The power of binary options trading is that anyone can trade. That is, even if you have no experience of the markets or have never traded before, you too can trade and profit. The reality, however, is that the more you know about the markets and the factors that influence the price movement of assets, the more effectively and accurately you can trade. A trader should also have a clear understanding of market pull or the knock on effect as this will also enhance trading accuracy. In simple terms, this refers to the influence that a movement in one asset can have on other assets. Let us explore this further.
Market Pull – Fundamental and Technical Market Analysis
The fact is the financial markets globally are driven by several factors and if you want to be a successful trader, you should not rely on ‘guess work’ when predicting the direction that the price of an asset will move. Instead, you should make informed decisions which are based on your analysis of the markets. When you take the time to review the markets, you will notice that there are hundreds, if not thousands, of factors which impact the market. To top it off, many of these factors are also inter-related which means that a change in one factor can cause changes in other factors. It is also important to note that not all factors can be predicted. Some events occur such as natural disasters and wars or terrorist attacks, which have a big impact on the markets but which cannot necessarily be predicted. Based on this, it is vital to find a reliable way to analyze the markets and this where fundamental and technical market analysis comes in.
Fundamental market analysis involves the interpretation of the economic climate as well as market data. The core focus in this form of analysis is on the financial well-being of the asset that you are analyzing. For example, if we want to assess how the shares of Google are going to perform in the future, we will look at the performance reports of the company as well as any pending announcements. In this way, we are able to establish how this will impact the future price movement of Google shares and then obviously its respective index which is the Nasdaq.
Technical market analysis differs in that it focuses on asset prices. That is, it takes into account the historical performance of an asset price and it uses statistics and mathematics to analyze the future price movements of these assets. The basis of technical market analysis is that history repeats itself which means that an asset price has a trend or a pattern and it keeps returning to these patterns over time. Due to external factors, price trends in an asset will change which will impact the supply and demand of the asset and this can impact the direction that the price of an asset moves. The demand-supply equilibrium is also analyzed in technical market analysis.
In Market Pull, our focus is on fundamental market analysis so let’s see how to apply this to our binary options trading.
Market Pull – Binary Options Trading
We know that a variety of factors impact market movements and also asset prices. Market pull tells us that no asset exists in isolation which means a change in one asset can cause a change in other assets. This is also known as the knock-on effect. So let us look at an example. It is a known fact that gold and the U.S. dollar trade inversely. This means that if the price of gold increases, this causes a decrease in the value of the U.S. Dollar. If a trader reads that recent economic news has pushed the value of the U.S. Dollar (USD) up, they can then make a Put option trade on gold based on the understanding that when the USD value increases, the price of gold usually declines.
This knock-on effect or market pull can also impact assets within the same asset class. Let’s say for example that Panasonic manufactures all the batteries required for electric cars produced by CarWhizz, a leading electric car manufacturer. We read in the news that Panasonic has decided to stop manufacturing the required batteries and that CarWhizz has not yet found a replacement manufacturing company. Based on this information, it is likely that the share price of CarWhizz will decline and so we can make a Put option trade on the VXmarkets trading interface for this company.
The bottom line is when an asset price in the market changes, this could cause a change in other asset prices so having a broad understanding of the financial markets and how each asset can impact another, is vital in order to trade accurately. Once you have grasped the knock-on effect or market pull, you will also be able to more easily predict the future price movement of assets based on the movements of other asset prices. This is the basis of successful trading.