Analyzing the market is vital when determining what and when you should be trading. However, deciding on which type of analysis to employ is equally as important, since both technical and fundamental analyses serve their fair share of benefits. Let us break them down for you.
Technical Analysis uses trends to evaluate assets
Technical analysis evaluates assets by analyzing the statistics generated by market activity, such as past prices and volume. Technical analysts do not attempt to measure an asset’s intrinsic value, but instead seek to identify patterns that can suggest future activity. Technical analysis is centered on three claims:
• Market Price Reflects Everything
• Price Movements Follow Trends
• History Tends to Repeat Itself
Fundamental Analysis uses market events to predict price action
Fundamental analysis uses external data to evaluate an asset’s value. Traders perform fundamental analysis by taking into account a wide range of variables including the sales, earnings, products and services of a company, to the GDP, interest rate, and unemployment rate of a certain country. Fundamental analysis utilizes a variety of major market indicators, among them:
• General monetary measures
• Building and housing trends
• National employment rates
• Consumer price indices
• International trade record
• Federal Open Market Committee (FOMC) books
• Manufacturing reports
These two types of asset analysis fall on completely opposite sides of the spectrum, but both can give you a great deal of insight into the market. And while the best strategy continues to be debated, you would be wise to research both methods to determine which would work best with your level of understanding and preference.
Technical analysis is one of the most important tools available for predicting financial market. It has been shown to be an effective resource for investors and is being increasingly accepted by participants in the market. If used in combination with fundamental analysis, the technical analysis can deliver a very precise assessment, which can make a difference in the execution of profitable transactions.
With a technical analysis one tries to predict future price movements by analysing the historical market performance. By using technical analysis one can establish whether the market will go through a downtrend, uptrend or sideways trend. Traders can find suitable times to get on or off for their orders by using the technical indicators they get from the technical analyses. A number of these technical indicators are found in volume graphs, price graphs and movement averages. Every type indicator serves a special purpose, such as the recognition of trends or establishing the strength of a continuity or a trend.
There is more objectivity to be found in technical analysis than can be found in fundamental analyses, because the emotional part of trading is removed from this type of analysis. Because traders who use technical analyses usually only trust the technical graphs for their investment decisions, they are often more disciplined. Times for getting on or off are outlined and planned in accordance with the findings of the graphs.
The six most important figures for technical analysts:
- Open: the opening price at the beginning of a period
- High: the highest listed price within a period
- Low: the lowest listed price within a period
- Close: the closing price at the end of a period
Trend trading is easy to understand and is frequently used when trading in Binary Options. With the aid of a graph, every trader can easily see if there is a trend, and if yes, in which direction this is going. (If there is no clear trend then there is ranging by definition). Trading according to a trend forms the basis of the majority of strategies.
In the financial world a trend is a clearly demonstrable direction in the price-setting of a financial product. That product may be a currency pair, but it also includes futures, indices, gold etc.
Most traders and technical analysts argue that prices move between a specific range about 70 to 80% of the time. Prices therefore move sideways (ranging) more often than they do in a trend. That makes successful trend trading difficult, but potentially very profitable.
The trend strategy for a trader is simple: ensure that you are there when the trend has just started. The opening thought for the trend trader is that the price keeps moving in the direction in which it is moving at that time; after all, there is a trend. If the price returns to where it was, there is apparently no trend, and the trader would gain nothing by trading.
Characteristics of a trend:
In case of an uptrend the price always reaches higher peaks (higher highs). In case of a downtrend it always reaches deeper troughs (lower lows). In between there is of course retracement, but the overall direction is clear. The image below is a good representation of what a trend looks like;
Range trading means taking positions with the purpose of profiting from the -temporary- range (sideways movement) in which the price moves. Again, this can be applied to currencies but also futures, indices, gold etc.
You can only tell that a stock exchange is ranging after it has been going on for a while. Since there must be resistance as well as support levels which are ‘kept’ (are not broken). Support is the bottom side of the price, where the exchange rate rises again and resistance is the top side, where the price lowers again.
The easiest way to tell whether a price is ranging is to simply look at the graph and search for the resistance and support levels.
The image below is a good representation of what a trend looks like;
The breakout strategy is a trading strategy whereby positions are taken at the time when the price breaks through a resistance or support level. There are various breakout strategies and they are used on all financial markets.
General Starting Tips
We will go into further detail about the factors that determine the prices, and which strategies you can use in order to make better decisions.
But before you really jump into the deep end and start trading in Binary Options we would like to give you a number of tips. These tips will help you to avoid the biggest mistakes often made by beginners.
Don’t be overconfident
Trading in Binary Options is fun and exciting, but ultimately it has to be worth it financially. It is all too easy to start overestimating your personal knowledge and talent after a couple of lucky hits and to all of a sudden start trading in amounts that are far too large. Please just take positions for modest amounts. With L&S Option you can start with as little as € 5.
Do not continue buying in a losing position
This is one of the biggest pitfalls in trading in Binary Options. You have taken a position, entirely in accordance with your personal strategy, and subsequently the market does not go in your favour. You want to win back that money, so you buy more—this time for a better price—because the price has gone down against your expectations, and therefore you can now buy at an even lower price.
Then the price continues to move in a direction which is disadvantageous to you. Don’t do it. Just accept the loss, stop for a while and analyse why it did not go as you had expected. Remember that not a single trader is able to place only winning orders. Everyone suffers losses; what counts is that you are left with more winning orders and fewer losing orders at the end of the day. Taking a new position at a lower exchange rate may be worth your while. But you should see it as an independent decision, and one that isn’t meant to make up for your earlier losses.
Don’t create false expectations
It does not matter if you lose € 100 once because you did something stupid; just as if you become enthusiastic because you may have earned € 1000 at some point. Take your time to become better at it and keep on looking realistically at your claims, without becoming obsessed by how much you exactly earned in the last week.
It may well be that, in time, you will earn more through trading in Binary Options than through your day job. Then again, it may not happen because you do not have the time, the interest or the discipline. It is best just to look and see how far you can get, gradually get better at it and book more profit, than to apply specific financial objectives and try to trade towards these. After all, you can’t always know what the future holds.
Only trade with money you can afford to lose
The best part about trading in Binary Options is that it is the least risky. You can never lose more than the capital that you deposited. It is therefore never necessary to risk money you can’t afford to lose. Just reserve an amount for your trade account and accept that you could, in principle, lose this amount. This is especially sensible when you’re still learning. If there is one thing that is not necessary when trading in Binary Options, it’s sleepless nights. So don’t put yourself in that position.
Never start trading without a plan
Always think carefully before opening a position. Do not take a position because you have some vague suspicion, or because an acquaintance let it slip at a party that the Dollar is really about to collapse. Instead, base your orders on well-thought-out Fundamental and Technical analysis. Try to determine an entrance and departure point as effectively as you can before you open a position.
At first you may notice that your plan does not always work and that the market sometimes moves unexpectedly. But this will only allow you to develop a better feel for trading and you will continue to get better at it.
Don’t open a position when in doubt
The Americans have a good expression for this: “When in doubt, stay out.” Of course, you also should not be a scaredy-cat, but if you have done an analysis and you are still in serious doubt about what the price will do, look for another stock exchange to place an order in, or go and do something else for a while. You take a position for a specific reason and if you cannot really convince yourself of the merits of this reasoning, then it is probably not a very good reason in the first place.
Concentrate when trading
This is something that every trader in Binary Options has done wrong at some point: button here, button there, busy with other things, and then all of a sudden…Pushed the wrong button. Bought instead of sold by accident. Or mistakenly deposited € 500 instead of € 50.
This can of course be easily avoided, provided you stay focused. Concentrate when you actually take a position. Make sure you have set all fields correctly before clicking on ‘Place Order’.
What is the best strategy to make a profit?
There is no such thing as the ultimate strategy that guarantees 100% profit! If there are brokers or other websites on the internet that state there is a strategy with which they guarantee you that you will always make a profit… Do not take them seriously. It does not exist! If it did we would all be millionaires…
However, there are certainly strategies which work well and these strategies have one thing in common: they anticipate the movements of the market. The exchange rate of a currency or prices on the stock exchange always come into effect through a market of supply and demand. If many people believe that the exchange rate of the euro will increase vis-a-vis the dollar, they will go for the EURO/USD. This will inflate the price of this currency, as a result of which the euro will indeed increase in value compared to the dollar.
This is why it is important for you to be able to assess what the market will do and to then do the same thing. There is no room for criticism because the market is always right, since the prices will always move with the masses, even if there is not really a good reason.
Assessing what the market will do looks easier than it really is, because you are not standing in a square full of people who show what they are going to buy or sell by putting their hands up. Like you, there are millions of other Forex traders sitting at home behind their computers or in their offices who are placing orders without you having any insight into this. However, there are resources that enable you to predict what all these people are going to do.
There are two possibilities for this, namely: fundamental analysis and technical analysis.
By developing a better insight here than the rest of market, you will learn to predict more quickly and effectively what a stock price will do.
If you want to be successful in online trading in Binary Options, you must first formulate some objectives. What follows is determining a profitable strategy. Your objectives must first of all be realistic. This makes sense of course, but enthusiasm and inexperience often ensure that people start without any plan, which is not advisable.
It is possible to start with € 500 and turn it into a €10,000 profit, but it will likely not happen in a week. (probably, because one might always get lucky, but chances are slim). Your financial objective is also determined by the investment with which you start and must therefore be in some proportion to the size of your account.