THE PHILOSOPHY

There are two major forms of investment analysis used by binary option traders: technical and fundamental. Technical analysis operates under the assumption that assets are accurately priced by the market, and shifts in value are the result of natural trends and movements, which can be predicted by analyzing historical data.

Fundamental analysis, on the other hand, operates under the philosophy that the vast majority of assets are incorrectly priced by the market. Because investors have an imperfect understanding of every factor influencing an asset’s performance, they make buying and selling decisions based on some level of ignorance. As new data becomes available, the asset price therefore shifts to better reflect its real value.

Fundamental analysis is used in binary option investment to try to accurately predict the real value of an asset. Once the real value is known, a position can be taken on that asset, with a strong likelihood that the asset will shift towards its real value. The markets are therefore seen as being in a constant state of self correction, with all movement explained by either an unfolding understanding of reality, or by the release of new fundamental data.

Because the world itself is always changing, accurate pricing of all assets is a virtual impossibility. Even if an asset should be accurately priced, a storm somewhere in the world, a product recall, the discovery of a new vein of gold, or any number of other fundamental events can render the price once again inaccurate. It is these discrepancies that create the opportunity for profit with binary options, and good traders are able to quickly assess and exploit them.

In practice, of course, fundamental analysis is best used in tandem with technical analysis. While fundamental movements have a large impact on asset prices, it’s important to keep in mind that historical trends, movements based on buy and sell thresholds, and other realities exploited by technical analysis are equally important. The most effective binary option traders use fundamental analysis to inform their technical analysis, and visa versa.