When looking for a good binary options trading strategy, it’s important not to over complicate things.
You could be forgiven for thinking trading strategies require some level of genius to understand when you watch CNBC and all of the other financial market news channels, because after all those graphs, charts, symbols and complex terms are pretty intimidating to a new trader.
Yet underneath all the jargon and tools there’s an element of simplicity and one very reliable trading strategy which doesn’t even require any form of technical or fundamental analysis. You can use ‘Trading the News’ as your sole binary options trading strategy if you wish.
Trading the news is exactly what the title suggests. You keep your eyes open for relevant news and you pounce on it, placing options to capitalize on the market movements that news prompts.
It’s not difficult, but that doesn’t mean it’s perfectly predictable either. Financial markets can behave in bizarre ways and even the best binary options trading strategy in the world will miss the mark once in a while.
An Example of Trading the News as a Binary Options Trading Strategy
Paul has been watching the financial news on CNBC for a while now, and he’s noticed that there are key dates on the ‘economic calendar’ which move markets, often violently, in one direction or the other. He’s noticed that one of the big numbers economists release every month is the unemployment number, and related markets tend to respond immediately to either positive or negative news.
He knows that the forecast for this month’s US employment data is 5.6% – but he thinks it will miss the mark and he’s willing to bet on it. So, just before the number is released, Paul places a ‘put’ option on the DJIA, one of America’s biggest and most volatile stock markets.
Sure enough, one hour later, the unemployment number comes in. It’s 5.9%, significantly worse than predicted. Traders begin shorting the market and selling stock, worried that this is a sign the economy in under-performing. The DJIA nosedives and one hour later, when Paul’s put option expires, it’s trading 180 points lower, netting him a handsome profit.
Not bad for an hour of work!
This is a perfect example of how trading the news is a profitable binary options trading strategy. Markets do tend to react to news immediately, and if the news is negative or fails to meet expectations, they tend to react violently as caution and fear overrules logic.
Put yourself in the position of a fund manager with billions of dollars of capital, making up people’s pension funds, and you’ll see why. Is he going to take the risk and answer to the higher ups in his bank as to why he lost millions on a trade? Of course not! He’s playing it safe, and you can take that to the bank.
Capitalizing on the news requires you to understand human psychology to a certain extent, but it isn’t difficult. Positive news creates hope and greed, negative news creates fear and panic. That’s about it.
So now that we know how to trade the news, what news should we look out for? There are plenty of important pieces of news we can watch out for every month, but which ones should we pay special attention to when forming an options trading strategy?
1. GDP Numbers
Every month, each country releases GDP data to let investors know how the economy is performing.
Estimates come in a week or so beforehand as analysts crunch the numbers and make their predictions. You can usually see these on good economic calendars and know what to expect.
GDP data is a crucial number as it indicates what is going on in the economy at large of whatever country is in question. Underwhelming numbers can send a stock market into a tailspin, while overly positive numbers will typically cause a rally.
Knowing what GDP numbers to look out for is the key. Some economies just aren’t that important and won’t have a big impact on markets. Look out for US, Chinese, Japanese and major European country’s GDP numbers. Learn which stock markets are linked to these country’s economies , and you’ll know what trades to place.
2. Employment Numbers
Another crucial piece of economic data which gives an up-close glimpse into how an economy is doing is unemployment numbers and new job creation stats.
These are again released monthly and have significant impacts on relevant markets. One of the biggest pieces of data of them all is the US Nonfarm Payroll data. This number is important enough that it can actually move markets around the world if it significantly over or under delivers.
Keep an eye on NFP and employment data. These are major market movers and stocks and indexes will respond to them right away.
3. Company Earnings Reports
Every company listed on a stock exchange has to release quarterly earnings so that investors can know how the company is performing and make investment decisions going forward.
Earnings reports are released quarterly and can have a huge impact on individual stock prices as well as indexes overall. ‘Earnings season’ as its known, can be a turbulent time for markets, and since market movement is the options traders greatest ally, it’s a great time for us to capitalize and profit.
Again, getting a good economic calendar will help you to remember when to place trades and what the market’s expectations are.
Look for companies which return higher than predicted profits for call options trades and companies which miss the mark for put trades.
Do not ignore earnings reports. They should be an essential part of an binary options trading strategy.
Trading the News – Summary
There are many other pieces of important economic news releases which could be traded on. In fact, it doesn’t only have to be economic news, and geopolitical events can also have significant impacts on world markets.
These three will get you started and provide plenty of opportunities. As you learn and grow and your options trading strategy evolves, you can look into what the other important news releases are.
Trading the news is a simple and extremely fun binary options strategy. It’s exhilarating and heart pounding to watch the markets jive and dance as our options profits swell, shrink and swell again!
Use this strategy to your full advantage but remember that nothing is ever guaranteed. You’re still always taking a risk, but as the old saying goes, there’s no reward without risking something!
Next we’ll take a look at another, more technical binary options trading strategy.