When you trade binary options, you’re predicting whether the price of an asset will rise or fall by a set time. The asset can be anything that has a price that changes constantly and which is quoted on a recognised market.
In practice, the assets you will trade can be:
- the shares in a particular company that are quoted on a stock exchange
- a complete market index, such as the FTSE 100 or the Dow Jones Industrial
- commodities that include gold and wheat
- a currency pair, such as USD:EUR, that is quoted on the foreign exchange market.
Although these are binary options assets that you can trade, you are only predicting how the price will change and you don’t actually own them. For this reason, they are generally referred to as underlying assets. One advantage of not owning the assets is that you don’t need to invest large amounts of money in order to make a reasonable return as you would with conventional trading.
A number of assets are available within each category on different markets around the world. This gives you plenty of opportunities to trade at any time of the day or night since there will be usually at least one market open.
Your chances of trading binary options successfully will obviously improve if you choose an asset you know something about. If you work in the oil industry, trade oil on the commodities market. If you’re employed in the financial sector, trade banking shares, currency pairs or any asset that has some relevance to finance. Clearly, you’re more likely to be familiar with a company share in your own country that one quoted on a different global market.
Analyse Your Assets
However familiar you are with an asset, you need current knowledge because out-of-date information is of little use. That generally means you need to research and analyse your asset to trade it successfully, using two main types of analysis:
- technical analysis, which works on the principle that assets are generally priced correctly because all events have been accounted for. Prices should therefore move in a predictable pattern and so past movements are guides to the way they will change in the future. Studying price charts will reveal patterns that indicate whether the current trend is likely to continue or if a reversal is due, enabling you to predict movements more accurately.
- fundamental analysis where the assumption is that prices are constantly being corrected based on events as they occur. The market will always be reacting to events and so you need to study news, publications and announcements. Identifying significant events will enable you to judge how they will affect prices and so you can trade accordingly.
The more analysis you undertake on an asset, the better your chances of predicting price movements correctly.