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With the help of binary options , you have the opportunity from one terminal to trade simultaneously on forecasts of prices for stocks, commodities, indices and currency pairs, all that is required of you is to predict the further direction of movement of the asset. Next, we will discuss what types of assets are available for trading, types of binary options, as well as some universal analysis techniques for predicting price movement. And most importantly, what assets should a newbie choose at the beginning of his trading journey.
Asset classes in binary options trading
The first step is to select the underlying asset, that is, a suitable financial derivative. If you are used to trading in any one market, for example, Forex , then the choice will most likely fall on currency contracts. On the other hand, the great advantage of binary options is the very variety of trading instruments, which will not only allow you to easily diversify risks, but also give you the opportunity to explore new areas for yourself and potentially increase your income. When trading binary options, there are four types of underlying assets:
- Stock indices;
- Currency pairs.
Compared to the stock exchange, trading stock derivatives in binary options has its own advantages. Firstly, the risks when concluding such contracts are always fixed, which means that both profit and loss are known to the trader in advance and in full. Secondly, the process of investing in stocks is far from being as trivial as trading binary options, and requires much more effort on the part of the trader to predict and control the trading portfolio. In the case of options, the question, as a rule, sounds like this: will the price on the conclusion of the contract rise, or will it still fall? And finally, unlike the stock market, here you are not buying the asset itself, but only a contract, which allows you to start with much smaller amounts and allows you to trade more expensive shares.
Depending on the liquidity provider used by the broker, you have the opportunity to trade shares of the largest stock exchanges, such as NYSE (New York Stock Exchange) or NASDAQ, which includes the shares of companies you probably already know:
- Coca Cola and many others.
Since the binary options market is an aggregator of trading instruments from various exchanges that can be located in different parts of the world or have different opening hours, you have the opportunity to trade almost at any time of the day and even on weekends.
When trading binary stock options, it is worth paying special attention to the company’s financial performance, as well as fundamental factors and the economic situation in the country in which the company operates.
The stock index is a convenient indicator that reflects the dynamics of a group of instruments at once, united by any common criterion, as well as related to a specific market sector or a specific stock exchange as a whole. As a rule, today most of the indices are weighted by free capitalization and reflect the total capitalization of all companies included in the index. However, there are equal weighted indices when the number of shares is chosen so that the weight of each share in the total capitalization is approximately the same. It is also sometimes used to calculate the index at weighted prices, which is considered as the sum of the prices of all instruments divided by a certain divisor.
The commodity market primarily attracts traders with its calmness and good predictability, which is explained by the strong dependence on fundamental factors. This asset class describes various types of raw materials and resources. These can be metals, food products, or energy raw materials. An important characteristic of this market is its, one might say, indifference to brands and producers, as a result of which one barrel of crude oil does not differ much in price from a barrel of oil from another manufacturer, since it is difficult to find many aspects of differences in the comparison of crude goods.
In addition to traditional investment methods, the commodity exchange is ideal for hedging strategies and arbitrage transactions, due to the simplicity of the commodity market analysis and the large number of patterns. Typically, at least a few commodity exchange instruments must have a place in a binary options trader’s portfolio.
A wide variety of instruments in the Forex market allows not only choosing a convenient time for trading, but also successfully applying different trading styles to the same instrument. For example, trading the yen during the Asian session makes more sense, since the pair is most active at this time. On the other hand, a certain kind of channel strategy works much better at night , which ultimately gives you the opportunity to choose the most pleasant trading style. Let’s consider some popular currency pairs:
- EURUSD is the most liquid currency pair. It is for this symbol that you will find the largest number of analytical materials.
- GBPUSD is the second most popular pair among newbies. The pair has sufficient liquidity and is more volatile in nature , which gives strong directional movements.
- USDCHF / USDJPY – these pairs do not show large movements and are more suitable for quiet trading. At the same time, pairs have sufficient liquidity.
- GBPJPY – Usually used by more experienced traders due to its volatility and high volatility. You should be careful, as some news events can provoke sharp fluctuations in the exchange rate.
- AUDUSD / USDCAD – pairs have little liquidity, so it is sometimes difficult to predict their further movement. On the other hand, pairs are strongly influenced by oil and gold prices, which makes it possible to predict their movement given the correlation with the commodity market.
How can a beginner trade?
Novice traders should pay attention to the least liquid assets, because it is on such instruments that it is easiest to learn to trade. First of all, the relative smoothness of the price movement and less noise affect, which simplifies the process of recognizing candlestick patterns and gives more time to prepare for a trade. The commodity market is ideally suited to the described criteria, specifically such instruments as oil, gold, platinum and others, depending on the conditions of your broker.
Another great advantage of trading with derivatives is its entry into the stock and index markets, one of the most popular traditional types of investments. If you have always wanted to join those very real stockists, then binary options is one of the easiest ways. Whereas when making a deal on the stock exchange, you have to buy the entire share, in the case of binary options, you buy only a contract with certain conditions of execution. This moment greatly simplifies the life of a novice analyst, because quite large errors are allowed in the forecast of binary options.
You also have the opportunity to trade a wide range of indices, such as: Dow Jones, Nasdaq, S&P 500, DAX 30, Nikkei. When analyzing indices, it is worth taking into account the weight of each instrument included in the basket, because the price of the index can be affected by each company included in it. Also, the capitalization of the index may even exceed the GDP indicators of some countries, so the overall economic situation in the country is an important factor.
Due to its complex predictability, trading currency pairs requires a particularly careful approach. It is believed that the most popular pair for trading is EURUSD and a little less than GBPUSD. However, their main advantage and at the same time disadvantage is that these pairs have a fairly high liquidity and the largest number of different opinions and forecasts.
In general terms, trading binary options is definitely a godsend for all short-term traders, allowing you to get up to 80% profit per trade. And the fact that the profitability of some types of binary options can reach 500% makes binary options trading an extremely profitable type of investment.
Asset correlation in binary options trading
It just so happened that some trading instruments are historically closely related and sometimes can exactly repeat the movements of each other. This relationship, as a rule, can be equally influenced by the economic situation in the country or the general export of a certain type of raw material.
The most suitable for financial markets is the Pearson correlation coefficient, which can take values from -1 to 1. Values close to zero mean a weak relationship, while the maximum and minimum indicators correspond to a high level of positive or negative correlation. The table shows the currently relevant values of the correlation of the main currency pairs against EURUSD. As you can see, in the short term, the Eurodollar has a strong connection with USDCHF and other currencies that are heavily dependent on the US dollar.
The rather high long-term correlation between GBPUSD and EURUSD is precisely explained by these factors. In this case, trading the same signals is unlikely to reduce trading risks, and it would certainly be better to give preference to an instrument with a stronger signal.
The myfxbook.com service is suitable for finding highly correlated instruments . The service allows you to build tables of instrument correlations and provides a visual representation of the dynamics of their relationships over time, with displaying up to ten pairs of instruments in one window.
The full advantage of risk diversification, that is, the distribution of capital between several financial instruments, can be obtained only if there are oppositely directed positions on positively correlated instruments, or unidirectional, on instruments with a negative correlation coefficient. This technique can achieve an almost completely neutral position.
In this case, losses on one instrument will be almost completely offset by profits on another, which is the main advantage of capital allocation. But even a perfectly balanced basket of correlated instruments cannot stay that way forever. Of course, in theory it could be such, but under the condition of a completely closed system, which never happens in real life and capital constantly flows from one market to another in different ways. But still, as a rule, for the correct formation of the basket, it is enough to follow the statistical data on the correlation of instruments with a weekly or monthly period, and accordingly add or remove instruments with a strong or too weak connection.
The binary options market can be safely called the Mecca of professional traders and the delight of those who are just starting their Silk Road. Gradually gaining popularity, binary options offer the most modern and logical trading environment. The low entry threshold and ease of analysis allow beginners to quickly get used to, and the potentially large profits and access to the most popular exchanges also attract experienced traders. Finally, flexible risk management allows you to quickly develop a reliable trading system that exactly matches your trading style.
Beginners should start their trading with the most predictable assets – the commodity market, and specifically such instruments as oil, gold, platinum and others, depending on the conditions of your broker .