Binary Options: Basics, Charting and Analyzing

So you want to be a trader, but don’t know where to start. You have also heard that you need to be a mini-Einstein to make money in this business. That’s OK, because this article is meant to clear the fog and give you some answers. Don’t worry, the part about Einstein is not true and you don’t even need an economics degree to succeed. Don’t believe me? Read this: I am not Smart – How can I Profit from Binary Options. What you do need instead is common sense and the ability to follow some basic rules.

 

 

How Does Binary Options Work – The Basic Principle

Just two words, guys: “Supply” and “Demand”. The meaning of these two words is the basic principle behind all trading. Think about this: the supply of Rolex watches is low because there’s only one company that manufactures them. But the supply of bread is high because there are lots of bread producers. Now let’s compare their prices: obviously a Rolex is much more expensive than bread. Can you see a pattern here? If supply is low, the price is high and if the supply is high, the price is low. On the same principle, if suddenly all the bread producers would magically disappear except one, the supply of bread would drop because one producer cannot cover the need of bread for the entire population. This would suddenly turn bread into an expensive product because everybody would still need bread, so demand is high, but the supply is very low.

 

To make it simpler, if somebody needs something, but the supply doesn’t cover all the need, the price is going up. On the other hand, if there is a large supply of a product, but not enough people want that product, its price will go down. This is the basic principle that drives the financial market and it can be applied to almost all assets that can be represented on a chart. And this takes us to the next section.

 

 

Charts – Can’t Trade Without Them

Charts are a graphic representation of an asset’s performance during a predefined period of time. There are lots of chart types and if you haven’t already, I recommend you read our article Binary Options Charts – Why, How, What. The most common is the Candlestick chart. For a more detailed explanation of candlesticks just click this article: Japanese Candlesticks – Trading naked. Basically a chart shows us the current price of an asset and also its past prices. Ok, you might say that we don’t need a chart to see that because it could just as well be represented by a number. That’s true, but the main advantage of a chart is that we can visually compare the current price with a previous one and we can perform analysis on it… hmm analysis… sounds familiar.

 

 

Analysis – Please, My Head Hurts Already

Remember Supply and Demand and how these can affect prices? Good. When the price is going up or down for an extended period of time, influenced by Supply and Demand, a trend is in place. You probably heard before that in trading, “the trend is your friend”. Well, it is, but sometimes it’s hard to recognize it and this makes me remember a guy that came up with one of the best and easiest way of identifying a trend: just ask a 4 year-old kid if the trend is going up or down. You need to take his advice with a pinch of salt, but what I am trying to say is that you have to keep things simple and don’t over analyze charts. If a chart is going up, why go against the flow of the market? It’s better to just go with the trend and choose Call. Over time, traders tried numerous complicated ways of identifying trends, but from my experience, the simple way is the best way. I’m not saying that you should go and bribe kids with candy to make them tell you what direction a chart is going, but instead use your common sense and follow the main direction of the market. To better learn how to identify trends, you could read this article: The Trend is your Friend” Strategy Review. Things can get a bit complicated in the second part of that article so you can just read the first part ;)

 

Binary Options are known for their simplicity but don’t let this fool you. The actual mechanics of trading binaries are simple because the platforms take all the complicated stuff out of the equation. You don’t have to calculate position sizes or Stop Losses like in Forex and once the trade is placed, basically all you have to do is wait for it to expire. That’s good, but if you want to get better at trading, you have to get better at predicting the direction of price. This can be done with the use of technical analysis and a big part of it is represented by technical indicators. These come in many forms – Relative Strength Index, Stochastic, Moving Averages, MACD to name just a few – but true strength comes when you combine various technical indicators to create Binary Options Strategies. Of course we have a wide variety of strategies for you to choose from, but first you must complete the School section, you cannot just jump in and trade a strategy without first mastering the basics.

 

 

Final Piece of the Puzzle

Now you have a basic understanding of the forces that influence market direction and you know that following the main direction will increase your chances of success, but it’s time to make a decision and dive into the market. What you have to understand is that your decision must be based on clear facts, not on gut feelings. Once you have identified a trend and you’ve checked economic or financial news that could affect that asset’s supply and demand, all you need to do is choose a direction based on your analysis, using price action and technical indicators. It’s not rocket science and it shouldn’t be treated as such, but all the pieces of the puzzle must fall into place. Then the fun begins, because making money with Binary options seems like fun to me.

 

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