Markets of Binary Options: types and characteristics
Most binary options brokers make the following four basic market options available:
- currency market (Forex);
- equity market (e.g. Google, Yahoo);
- commodity market (e.g. gold, petroleum, copper, rice);
- stock market indices (e.g. WIG20, FTSE 100).
Currency market is the most popular market in binary options, but it is also the most commonly chosen financial market in the world. As the economists tend to say, it’s the circulatory system of the global economy. Forex average daily turnover in global foreign exchange markets is estimated at $3.98 trillion. It’s extremely hard to anticipate what is going to happen in a market that extensive, which explains the risk level connected with Forex investments.
When it comes to binary options, you do not buy or sell any currency. All you do as an investor is predict in the market’s direction in a currency pair (an asset). You can earn if the pair goes up and you lose if it goes down.
Currencies such as United States dollar, Japanese yen or Euro make currency pairs which are traded on a currency market.
The most popular currency pairs are:
Different brokers offer different varieties of currency pairs. You can check the availability of currency pairs either on the broker’s website or the platform.
Each pair is specific. While some currency pair prices change dynamically, others are slow to change, which is especially important when choosing the optimal strategy. The currency market is by and large speculative, so the currency price is not always established by way of actual, economic data (such as interest rate changes, natural disasters or political changes occurring in a given country). In fact, it’s mostly speculating on changes in the currency. The crucial pairs are usually made up of United States dollars.
When using fundamental analysis it’s important to follow the market’s news. Binary options brokers often allow special access to market information. Naturally, some are more important and more influential than others, but it also happens that some statements or declarations are incorrectly interpreted by the market, causing sudden price swings in both directions (up/down), for example some statements made by the European Central Bank (ECB) regarding the changes in interest rates. Therefore, some economic events, and especially their effects on fluctuations in the price of the currency pair, can be used in binary options trading.
What does it mean that a currency pair goes up or down?
When we have a currency pair, e.g. EUR/USD, and the euro is getting stronger against the dollar, then the currency pair goes up. If the opposite is true, it goes down. As the prices constantly change, the market price of the currency fluctuates as well. Such fluctuations are illustrated on charts, by means of which you can assess the trends, corrections and changes using technical analysis (using the analysis of the charts based on historical data to predict the future course of the price).
The currency market is open Monday to Friday, therefore using it in binary options trading is also available Monday to Friday. Bear in mind, however, that a broker may consider making some exceptions.
Shares are securities issued by companies like Google, Yahoo, or Microsoft. Upon their purchase we become owners of a share of the company’s assets. The shares have a certain value which is subject to constant changes (depending on the condition of the company). Consequently, they are ideal for binary options trading. Still, remember that binary options do not mean buying any assets, all we do is predict the prices and their direction.
Brokers usually offer trading on such globally known shares as: Google, Coca Cola, Intel, or Vodafone.
In contrast to the currency market, shares trading is available only in certain time intervals (when the market is open).
There are many factors influencing a share price, but fundamental analysis is what’s most important, meaning the data connected to the company’s activities. It’s helpful to follow the market and the company’s statements, as well as the opinions of people analysing them, so that we know how the share price will correlate with the data. For instance, when we find out that a company has just discovered new oil resources, we may predict that the share price will go up. But when a company that was supposed to find new oil resources is not successful, we may predict that the share price will go down. Similarly, when a newly launched Apple product is defective, we may predict a drop.
To rationally analyze companies issuing shares we need to calmly calculate the options instead of taking into account our feelings for a certain company. You should not “invest” in a company just because you like the product.
Commodities and raw materials market is where the main price-changing factor is the supply and demand. Raw materials, meaning noble metals (e.g. gold, silver, platinum), other metals (e.g. copper), or energy (petroleum, gas, or gasoline). Commodities mean, e.g. rice, cotton, corn or pork.
Most brokers offer petroleum, gold and silver trading, which is available Monday to Friday.
What is the correlation between the price of raw materials and supply/demand?
For example, if there’s demand for petroleum, but the production level remains the same, it’s not hard to predict that the price of petroleum goes up. When there’s an increase in supply and more petroleum is produced, but the demand is either the same or lower, the price of petroleum goes down. Let’s say that there’s finally an alternative to petroleum (e.g. electric cars) and it’s more and more ubiquitous. That would mean that both the demand and the price of petroleum go down. On the other hand, when there’s an economic boom in China and Chinese people can afford more, there’s an increase in demand for cars, especially luxury cars that need more fuel than the cheaper and smaller ones, influencing macroeconomy.
This market is dependent on many factors, so those interested in binary options trading need to follow the commodities and raw materials market to predict the prices. Materials such as gold or oil tend to fluctuate more than currencies, especially in face of war or elections, whereas commodities such as rice of coffee are greatly influenced by climate.
Stock market indices
Index means grouping certain components on the basis of a specific criterion. For example, the NASDAQ Composite is a stock market index of the common stocks and similar securities listed on the NASDAQ stock market. Binary options brokers offer the biggest and most popular: S&P, Dow Jones, FTSE, S&P 500 or Nikkei.
Similarly to the equity market, stock market indices are influenced by supply and demand which covers not just one company, but the entire group. Therefore, analyzing the fluctuations of share prices must be global and rather extensive.