RANGE

Range is the third type of binary option offered by OptionBit. Based on tunnel trading, Range options have a predetermined upper and lower boundary. When buying a range option, the trader must predict whether the price of the underlying asset will stay “In” or go “Out” of a predetermined range at the time of expiration.
This way the trader can trade on the volatility of the asset – If he or she thinks that the asset volatility is high, he or she can buy an “Out” of the range option. On the other hand, if the trader thinks that the option is not volatile, he or she should buy an “In” range option.

Trading Example
You decide to trade a forex option, USD / EUR. In the trading room you see that there are two options available, “In” and “Out”. Each option has a predetermined range and you must determine if the asset will be in the upper or lower range at the time of expiration.
You think that the price of the underlying asset will be in the range at the time of expiration so you select an “In” option. If you thought that the price of USD / EUR will be out of the range at the time of expiration, you should have bought a “Out” option.
If when the contract expires the price of USD / EUR stayed in the predetermined range that you selected, you’ll get a high return on your investment between 75 – 81%.

TOUCH OPTIONS

Touch options are another type of binary option available on OptionBit. Touch options expire in-the-money if the price of the underlying asset touches a predetermined barrier by the time of expiration. Price barriers can be higher or lower than the current price of the underlying when the option is purchased, enabling traders to take advantage of the traditional omni-directionality offered by binary options.
OptionBit also offers variations on Touch, including “Touch Up” and “Touch Down”.

Trading Example:You decide to try touch trading. After looking at the assets available, you decided that you would like to trade a touch option on Microsoft.

In the trading room, you select Microsoft as the asset you would like to trade and see that the option is expiring in 30 minutes. Depending on the current price of the asset, two options are available with predetermined strike prices, “Touch Up” and “Touch Down”. You believe that the price of the underlying asset will touch the high strike price until the expiry date, so you select “Touch Up”. On the other hand, if you believed that the price of the underlying asset will touch the low strike price, you would select “Touch Down”.

If when the contract expires the price of Microsoft has touched the option you selected, you’ll finish in-the-money and take home a high return between 75 – 81% of your initial investment.

ABOVE-BELOW

Above / Below is the most popular type of binary option and the one that the majority of traders are familiar with. Based on “cash-or-nothing”, Above / Below binary options expire in-the-money when the trader correctly predicts if the price of the underlying asset will move above or below the predetermined strike price by the time of expiration.
Like with all binary options, payouts are known from the onset so that traders know where they stand before buying the contract. When trading with OptionBit, traders can get a high returns between 75 – 81%.

Trading Example :
You decide to try trading Above / Below options and sign up for a free account. After looking at the assets available, you decided that Gold is the asset you would like to trade.
By quickly looking at the historical graph that day and conducting a technical or fundamental analysis, you notice that Gold is currently trading at a low point for the day. Based on this information, you decided that this low point is a lull rather than a continuing drop and you think that Gold will finish higher than it’s current price in one hour.
Since you believe that price of the underlying asset will increase, you buy a Call option that expires in 60 minutes. If you believed that the price of the asset would decrease, you would buy a Put option.
Since it’s your first time trading, you decides to start with a small investment of $100. If when the contract expires the price of Gold has risen, you’ll finish in-the-money and take home a high return between 75 – 81% of your initial investment.

TYPES OF BINARY OPTIONS

While there are several different types of binary options, the most popular form of binary option is above / below options. As the name of the instrument implies, there are two possible outcomes when you trade above / below binary options–win or lose.

When trading above / below options winning or losing depends on if you can accurately predict if the price of an underlying asset will increase (above) or decrease (below) by the time of expiration. If the trader believes that the price of the underlying asset will be above the current price by the time expiration, they will take out a Call option. On the other hand, if they believe that the price of the underlying asset will go below the current price by the time of expiration, they will take out a Put option. The option will be in-the-money and the trader will receive a high return between 75% – 85% on their initial investment if they predict the direction of the option correctly.
There a few important differences between traditional options and above / below options. With traditional options, the intrinsic value of a Call or Put increases as the price of the underlying asset goes deeper in-the-money. However, with binary options, the degree to which the underlying asset’s price is in-the-money does not affect the payout. Unlike traditional options, binary options cannot be sold or exercised before they expire. While owners of traditional option contracts can take delivery of underlying assets like stock shares and commodities, binary option traders never actually buy the underlying asset, but simply buy an option on which direction it will move.

There are three majors types of binary options, Above / Below, Touch and Range. Traders can achieve great flexibility with their trading by exploiting the unique characteristics of each type

EXPORT AND IMPORT DATA

Import and export information for large consumer and producer countries affects every market: the stock markets rise or fall based on the prospects of producing companies, the Forex markets respond to what the information shows about the strength of a domestic economy, and commodity markets swing wildly based on what the information demonstrates about demand for raw materials. That’s why it’s essential for binary option traders to make sure that they keep their eye on import and export information.

The effect that import and export data have on the Forex markets is perhaps the most subtle, and most intriguing, of the fundamental relationships. Large producers and consumers can drastically affect currency value based solely on their import and export activity. This is because when buying or selling to another country the home currency of the producer is generally used. For example, one can imagine an enormous car manufacturer in the United States selling $5 billion worth of automobiles to the United Kingdom. In order to purchase that order, the importer in the United Kingdom will have to exchange a comparable amount of Pounds (GBP) into US Dollars (USD). This in turn will shift the supply/demand equation radically.

Import and export data from the world’s developing economies also have a huge impact on the commodities markets. This is because these countries consume a highly volatile and sometimes massive amount of raw resources – as opposed to established economies, which tend to consume roughly the same amount year to year, with a regular growth rate. When a country like India or China releases export data that shows a massive spike, the price of commodities such as Steel, Oil, and Gold may all skyrocket, as the nations’ demands for the raw materials needed to increase production levels will grow. Similarly, when export data shows a slowing of production, the commodities markets tend to get spooked, as a slowdown in any of the major growth economies could seriously impact global demand for underlying resources.

SUPPLY REPORTS

Although modern markets have added extra layers which distort the natural market somewhat, at their cores the markets continue to be driven by the law of supply and demand. This is especially true in the commodities markets, and traders of those markets look closely at supply and stockpile reports, which reveal the current relationship between a commodity’s supply and the demand for it.

One of the most important supply reports from a market perspective is the Energy Information Administration (EIA) weekly report on various energy sources: petroleum, natural gas, and coal being the most market-applicable. The publication, This Week in Petroleum, is a must-read for any serious energy commodity trader because it contains current supply and stockpile data for coal. Each month the agency also releases Petroleum Supply Monthly, which contains inventory data for petroleum products.

Supply reports are important not simply in how they relate to data given in previous reports, but in how they relate to analyst predictions. In fact, data released in the previous week or month is generally supplanted rather quickly in the market by guesses as to what the next report will reveal. The market then reacts to these predictions, and when the next report is released the market swings based on how accurate those predictions were – if predictions were for greater supply than turns out to be the case, commodity prices will swing upward; if there turns out to be a greater supply than predicted, commodity prices will swing downward.

While energy commodities are the most visible to use supply data, in fact agricultural commodities tend to depend on them much more. While energy commodity supplies are generally relatively stable – excepting drastic events like hurricanes, or the discovery of new reserves – supply levels of agricultural commodities can be radically altered overnight. Heavy frosts can destroy half the orange crop in Florida, causing the price to spike overnight, and good weather can cause bumper crops, which will result in high supply reports that drive the commodity price down.

INTEREST RATES AND EQUITIES

Countries with strong Central Banks that adopt hands-on approaches to their currency valuations have the ability to drastically impact the markets through a very simple device: the raising or lowering of interest rates. This gives them a measure of fine-tuning over the markets that can help stabilize a country, impede inflation, or pull an economy out of a recession or stagnation.

At its most basic, the relationship between low interest rates and equities is easy to understand: it’s about a risk to profit ratio. Government bonds are extremely safe investments; short of a government collapse, or a total loss of economic stability in the country, they will always pay out at the rate they are given. Equities, on the other hand, have varying degrees of risk that are always greater than a government bond. The reason that risk is acceptable is because the potential for profit is so much greater. The attraction of equities to low- and mid-risk investors is therefore directly attached to the gap in profitability between bonds and stocks.

When interest rates are at 1.5% or 2%, for example, option bonds may be attractive to low-risk investors, even though they would almost certainly be out-performing that return with a good portfolio in the binary option  market, so long as the market as a whole was seeing some upward movement. When interest rates rise above 2% they become attractive to an even broader group of investors. When large investment funds start moving into bonds, the repercussions for the stock market can be quite noticeable, with equities suffering across the board.

Conversely, when the government brings interest rates down to 0%, any attraction they may have for all but the most risk-averse investors vanishes entirely. As a result these investors are forced to move into higher risk investments, and the equities market tends to reap the largest share of this gain.

ENERGY STOCKS AND ENERGY COMMODITIES

The relationship between energy commodities – such as Oil, Gasoline, and Natural Gas – and the stocks of energy companies can be somewhat confusing at first glance, but understanding the fundamentals at play can provide a savvy investor with the opportunity to profit off of the volatility of energy commodities by trading binary options.

The first thing to understand is that energy stocks are generally much less volatile than the energy commodities that underlie them. As a result, when commodity markets experience huge swings back and forth, little change may be seen in the corresponding options. Investors who play in energy options will tend to wait until a clear direction can be seen in the commodity market before they take a position, adopting mid-term positions rather than the short-term positions favored in the commodities market.

The other thing to recognize is that commodity options can suffer both from overly weak commodity prices and from overly strong commodity prices. Cheap Oil, for example, will generally push up the value of manufacturing-based equities, as growth increases when Oil becomes more affordable. Cheap Oil has the opposite effect on the stocks of oil developers and processors, however, since their profits are severely cut by lower prices. On the other hand, if the price of Oil passes a certain threshold, growth is impeded, reducing demand for the commodity, and resulting in growing stockpiles for those same companies, which also damages their stock value.

As a result, trading commodity options is primarily about identifying balance points between over-valued and under-valued commodities, where growth is maximized but profits remain maximized as well. One easy way to determine this for Oil is to simply look at OPEC’s target price for the commodity, as their driving motivations are much the same as private-industry energy companies. Once an investor has an idea what his target is, all that remains is to wait for prices to move toward that equilibrium and stabilize, at which point the stocks will almost certainly increase in value until equilibrium is lost.

GOLD AND FIAT CURRENCIES

Fiat currencies – those currencies that are not backed in their entirety by a physical commodity – have historically had a very strong relationship to Gold – the ultimate physical commodity. In recent years the relationship has become much more volatile, as sectors of the market have become skittish about the long-term prospects of major benchmark currencies. Faith in fiat currency tends to revolve around a handful of benchmarks, including the US Dollar (USD), the Euro, the Swiss Franc (CHF), the Pound (GBP), the Australian Dollar (AUD), the Canadian Dollar (CAD), the Yen (JPY), and the Yuan (RNB).

When major economic or global events rock the market, binary option traders and investors are pushed to move their capital out of riskier assets and into safe havens. Traditionally certain benchmark currencies act as safe havens – the USD, JPY, and CHF, most notably. At times, however, economic uncertainty spreads and reduces faith even in those sturdy currencies. Rising domestic deficits, global recession, or the threat of global war are just a few things that can make binary option traders and investors skittish about putting their capital in any currency, no matter how strong it may seem.

When faith in underlying fiat currencies is impaired, the vast majority of the market suffers. Confidence in manufacturing commodities is damaged, because the prospects for growth are negative in such a shaky environment. Equities suffer from the same distrust of the markets. As a result, investors are often frantically searching for somewhere to put their money, and underlying mineral resources are the obvious choice – Platinum, Silver, and most notably Gold, all see surges when the future of fiat currencies is called into question.

Although relatively rare as a fundamental mover, the collapse of faith in fiat currencies is one of the most certain predictors in the market. It is very difficult to miss the signs of crumbling confidence, and the movements it provokes in Gold are swift, and often enormous. Conversely, recovery can be equally swift and extreme, so it is important for binary option traders to keep a careful eye on the market when playing on this fundamental; be ready to close positions as soon as market sentiment shifts back towards fiat.

RETURN ON EQUITY

The return on equity, or ROE, is a way of measuring how successful a company is at leveraging the investments made by the shareholders. It is determined by taking the after-tax income of the company and dividing it by the book value of the company. The book value is determined by taking the total assets of the company and subtracting its liabilities, making it effectively a measure of the shareholders’ investments. The after-tax income is taken after preferred stock dividends are paid out, but before common stock dividends are paid out.

For example, if a company has total income of $50 million, and has a book value of $35 million, then its ROE is 1.429, often expressed as 42.9%. If, on the other hand, the company has a total income of $50 million, and a book value of $75 million, then its ROE is 0.667, or -33.3%. Companies with high ROEs have shown themselves to be effective at using the resources provided by the investors to grow the profitability of the company. Companies with a low ROE, on the other hand, have shown themselves to be less adept at leveraging these investments, and companies with a negative ROE are actively losing money for their investors.

Of course, when analyzing the ROE of a company, it must be put in context. During times of global recession, for example, ROE may flip negative for many companies. This does not necessarily imply that the company’s long-term prospects are poor, simply that it is struggling along with everyone else. Similarly, care must be made not to compare the ROE of companies in very different industries. Because different industries have radically different margins; what is low by one industry’s standards may be high by another. Generally, ROE should only be compared within the same industry, or within industries that have similar ROE averages.

THE BOOK VALUE

The book value is, simply put, the total worth of a company’s assets, minus its total liabilities. It is often viewed as the worth of the company as owned by the shareholders. Book value is a crude measurement of company value, but it is nonetheless useful in calculating other rubrics by which to measure a stock’s potential for growth or loss.

Calculating book value is a fairly labor-intensive process, and generally it is preferable to find a source, such as the company itself, to provide the book value. The book value is basically the worth of the company were it to go out of business at that moment, liquidating all of its hard assets. For this reason, book value is primarily of interest to value investors, who want to know where a company stands currently. Book value ignores profits, potential for future growth, and many other factors that imply the worth of a company’s stock in the long run.

In addition, book value generally ignores many non-tangible assets, such as the long-term market value of intellectual property. As a result, book value for companies that subsist primarily on their intellectual property will tend to be much lower than companies whose revenue is generated by physical assets which can be sold off as-is. So a retailer will have a much higher book value than a mining company, which will in turn have a much higher book value than a book publisher.

When using book value to calculate other rubrics useful in gauging a stock’s worth, one generally uses the book value per share. To determine this, one simply takes the total book value of the company and divides it by the total number of that company’s outstanding shares. Because this is the only way the measurement is useful in fundamental analysis, analysts may use the term book value as shorthand for book value per share.

DIVIDEND YIELD

While the dividend payout ratio measures the relationship between dividends and a company’s profits, the dividend yield measures the relationship between dividends and the investment on the part of the trader. It is determined by adding up all dividend payouts over a year, and dividing them by the stock price.

For example, if a company makes four dividend payouts over a year of $2, $5, $7, and $3, it has a total annual dividend payout of $17. If the company’s stock trades at $238, one can simply divide $17 by $238, to get 0.0714. In other words, that company has a dividend yield of 7.1%.

As with dividend payout, the dividend yield is primarily a measure of how established a company is, versus how intent it is with its growth. The newest companies generally do not release a dividend, as all of their profits are reinvested into growth. Smaller but established companies will have a low dividend yield, as they invest part of their profits into keeping long-term shareholders happy, but the bulk of their profits are still invested into growth. And large and established companies will have higher dividend yields, as they are targeting long-term investors, and generally have established themselves in the marketplace to the point where they do not need to invest as much in growth.

In the past few years dividend yields have gone down across the board, and they are a less important rubric for measuring the worth of a stock than they were in the past. This is primarily because even larger companies are often courting long-term investors less, as they can generally get better returns off of private investment, and dividends are taxed doubly in most regions of the United States. As a result, using the dividend yield to determine whether or not a company is in a growth spurt or sitting stagnant should be undertaken with great care.

PRICE TO BOOK P/B

The price to book, or P/B, ratio is a way of measuring the relationship between a company’s stock price and its book value. The book value of a company is simply its total assets, less its liabilities, or the part of a company that can be said to be owned by the shareholders. Price to book gives an idea of the market sentiment toward a company, as it demonstrates the premium investors are willing to pay above the actual hard value of the company’s assets. Conversely, a company that has an incredibly low P/B may have structural flaws that make investors unwilling to value the stock at even the value of the company’s assets.

For example, one can imagine a company with a stock price of $60, a book value of $15 million, and one million outstanding shares. To calculate the book value per share, one simply divides the book value by the number of shares, in this case resulting in a $15 value. The P/B is then simply $60/$15, or 4. A P/B of 4 implies that the market believes the company is worth a fair amount more than the worth of its assets. Price to book ratios in the 20 to 30 range imply that a company is valued significantly higher than the worth of its hard assets.

Of course, when using P/B as an indicator of value, one needs to remember that book value is a very crude measurement, and in some cases is essentially useless. For example, book value does not accurately factor in the market worth of intellectual property assets. As a result, a company that primarily markets its intellectual property would appear to have a very low book value. Of course, investors would know that was not the whole story, so the stock would have a much higher value, resulting in a high P/B.

PRICE TO SALES P/S

Price to sales ratio, or P/S, is a way of comparing a stock’s value to its own historic market valuation. This is done by dividing the total market valuation of the company by a twelve-month revenue per share average. For example, a company with a stock price of $1.20 and ten million shares would have a valuation of $12 million. If the company had revenue of $24 million in the previous twelve months, one would divide 12 by 24 to get a P/S of 0.5. Price to sales has a number of specific applications in which it is considerably more useful than a P/E, although it must be used cautiously.

Because P/S doesn’t need to look at earnings, it can be used on companies that have no track record of earnings. This makes it ideal for new companies, as it can give an insight into undervalued companies without having to wait for them to start turning a profit. The P/S ratio was widely used during the dot-com years, as investors struggled to determine whether a stock was a good buy or not.

P/S also has applications in market sectors where earnings tend to be cyclical. The automotive industry is a good example of this – the companies may turn enormous profits one year, and then lose for a number of years in a row before turning a profit again. This is not a fault in the company itself, but if subjected to a P/E analysis even the strongest company might appear to have structural faults. Using a P/S analysis is a way to mitigate this, by eliminating the dependence on profits.

Generally, binary option traders and investors look for companies which have a lower P/S, as it indicates a stock that is undervalued by the market. It is particularly important to look at other factors when using P/S, however, as a high annual revenue may not necessarily indicate a structurally sound company. Strong fundamentals are necessary for the market to ever begin to value the company more highly and thus provide profits for a binary option trader or investor .

PROJECTED EARNING GROWTH

The projected earning growth, price/earnings to growth, or PEG ratio is a way of measuring the way the P/E relates to annual growth in a company. It is determined by taking the P/E of a company and dividing it by the annual EPS growth. Since the EPS growth rate is necessarily a prediction, a PEG is not an entirely accurate measurement, but it can nonetheless provide an important insight into the valuation of a company’s stock. When determining a PEG, it is generally preferable to use a larger P/E average, such as a ten-year, or P/E10. This normalizes the number somewhat, cancelling out some of the noise that can interfere.

For example, if a company had a EPS average over the previous ten years of $64, and a stock price of $16, it’s P/E10 is 4. If the growth rate is 2%, then the PEG is 2. If, on the other hand, the growth rate is 8%, the PEG is 0.5. Because the PEG essentially measures how well the company’s share price is keeping up with its overall growth, it is an excellent tool to determine whether a stock is overvalued or undervalued.

As a general rule of thumb, the lower a stock’s PEG, the more undervalued it is. A stock with a PEG of less than 1 has plenty of room for growth in the future, and is an excellent investment. In some cases the PEG may be much lower, and often PEG is low across the market after a large sell-off since company assessments of their growth potential ramp up before the markets have a chance to value them appropriately. Generally, investors stay away from stocks with PEGs of higher than 2. Of course, in some cases there may be other strong fundamentals that mitigate the high PEG, such as a surge in demand that has not yet been absorbed into EPS growth predictions.

P/E PRICE TO EARNINGS RATIO

If the earnings per share is the fundamental measure of how well a company is performing, then the price to earnings ratio, or P/E, is the fundamental measure of how over- or under-valued a stock is. The P/E is derived by simply dividing a company’s stock price by their EPS.

For example, if a company has annual earnings in 2009 of $45 million, and there are one million outstanding shares, then the company has an EPS of $45. If the stock is currently selling for $38, then we divide $38 by $45, and get a P/E of 0.844. If, on the other hand, the stock was selling for $52, the P/E is 1.155. In the first case, with a number less than 1, we can expect the stock price to increase over time. In the latter case, we can expect the stock price to decrease. A core principle of fundamental analysis for binary options, in fact, is that the P/E of a stock will tend to approach 1, unless other fundamental factors prevent that from happening.

In fundamental analysis, two types of P/E are generally looked at: prospective P/E and historical P/E. Prospective P/E looks to the future by examining company or analyst predictions for EPS, while historical P/E looks at past EPS and past stock price.

For example, a binary option trader might see analyst earnings predictions that average $51 million in 2010 for a company with one million shares of outstanding stock. This would give the company a prospective EPS of $51, and the option trader would choose to purchase the stock at any price less than that. Looking at historical P/E, on the other hand, can give a feel for whether a company tends to be undervalued by investors or overvalued, which indicates how reliable the company’s market valuation is in the short term.

THE MARKET

Watching the market as a whole is the final step in a bottom-up qualitative analysis of a potential stock pick, and is crucial for traders buying binary options. The strength of a company and the overall health of the industry can be trumped by a broad market sentiment, which can shift directionality almost instantly if the forces at work are strong enough. This is why most serious binary option investors have a constant stream of global data coming in while they are trading, to ensure that they know of any large-scale events as soon as the rest of the market does. Perhaps the most important qualitative market force is investor sentiment. Because traders are fallible human beings, they can often act in irrational ways, guided by fear or uncertainty on the one hand, or over-confidence and brashness on the other. At times the market may seem to ignore fundamental data entirely, moving as a whole in one direction or another based on a herd mentality. Watching for strong bullish or bearish movement in the market is crucial to avoid misgauging an asset’s direction. Even if every bit of data seems to imply that an asset will move in one direction, if the market sentiment is pushing strongly enough in the other direction, it will likely move that way. Times of uncertainty are perhaps the single biggest motivator in the market, and impact everything from the prices of currencies and commodities to the lowliest stock. If the threat of war arises, for example, or if a country seems poised on the edge of default, the market may choose to pull back from riskier assets, including equities, en masse, running instead for the safety of the US Dollar or other safe harbor instruments. These moments of market crisis can be excellent opportunities, however, as they can amplify directionality if they coincide, removing a great deal of doubt from a relatively strong binary option.

EPS (EARNINGS PER SHARE)

Earnings per share, or EPS, is the first quantitative factor that should be taken into consideration when performing fundamental analysis on a company to determine whether or not its stock is likely to move up or down in value. The earnings per share of a company is, quite simply, the annual profits of the company divided by the number of shares released.

For example, if a company has annual earnings in 2009 of $45 million, and there are one million outstanding shares, then the company has an EPS of $45. This is a critical benchmark in measuring the performance of a company, and when compared to the market value of the stock it can indicate whether a stock is over- or under-valued.

It is important to look not only at the EPS of a company for a single year, but to analyze averages to get a better feel for the position of the company. Most analysts look at a three to five year average to see how the company is performing. For established companies, comparing the EPS of a current three to five year average with a past three to five year average can help to understand how stable the stock price is. Generally, one wants a stock price to demonstrate a high level of stability, with growth coming at a steady rate, rather than surging up periodically and then leveling out or dropping off.

As an example, if a company has earnings of $45 million in 2009, $42 million in 2008, $52 million in 2007, and $47 million in 2007, and the same one million outstanding shares all four years, then the EPS for that period would be $46. If the same company had earnings of $29 million in 1999, $34 million in 1998, $24 million in 1997, and $18 million in 1996, and at that time had 750,000 shares outstanding, the EPS in that period would be $35. Analyzing this, one can see that the EPS is relatively stable, but also that it is steadily increasing overtime, making the stock a strong buy.

THE INDUSTRY

Understanding the circumstances of the industry the target company belongs to is another cornerstone of qualitative analysis. Even the strongest company can still see its stock price decline if the industry itself is in dire straits. A robust company’s value may fall less than a weak company’s, but both will see some level of convergence to a new industry-wide benchmark.

While plenty of quantitative data exists to help with industry-wide fundamental analysis, qualitative analysis can often provide a quick and dirty insight into the direction of the industry. Quantitative studies may be released weekly, monthly, or yearly, but for day-to-day movements, which are crucial in binary options, a more qualitative approach may need to be taken.

Much of the broader assessment of an industry is also largely qualitative, and investors who take the time to ask a few simple questions may have a much stronger concept of how a option will perform. For example, the growth potential for an industry may be apparent by investigating media buzz about products within the industry, its prevalence in popular culture, and simple personal experience, such as spotting certain products more and more frequently on the subway. While these assessments may eventually be realized in a quantitative study, recognizing them early through more subtle cues can put the investor in a much stronger position.

Looking at barriers to entry into an industry is an excellent step to take when analyzing a new company’s chances of succeeding in the marketplace. Some businesses lend themselves to being competitive no matter how much entrenched competition exists. Others may rely on extensive infrastructure, established brand recognition, or other factors which offer a massive advantage to established companies, making new companies entering the space unlikely to succeed unless they have a particularly innovative approach or some sort of ace up their sleeves.

THE COMPANY

Qualitative analysis can begin either from the top, by analyzing the market as a whole, or from the bottom, by looking at an individual company. In binary trading most investors choose to start by looking at a specific company for which they are interested in purchasing a contract. This provides a baseline fundamental analysis, to which industry and market factors can be applied to paint a more accurate picture of stock price directionality.

A qualitative fundamental analysis of a company generally begins with examining the core management team. Public companies usually make a great deal of information about their management team available online, and this is a good place to start. Look at the educational background of key players, and look at companies they have managed in the past, to see how those companies performed under their guidance. If members of the team have worked together in the past on projects, give the performance of those projects special weight, as often the way a team performs together is a more important factor in long-term success than individual prowess. Beyond information supplied by the company, interviews with management can reveal their philosophy and plan for the company.

Interacting with various aspects of the company is another excellent way to gather qualitative data about a company a trader is considering for a binary option contract. Calling their technical support lines, visiting their website, and using their products will all give a trader an understanding of the company that is just as important as their financial data. Many companies will be happy to have a media contact person speak reach out to investors, or to take them on a tour of one of their facilities. All this can give traders the opportunity to see how the actual corporate culture of the company operates, and may present red flags or give traders further confidence for potential binary option positions.

BASIC PRINCIPLES

Fundamental analysis can take one of two approaches: a top-down approach or a bottom-up approach. In a top-down approach the trader starts by looking at the global market as a whole, analyzing macroeconomic events to see where the market is being most impacted. The trader then focuses on an asset class, such as Forex, to study the fundamental events targeting it and find a specific asset that is experiencing movement and thus offering trading opportunities.

In binary option trading many people choose to pursue a bottom-up approach instead, as it lends itself to a smaller set of assets for which contracts are available. Using a bottom-up approach, the binary option trader chooses a specific asset he is interested in, such as gold or an individual stock, and then analyzes only those fundamental data points that are likely to be impacting that asset.

Fundamental analysis may also focus on macroeconomic factors or on microeconomic factors, depending on what class of asset is being analyzed. Forex pairs and commodities, for example, are most impacted by macroeconomic fundamentals, so this is where the bulk of analysis will take place. Stocks, on the other hand, are influenced most strongly by microeconomic fundamentals, although they may experience bias in one direction or another based on the overall movement of the market as a result of macroeconomic events.

In many cases, one class of asset will influence another, creating a situation where a broad range of fundamentals must be understood to predict movement. For example, many commodities have an inverse relationship to the strength of the US Dollar, creating a situation where to predict commodity prices the binary option trader must look not only at fundamental data related to the commodity itself, but also to fundamentals that may influence the US Dollar.

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.

FUNDAMENTAL ANALYSIS

Fundamental analysis is a method of prediction that looks at available facts to come up with an idea of how the market will move. These facts may come from public statements, news reports, current events, and virtually anything else that might impact the value of an asset. The fundamental analyst then examines that collected data to try to predict new trends in the market.
For example, an analyst looking at currency pairs might watch for a public report from a country on their GDP, or an announcement from their central bank. An equity analyst might look at what a company’s quarterly reports show about their performance, or listen to announcements from a CEO to gain some insight into the direction a stock might take. It’s important for a fundamental analyst to keep both a broad view and a specific view, noting what is happening in the world at large, as well as what is happening on the micro scale in regards to their specific assets.
Unlike objectively-based methods of analysis, fundamental analysis is largely subjective. People may have different interpretations of what a CEO’s announcement means about the health of the company, or how an earthquake will affect the price of oil. Since there are no rules set in stone, fundamental traders are generally referred to as discretionary traders – they use their own judgment to decide what course of action to take, after analyzing all the data they have available.
Because it is subjective, most fundamental analysts find their ability to predict things like market direction improves as they get more practice. Fundamental analysts become experts at reading between the lines, to understand what exactly a data point might mean, and they also learn to connect the dots, combining many discrete data points into a comprehensive overall picture.
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Fundamental analysis is one of the two major forms of investment analysis, and is the form most commonly used by binary option investors. The goal of investment analysis is simply to identify an asset to purchase, and to then determine what sort of contract to purchase. This asset might be an equity, an index, a commodity, or a currency pair. Fundamental analysis makes its assessment by looking at an asset’s underlying realities, examining things such as the health of a company, the rising demand for a commodity, or a country’s fiscal policy changes.

Many binary option investors appreciate fundamental analysis because it is a way to analyze the market which doesn’t require a specialized knowledge of calculus or statistics. Many forms of fundamental analysis are, in fact, common sense approaches to examining the outlook of a company or asset.

In fact, any time a binary option trader picks up a copy of the Wall Street Journal or visits a news website, he is performing a rudimentary form of fundamental analysis. Because the market responds so clearly to a wide range of stimuli from the outside world, keeping track of global threats of violence, instabilities in various economic zones, or major weather events can give an investor a distinct advantage in predicting the direction of assets. This sort of macro view is most often used when purchasing binary options on commodities, indices, and currency pairs.

When purchasing binary option contracts for equities, a much more specific form of fundamental analysis is generally used. In this sort of fundamental analysis the trader takes the target company and examines its revenue data, its book value, projected earnings, market share information, and any statements made by the CEO, CFO, or other key figures, to determine the real value of the stock.

WEIGHTED MOVING AVERAGES

Most binary options traders, like traders of other instruments, use moving averages on their charts. While simple moving averages are popular, they do have limitations. A simple moving average is a severely lagging indicator because it is calculated from a period of past prices that are all weighted equally. Some simple moving averages barely react to large changes in current price. This has led many technicians to believe that simple moving averages to do not adequately reflect the ever changing influences on a market’s current price. As a result, many traders prefer to use weighted moving averages, which give more mathematical significance to the most recent price periods used in their calculation. Moving averages can be weighted linearly or exponentially.

Linearly weighted moving averages distribute the weight for each number in the calculation with linearly decreasing significance extending into the past. For instance, a 10-period linearly weighted moving average might multiply the most recent closing price by 10 and the second most recent by 9 before adding them together, then add THAT to the third most recent multiplied by 8, and so on. The sum will be divided by 55, which is 10+9+8+7+6…etc. The result is that the most recent price action most heavily influences the newest point on the moving average line.

Exponentially weighted moving averages assign even more weight to the most recent period’s closing price. Each new closing price is typically given 10% of the total numeric weighting in the average, with all of the rest of the points combined receiving the remaining 90%. The second most recent will be assigned 10% of that remaining 90%, and this trend continues as the periods go farther back in time. The result can be that the period farthest in the past has an almost completely insignificant influence on the calculation.

Generally, weighted moving averages create smooth, trend-identifying lines just like simple moving averages. The difference is that weighted moving averages—even long term ones—will be more sensitive to large changes in current price so that they more accurately reflect the constantly changing dynamics of a market in real time.

SIMPLE MOVING AVERAGES

Simple moving averages are very popular among traders of all assets, including binary options. As with all moving averages, simple moving averages are superimposed over the price data on a chart and used to identify or confirm the existence of a trend. Trading software usually gives traders the ability to customize the moving averages they use, but there are some popular conventions for the parameters that are used.

To build a simple moving average, a trader first chooses the number of price periods he wants to be included in the average. 50-period moving averages are very popular. Each new point on a 50-period simple moving average line is calculated by adding the closing prices of the previous 50 bars or candles on the chart and dividing the result by 50. A new point is added to the line as each new period comes to an end. The result is a smoothly curving line that follows price data closely and makes the trend in the data stand out very clearly.

Adjusting the number of periods used to calculate a moving average can change its behavior significantly. Including more periods makes the moving average line smoother and less reactive to large price changes during any single period. These moving averages generate fewer trading signals for traders to use, which can be good and bad—there will be less opportunities to profit, but also fewer false signals generated. Moving averages calculated using fewer periods are much more sensitive to large price changes that occur in a single period. They are thus less smooth than longer term moving averages and tend to generate more trading signals—true and false ones. Many traders take advantage of these differences in moving averages by plotting two on one chart and using the instances when they cross each other as trading signals.

MOVING AVERAGES

Moving averages are indispensable tools for binary options traders, who must continually hone their ability to predict price direction in markets. Technical analysts use moving averages to confirm the existence of a trend and show when a trend might be about to reverse. Multiple moving averages are commonly used on one price chart to generate buy and sell signals; binary options traders can use these signals to buy Puts and Calls.

A moving average is a meandering line that closely follows price action on a chart. It is considered a lagging indicator because the values plotted on the moving average line are calculated using past price data. The essential function of a single moving average is to smooth the price data and make the prevailing price trend stand out more clearly. Each new point on a moving average line is calculated by adding up a number of past closing prices and finding their simple or weighted average. Most trading software packages enable traders to choose how many periods to include in the calculation. Generally, including more past data in the moving average calculation makes the moving average line smoother and less sensitive to changes in current price. This has advantages and disadvantages that are discussed in the articles about specific moving average types.

There are a few types of moving averages. Simple moving averages take into account the closing price of each past period equally, whereas weighted moving averages, such as linearly and exponentially weight moving averages, give more mathematical significance to the most recent periods.

Moving average crossovers are widely used as buy and sell signals. These occur when a moving average calculated over a long period of time is on the same chart as a more sensitive, shorter term moving average. The shorter term moving average reacts more quickly to changes in current prices and will sometimes cross the longer term moving average. The direction of the crossover can be used to trigger a buy or sell action.

TRENDLINES

The key to successful binary options trading is the ability to predict the direction that an underlying asset’s price will move in the near future. There are various technical analysis tools available to help a trader do just that. One of the most basic is the trendline. Identifying and following a trend in progress is one of the most time-tested and reliable methods of determining where an asset’s price will go in the short-term. The trendline is the primary method of identifying a trend.

A quick look at any price chart–whether it’s a chart of a stock, commodity, currency pair, or market index–shows that price moves in waves complete with crests and troughs. Sometimes these waves move in a general upward trend, with subsequently higher troughs and crests. Sometimes the waves move in a general downward trend, with subsequently lower troughs and crests. The best way to trade in the direction of a trend is to use a trendline.

To properly draw a trendline, first identify the direction of a trend. An uptrend will have a series of higher troughs in the price waves. Draw a line that connects the bottoms of the troughs together. Project the line into the future, then anticipate that the asset’s price will bounce up from the trendline the next time it comes down to touch it. An uptrend has a series of lower crests in the price waves. Draw a trendline for an uptrend by connecting the tops of the crests together. Project that line into the future, then anticipate that the asset’s price will bounce down from the trendline the next time it comes up to touch it.

The best types of binary options trades to plan using trendlines are above/below trades. After all, trendlines tell the trader when price is likely to turn in the direction of the trend; any analysis tool that helps predict direction enables binary option traders to set their sights on the specific price goals required by above/below trades.

SUPPORT AND RESISTANCE

The idea of support and resistance is one of the oldest concepts in trading. Price support refers to an area on a price chart that price cannot seem to sink below. In economic terms, support is really the concept of demand. Prices cannot fall below a certain level when there is demand there. Price resistance refers to any area on a price chart that price cannot seem to rise above. In economic terms, resistance is really the concept of supply. Prices cannot rise above a level where there is too much supply.

The proper use of support and resistance in trading involves traders buying an asset when the asset’s price nears an area of support. This is because prices typically stop falling and start rising when they hit support. Conversely, traders plan to sell an asset when its price reaches an area of resistance because prices typically stop rising and start falling when they hit resistance. Binary option traders can use this knowledge in their above/below trading to help set price targets and plan their trades.

There are several different methods that traders use to identify support and resistance on price charts. Some traders contend that whole numbers act as natural support and resistance levels, such as an on-the-dollar price in a stock (like 10.00 USD as opposed to 10.15 USD) or 10,000 in the Dow Jones market index. Fibonacci percentages are often used as support and resistance lines while following trends. Trendlines drawn underneath uptrends are often used as support; trend-following traders buy as price falls back to touch its trendline. Trendlines drawn above downtrends are often used as resistance; trend-following traders sell as price rises to touch its trendline. Channel lines can be used to the same effect.

Several binary option trading strategies can effectively utilize support and resistance. Primary among them is the above/below strategy that requires a trader to know the direction of price.

KEY REVERSALS

Binary option traders can benefit from any technical signal that helps them predict the direction of price. While trend analysis can tell traders to keep trading in the same direction, the concept of a key reversal tells traders when they can expect a trend to end and should therefore start making market decisions in the other direction. Key reversal patterns do not occur often, but are said to be reliable when they do.

A chart type that shows the high, low, open, and close prices of each time period, such as a bar or candle chart, is necessary to identify a key reversal pattern. Line or dot charts simply do not show enough information. Traders most often look for key reversals on daily charts, but the concept can be applied to shorter time frames as well.

There are two major types of key reversals to look for. They both occur in the midst of an uptrend or downtrend. Consider the first in the context of an uptrend: the key reversal occurs on a day where a new high in the trend is made, yet the close of the day is much lower–near where it opened and away from the high. This pattern indicates that a lot of buyers got caught in a sell-off, which will likely create the selling momentum needed to generate a downtrend.

The second pattern has a similar concept and is potentially even more powerful. The key reversal occurs after a candle where a new high in the uptrend is made, but that closes below the entire trading range of the previous day. This is known as an engulfing candle or bar and is considered to be a powerful indicator of trend reversal. Simply flip the logic of the definitions upside-down to use these concepts to find key reversals that signify the ends of downtrends.

CHANNELS

Binary option traders have many technical analysis tools at their disposal, one of which is the identification of price channels. Any asset’s price can travel in a channel, and this occurs when the price waves are neatly contained within two straight-line boundaries, just as the water of river is contained within its banks. Price channels can trend in a direction–up or down–or they can move horizontally on the chart, resulting in no net price change for a long period of time.

To identify and draw a price channel on a chart, look for a series of price waves that are all roughly the same size. Draw one trendline that connects all of the wave troughs together, and one trendline that connects all of the wave crests together. The two lines form the channel, or the ‘banks of the river’.

If the channel has an up or down slope on the chart, it has identified a price trend and binary options traders can use the channel by projecting the lines into the future to predict where price will be. Sloping channels are best combined with above/below binary options trades. If the channel has no slope and proceeds horizontally into the projected future, traders can surmise that price will not change significantly in the near future. Non-sloping channels are best combined with no-touch binary options that require price to stay in a specific range for the trader to receive her return.

Successful traders carefully watch for channel breakouts. When price breaks out of an upward sloping channel to the downside, this can signal the beginning of a downtrend. When price breaks out of a downward sloping channel to the upside, this can signify the beginning of an uptrend. When price breaks out of a neutral channel to either side, it can mean the beginning of a trend in either direction. Binary option traders should carefully examine price channels to determine the proper strategy to use.

HEAD AND SHOULDERS

A head and shoulders pattern is one of the most famous technical analysis patterns. Traders are particularly fond of it because it not only indicates a change in price direction, but can offer specific price targets for those familiar with its use. Binary option traders who enjoy employing the above/below type of options would do well to familiarize themselves with the head and shoulders pattern.

To identify a head and shoulders pattern on a price chart, traders look for what appears to be the silhouette of the head and shoulders of a person. A proper head and shoulders usually occurs in the context of an uptrend, and is characterized by three price waves. The first is a small-sized ‘shoulder’ wave, and it is followed immediately by the larger ‘head’ wave. The ‘head’ wave is in turn followed by another ‘shoulder’ wave identical in size to the first. The ideal head and shoulders is a horizontal pattern with the lowest points of the shoulders and head aligning perfectly.

At the end of the second shoulder, when the price of the asset lines up with the base of the ‘neck’ below the head, a trader should be ready to go short and do so as soon as price breaks below that neckline. The move down in price after a head and shoulders is said to be a measured move because it will fall a distance equal to the distance between the top of the ‘head’ and the base of the ‘neck’. This is invaluable information that binary option traders can use to incorporate into their above/below or one-touch option trading.

Reverse head and shoulders occur as well. These happen in the context of downtrends and look like the mirror images of standard head and shoulders patterns. All of the same principals apply.

DOUBLE AND TRIPLE TOPS AND BOTTOMS

Double and triple tops and bottoms are similar to the revered head and shoulders pattern. As a matter of fact, triple tops are essentially a variation of the head and shoulders pattern wherein the ‘shoulders’ are as big as the ‘head’. Not surprisingly, double and triple tops indicate the reversals of uptrends, whereas double and triple bottoms indicate the reversals of downtrends. Binary option traders can use these patterns for their directional trades just as effectively as they use the head and shoulders pattern.

A double top occurs when the price of an asset is uptrending, then creates two adjacent peaks at the same price level. A trend reversal is indicated when price breaks below the low of the valley between the two peaks. At that point a trader who starts trading to the downside has probability on his side. A double bottom is the mirror image of a double top. It reveals itself as two valleys at the end of a downtrend that have identical or near-identical low points. The downtrend is reversed when price breaks above the high of the peak between the two valleys.

Triple tops are said to be more powerful indicators than double tops. They are similar, just that instead of having only two peaks, triple tops have three peaks. When the lows of the valleys between the peaks are broken, the uptrend is likely at an end and traders should anticipate a downward move in price. Triple bottoms are the mirror images of triple tops; they contain three valleys, and when the highs between the valleys are broken, the downtrend is reversed. To idea that triple tops and bottoms are more powerful than their double cousins means that traders consider them to be more definitive indicators of trend reversals.

TRIANGLES

For their directional trading, binary option traders need to know when a trend is likely to continue in the same direction. Triangles are part of a group of chart patterns known as continuation patterns, which are thus called because they tend to indicate that the dominant trend is going to continue. Ascending triangles tend to occur during uptrends and are bullish signals that foretell the continuation of the uptrend. Descending triangles tend to occur during downtrends and are bearish signals that foretell the continuation of the downtrend.

Ascending triangles form when an essentially horizontal price pattern has a flat top and rising bottom. That is, the peaks of the price waves occur at the same price level every time, whereas the troughs occur at progressively higher price levels. Traders interpret this to mean that buyers are ‘closing in’ on the sellers, who are trying to hold price at the resistance level signified by the top of the triangle. Once the buyers have neared that resistance level, the pressure they apply often overcomes it, resulting in a breakout to the upside and the continuation of an uptrend. Binary option traders who see this breakout occur should put their money on above/below options with returns that reward a price increase.

Descending triangles are the mirror images of ascending triangles. A descending triangle is a horizontal price pattern wherein the price waves have subsequent troughs at identical price levels–representing a support line–and progressively lower peaks. Traders believe that this pattern indicates that sellers are ‘closing in’ on buyers, and that price will break out to the downside just before the triangle fully closes. Binary option traders who see the downside breakout of a descending triangle should count on the resumption of a downtrend and place their money into above/below options favoring the downside.

RECTANGLES

Binary option traders looking for continuation patterns should include rectangles in their searches. A rectangle, also known as a consolidation pattern, often occurs in the middle of a trend and is commonly believed to indicate the resumption of that trend upon the breaking of the pattern. The idea is that traders are resting during consolidation patterns, which often occur on low volume, and when they come back to their desks they will resume the buying–or selling–that was taking place before their break.

Technically, a rectangle occurs when price reaches a new high before pulling back to an intermediate support level. The pattern continues with the continual testing of both the new high and the intermediate support level. Each level must be tested at least twice for the pattern to be considered a genuine rectangle. As price bounces between these two levels, it trades sideways for a period of time and forms a horizontal price channel.

Traders can trade range-style or no-touch binary options while this pattern occurs, because the support and resistance levels will hold price in a predictable range for a little while. They can also use above/below options to profit from the likely breakout that will occur in the direction of the prevailing trend. Again, rectangles that form in the midst of an uptrend foretell the continuation of that uptrend, and ones that form in the midst of a downtrend foretell the continuation of that downtrend.

It is important to note that rectangles, as with all continuation patterns, do not predict with 100% accuracy that the prevailing trend will continue. Therefore, any breakout of a rectangle that occurs with substantial trading volume should be considered the direction that price will head, at least temporarily, even if it is in the opposite direction of the prevailing trend.

DIAMONDS

Binary option traders looking for signs of a trend reversal should keep their eyes open for diamond patterns. The diamond pattern is not as common or as powerful as some other reversal patterns, such as the head and shoulders or triple tops and bottoms, but they exist and should be included in any trader’s arsenal of technical analysis techniques. There are two types of diamond: the diamond top and the diamond bottom.

Diamond tops occur at the apex of uptrends. They can form when price in an uptrend stalls and trades horizontally for a while. The diamond takes shape if vertically short price waves at the beginning of the horizontal trading expand, becoming taller, before contracting once again to their shorter form. The overall effect of this expansion cycle is the shape of a diamond lying on its side. As the last, narrowing part of the diamond top is formed, traders should expect price to break out to the downside since a diamond is a reversal pattern and not a continuation pattern.

Diamond bottoms are the mirror images of diamond tops. A diamond bottom occurs at the lowest point in a downtrend and hails the beginning of an uptrend. Diamond bottoms show the same wave expansion/contraction pattern that diamond tops do, except that toward the end of the contraction phase, traders should expect price to break out to the upside of a diamond bottom. Again, this is the expected direction because diamond bottoms, like diamond tops, are reversal patterns.

Binary option traders can use diamond patterns to reverse the direction of their trading. If they have been making money all day buying Put options, a diamond bottom would signal that it’s time to start buying Calls. Likewise, a diamond top would be a signal to start buying Puts once again.