Trading the financial market takes time and effort and should not be dismissed as a endeavor in which individuals can quickly make money. In fact, most traders initially lose money before they come to the realization that trading markets is like any other business, and needs a solid plan for short and long term success.
Long term investment analysis is usually based on relative historical values in which an analyst believes that a financial asset is under or overvalued relative to some of the fundamental statistics that make up the value of the asset. For example, if a stock has a cash flow and earnings that are similar to a period when the stock had a higher value, but historical multiples are low because of recent financial events (such as the recent US financial crisis or the current European debt crisis), then a reasonable view might be that the stock could move higher when multiples climb.
Binary options, as a trading tool, are not specifically geared to trading a long term investment thesis. In the example above, the markets may stay depressed for years before the stock is able to reflect its true fundamentals. An investor who is looking to trade binary options, should try to focus on short term (or medium term) horizons in an effort to successfully trade the binary options market.
So what are the best ways to determine if a market will move in a specific direction over a short period of time. A traders can use short term fundamentals, in which a new piece of economic data is released, or an investor can analyze technical analysis, to determine future price action.
For this article, short term trading can be described as periods of times from a hour to a week. When looking at a calendar of economic events, a trader can look at specific events that are likely to move the market, and take advantage of these short term movements with binary options.
Another type of tool that a trader can use is specific types of technical analysis that have historically had success in predicting short term market movements. Traders can either back test historical price action or find research that leads them to believe that specific technical indicators are geared toward trading binary options.
Back testing historical data is the process of determining if specific market movements can predict future market movements. For binary options trading, and analyst would want to find a trigger that would lead to a binary option signal.
The alternative is to find research that reflects technical indicators that show historical success in creating a binary option signal. Many traders use break outs, which are specific types of support and resistance levels which have historically shown success in predicting future movements in the capital markets. There are also a number of mean reverting indicators that reach a point where the “rubber band has stretched to far” and the market reverts to its medium term mean.
The key for successful trading of binary options is to find a strategy that an investor is comfortable with that show success in trading the markets in the short term.