levels on a chart. If a stock approaches from below $100 per share, this level is likely to have a psychological impact on market participants. Many investors might think that the company has no capacity to expand above $100 per share and can sell their assets, creating supply and reducing the price of the stock.

Technical analysts use various tools to analyze the price action of stocks. Some of these are:

  • Candle patterns
  • Chart patterns
  • Trend lines
  • Channels
  • Indicators
  • Oscillators
  • Price momentum
  • Trading volume
  • Volatility

Each of these tools and indicators has a different meaning and tells a story. But when matching signals from different indicators, a technical analyst attain signals with higher reliability.

The Best Research Tools for Fundamental Analysis

In most of the cases, your broker will supply you with the most important data you will need to conduct a fundamental analysis of a stock.

TD Ameritrade

One of the best online brokerage agencies with a very comprehensive research section is TD Ameritrade. Its advanced trading platform, thinkorswim, includes stock data research.

The platform includes a stock screener which lets you filter stocks based on different fundamental parameters. TD Ameritrade also harvests a lot of fundamental data and investing newsletters from sources like CNBC and Yahoo! Finance.

Finviz

Finviz is a very adequate solution to screen fundamental stock data and has a sufficient free version.

This is what you will see when you search for a stock. The data includes the most important fundamental parameters of a stock.

Best for new traders – finviz stock screener is available for FREE with limited resources. Upgrade to finviz Elite for a low monthly fee and get access to all of their platform including premarket data.

Yahoo! Finance

Yahoo is one of the oldest providers of stock fundamental data. When you go to the Yahoo! Finance site, you will see a search bar and once you see what interests you, this is what you will get.

You’ll see different tabs at the top which contain extra fundamental information related to historical data, financial reports and statistics.

Be Familiar with Fundamental Analysis

Fundamental analysis is essential in stock trading. You need to be familiar with the basic fundamental indicators if you want to start investing in stocks so you can build a picture of the financial condition in a company — whether it’s financially efficient, sustainable and profitable.

Although the stock analysis is important, it is always good to pair it with technical analysis data. Always mind the important psychological levels on the chart, which might be a turning point. Try to match technical data with fundamentals. If you find your way to understand both of these languages, your analysis will reach a new level of comprehension.

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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.

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.

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