intermediate concepts in binary options · aggressiveput tradesaregenerally placed by binary option...

Option Banque Training Series Vol. 1INTERMEDIATE CONCEPTSIN BINARY OPTIONSCapital Street BancClear Corporation Ltd | Suite 305, Gri�th Corporate Centre,Beachmont, KingsTown, Saint Vincent and The GrenadinesEmail: [email protected] | Web: www.optionbanque.com

TABLE OF CONTENTS

Technical Analysis……………………………………………………………………………….. 2

Calculating Support & Resistance Levels........…………………………… 2

Horizontal S/R………………………………………………………………………….....……… 2

Fibonacci S/R……………………………………………………………......…………………... 4

Simple Moving Average S/R…………………………………………………………… 6

Fundamental Analysis……………………………………………………….....…………... 7

Top 3 Fundamental Events You Need to Know in Binary

Option Trading…..........................................................................………….. 7

Interest Rate Decision .……………………………...............................…………... 6

Quantitative Easing......…..…………………………...............................…………... 8

Nonfarm Payrolls............…..…………………………...............................………….. 9

Capital Street BancClear Corporation Ltd | Suite 305, Gri�th Corporate Centre,Beachmont, KingsTown, Saint Vincent and The GrenadinesEmail: [email protected] | Web: www.optionbanque.com

1

BINARY OPTION TRADING–BOOKLET II

In order to become a successful binary option trader one must be able to con-

duct basic technical and fundamental analysis of the markets. Inthis booklet we

are going to discuss di�erent methods for calculating support & resistance

levels and cover some of the major fundamental events that a�ect financial

markets, in important ways.

TECHNICAL ANALYSISCalculating Support & Resistance LevelsSupport and resistance levels are believed to be the main pillars of technical

analysis generally and are equally relevant in binary options markets. Binary

option traders often buy call options when prices hit key support levels while

put trades are triggered when price of an asset retracts from key resistance

levels. Traders use a number of methods to calculate the support and resistance

areas, let’s briefly discuss a few reliable methods to calculate such levels.

Horizontal S/R

Horizontal support and resistance levels are the areas/regions that

reversed the price trend at some point in the past. For example, consider

the following USD/CHF daily chart; you can clearly observe that the price

repeatedly faced rejection around horizontal resistance areas marked with

the red lines. If the price approaches this resistance again in future, then

the area will again act as critical resistance level.


2

Aggressiveput tradesaregenerally placed by binary option tradersaround hori-

zontal resistance areas in the expectation of a bearish reversal(s) as happened

in the past. While an opposite reaction is seen by the traders around horizontal

support areas i.e. they enter call trades aggressively in the expectation of a

bullish reversal. It is to be noted that once horizontal support area/region is

breached and the price moves past it, the same area will then act as the critical

resistance level for the price as you can see in the above chart. The opposite

would be true if the price rises and penetrates through a horizontal resistance

area/region.


3

Fibonacci S/R

Fibonacci tools utilize special ratios that naturally occur in nature to help

predict points of support or resistance. The logic most often used by

Fibonacci based traders is that since Fibonacci numbers occur in nature

and the stock, futures, and currency markets are creations of nature -

humans. Therefore, the Fibonacci sequence should apply to the financial

markets. Arguably the most heavily used Fibonacci tool is the Fibonacci

Retracement.

In order to find these Fibonacci retracement levels:

Go to: Insert >>>>Fibonacci >>>> Retracementin your charting software.

Now you have to find the recent significant Swing Highs and Swings Lows.

Then, for downtrends, click on the Swing High and drag the cursor to the

most recent Swing Low. For uptrends, do the opposite. Click on the Swing

Low and drag the cursor to the most recent Swing High.


4

Identifying support and resistance levels with the help of Fibonacci

retracementsis perhaps one of the simpler and common strategies among

binary option traders. Consider the following CAD/JPY daily chart; you

can observe that price reversed the trend exactly from the 50% fib level.

Some major fib levels which may act as critical support or resistance levels

include 50%, 61.8%, 76.4%, 100%, 0%, 23.6%, 38.2% and 161.8%. In the above

CAD/JPY example, if the price had broken 50% fib level resistance, then

the same level would have acted as the critical support level. A very

reliable binary option trade setup emerges when a fib level is confirmed

by some reversal candle. Mostly traders use fib support and resistance

levels in conjunction withcandlestick pattern.


5

Simple Moving Average S/RA simple moving average is formed by computing the average price of a

security over a specific number of periods. Most moving averages are based on

closing prices. A 5-day simple moving average is the five day sum of closing

prices divided by five. As its name implies, a moving average is an average that

moves. Old data is dropped as new data becomes available. This causes the

average to move along the time scale.

Moving averages can be used to spot support and resistance levels. For

instance, consider the following USD/CHF chart; you can see that price reversed

the trend after hitting the 100 SMA. If the price is below Moving Average (MA),

then the MA acts as critical resistance level. Similarly, if the price is above MA,

then the MA acts as the critical support level.

If the price breaks Moving Average Resistance, then the same Moving Average

Resistance will act as the critical support level. The price action traders mainly

use 100 SMA, 200 SMA and 50 SMA to identify the potential support and

resistance levels. It is however preferred to use moving averages in conjunction

with other price action strategies such as candlestick pattern, fib levels or swing

analysis.


6

FUNDAMENTAL ANALYSISTop 3 Fundamental Events You Need to Know in Binary Option TradingA close eye on major economic releases and events is very crucial in binary

option trading because they a�ect the market perception of the economic

situation at any given point in time, and therefore the possible price direction

for various assets. Let’s briefly discuss three of the most important fundamental

events of the financial markets.

Interest Rate DecisionBenchmark Interest Rate decision by a central bank is one of the most crucial

events for financial markets. The currency of a country may plunge if the central

bank cuts or plans to cut its interest rate and vice versa.

For example, if the European Central Bank (ECB) reduces or indicates any plans

of reducing its benchmark interest rate then a huge downward trend may be

triggered in the exchange rate of Euro. Binary option traders keep a close eye

on monetary policy minutes and press conferences by the heads of central

banks for any indication about future interest rate decisions.

The Federal Reserve of the United States, ECB, the Bank of England (BoE), the

Reserve Bank of Australia (RBA), the Reserve Bank of New Zealand (RBNZ), the

Bank of Canada (BoC), the Swiss National Bank (SNB) etc are world’s most

powerful banks, their interest rate decisions cause major volatility in the financial

markets.

When a central bank cuts or increases rates, they are literally increasing or

decreasing the money in circulation respectively. Common wisdom saysthat rate

increases tend to strengthen a currency because the currency is higher yielding

now as to before and vice versa.


7

Quantitative EasingAsset Purchase Program, commonly known as Quantitative Easing or QE is

another major fundamental event for financial markets. QE is an e�ective

monetary policy tool for a central bank to deal with the consistently low

inflation or other crises such that cause dangerous drops in liquidity within the

financial system, or other events that, threaten to disrupt the global financial

system due to a lack of confidence in economic institutions and markets.The

primary purpose of such programmes is to introduce confidence through the

injection of money and liquidity into the financial system, and to avoid a

disruptive slowdown in economic activity that negatively a�ects standards of

living and stifles economic growth of nations.

The famous QE initiative by the Federal Reserve in 2008 worked well and took

the US economy out of recession. The European Central Bank (ECB) also took a

similar initiative recently and it plans to buy assets worth one trillion Euros by

the end of 2015 in a bid to bring the Eurozone out of low inflation and fragile

economic growth. A binary option trader must keep a close eye on the QE

decisions because the currency may experience major depreciation if the

central bank announces QE. Further, stock markets may react positively to such

programmes that encourage economic growth, while the prices of commodities

and bonds may move in varying directions, depending on the precise e�ect of

extra liquidity and money on that particular market. For example, precious

metals may rise as a hedge against the depreciation of paper money, while

industrial commodities may rise due to a rise in demand through the growth

inducing policies. The e�ects of such far reaching decisions should be studied in

combination with other prevailing market conditions, as the e�ects are often

di�erent for individual assets.


8

Nonfarm PayrollsThe nonfarm payroll is a monthly job report released by the US Bureau of Economic

Analysis on the first Friday of every month. The report indicates the number of jobs

added by corporations over a period of one month. Generally speaking, higher

nonfarm payrolls are considered positive for the US economy and vice versa. The

report plays key role in policy making, the Federal Open Market Committee (FOMC)

makes interest rate and other vital decisions on the basis of job market data.

Since the US economy is the largest in the world, a strong employment environment

in the US is considered a stable input into the global financial system, allowing for

greater generation of opportunities world-wide indirectly, through trade, investment

and innovation.

This was a brief introduction about top three fundamental events of the financial

markets.

Other major economic releases include

Gross Domestic Product (GDP)

Consumer Price Index (CPI)

Retail Sales

Manufacturing Purchasing Managers Index (PMI)

Reuters/Michigan Consumer Sentiment report

Services PMI

Housing Price Index

Foreign Direct Investment report

Imports, exports, trade deficit, fiscal deficit and other similar reports for e.g ZEW

economic sentiment indicator in the EU, or the Fed’s Beige Book.

A binary option trader must take into account, the recently released and upcoming

economic releases relevant to the trade intended, before placing any trade.


9

RISK DISCLOSURE: Options Banque does not accept any liability for loss or damage as a

result of reliance on the information contained within this website; this

includes education material, price quotes, charts, and analysis. Please be

aware of the risks associated with trading the financial markets; never

invest more money than you can risk losing.


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