Fundamental analysis takes account of various factors of which financial and market news, predictions, announcements and company news are very important. Let us take a look at how these can actually affect the markets for binary options trading. Market news and financial news are mostly interrelated. Instead of complicating things for you, we will give you some examples and explain how to interpret those news and apply them in binary options market.
Cyber Crime News
This may appear to be nowhere related to financial market but think again because, there are deep relationships between them. For instance, we may hear something like, ‘China Ramps up Cyber Espionage against US, Steals High-Tech Weapon Designs’. When that happens, it is very likely that tensions between US and China will grow and as a result the two governments can actually take drastic steps like cutting of trade relations. There are many US electronics companies that have manufacturing units in China or import Chinese raw materials for the purpose of production just to cut down their manufacturing expenses. Once trade relations between the two countries are hampered, it is very likely that US companies will stop importing raw materials from China. When that happens, the costs of manufacturing for the US companies increases. This will drive down the profits of those companies. This will in turn reflect on their stocks and their stock prices will start falling. So, in binary options market, if you are trading in a stock of a US electronics company, your best bet will be to go for Put option because you will know that the prices will go down. The challenge however will be to identify those companies which will be affected by the decisions taken by the governments to block international trades between the two countries!
Iraqi Oil Fields News
Tomorrow morning when you pick up your newspaper, you may read news something like ‘4 Iraqi Oil Fields on Fire’. What do you deduce from the news? Yes, there can be an oil crisis in international markets and the price of oil per barrel will increase. So, in binary options market, it is ripe time for you to invest in oil and use a Call option because oil prices will move up. What can be the other possible effects? There are many! However, the immediate effect will be on those companies which use oil as a part of their manufacturing process. In other words, oil is their raw material. Their manufacturing expenses will increase and this will have a negative impact on their profits and hence, their stock prices will fall! So, you can actually go ahead and use Put option trades for stocks of those companies that will be directly affected by the fire in Iraqi oil fields.
You may come across the news which says – ‘Brazil’s Coffee Productions Fall in Q1’. What does that mean? It means that coffee productions in Brazil have fallen in quarter one of the year. For your information, Brazil is the world’s largest coffee producer with second position taken by Vietnam followed by Indonesia in third position. So, if Brazil’s coffee production falls, there will be a global crisis in coffee and pressure on next major producers will increase to meet the global demands. This will drive up the prices for coffee. Because coffee is a commodity traded in binary options market, you can safely deduce the conclusion that coffee prices will increase and hence, you can invest in coffee and use a Call option to make profits.
Government Policies and Financial News
Possibly you have heard about Ben Bernanke. He is the Chairman of Federal Reserve. A few months ago, he told in a senate hearing that Fed will continue with the stimulus policy. What does that mean? Explaining the stimulus policy or monetary policy is way out of the scope of this chapter but still we will put it in simple words. The idea is that Fed will continue to print dollar bills until the employment status of the country improves. How is that supposed to help? Ben assumes that when more money is given into the hands of people, they will try to spend more. This spending spree will lead to an increase in demands for products and services. This will force the manufacturers and service providers to increase their production levels. In order to do so, they will hire more people and increase their production capacities. Thus, there will be new jobs. Interesting, ain’t it? Unfortunately, this is not always true. When more dollar bills are printed, the dollar bubble increases. The supply of dollar increases and hence, its value decreases in the international market. This is exactly what happened. Dollar started trading low and reached an all-time low and fell by 0.6% compared to other currencies overnight. The Euro on the other hand gained value and so did some other major currencies. Thus, those traders in binary markets who traded in favor of Euro/USD made a profit. With Bernanke’s statement, Euro, which traded at the rate of 1 EUR = 1.3150 USD started trading at the rate of 1 EUR = 1.3208 USD. Those who purchased a Call option in favor of Euro gaining against USD actually won!
Company or Business News
While you actually look into international market news, it is also important that you look at individual company news for those companies that you prefer. Let us take the classic case of Apple. When Steve Jobs dies, there was a crisis and value of Apple shares fell. Investors were wary about the changes in leadership. The investor did not know how Apple would perform under its new leader. This is quite normal. These kind of isolated news originating within a company can actually affect the company’s overall market value. In terms of binary options trading, company news plays a crucial role in your trades. As it happened in case of Apple, with death of Steve Jobs in 2011, those who preferred trading in Apple stocks went for Put options and made profits. Those who went for Call options lost their trades.
Announcements & Predictions
What happens when tomorrow, the leading market analysts predict that in next 6 months, Google search engine will lose its #1 position to Bing search engine? You must have heard of Google and Bing. They are the top two search engines in World Wide Web. If Google loses it position, the profits of Google will go down and hence, it stock values. These types of predictions can also help you to speculate the direction in which the market will move.
Announcements on the other hand are also interesting. If a company announces say, 25% increase in profits in Q2 compared to Q1, people will generally trust the company and will want to invest more in the company’s stocks. This will drive up price of the stocks for that company and hence, using Call option for trading that stock in binary markets will lead to profitable trades.
By now, you must have gained a fair knowledge of how fundamental analysis works. If you have noticed, none of the above examples used ‘price’ for analyzing markets. Rather they were based on completely different approach of analyzing the markets. Because this chapter cannot cover everything in details, you have to do the fundamental analysis on your own. Also remember that some of the examples cited above were hypothetical (but possible) in nature and some were based on true events. You will actually be dealing with real events and news and your understanding of the event will actually determine how well you perform in binary options market.