Using Forex Trading Analytical Methods in Binary Options Trading
Forex trading experience is advantageous to binary options traders
In both forex trading and binary options trading, traders can trade currencies; however, their trading rules are different from one another. The common part between the two is that a trader predicts the future price movements. Therefore, when a trader trades binary options, he can apply forex trading analytical methods.
Some investors think that market analysis is not important in binary options trading. However, this is not true. If a trader could conduct analysis and use strategies, he can increase the winning percentage in binary options trading.
There are some traders who lose in forex trading can actually make a profit in binary options trading. This is because that, unlike forex trading, the risk in binary options trading is pre-determined. In addition, the analytical methods that are used in forex trading can be very effective for binary options trading.
Using technical analysis to increase the winning percentage
In binary options trading, a trader makes a prediction on whether the price will go up or go down at the time of expiry. There is a 50% chance the trader can win the trade. Let’s assume a trader placed 10 trades. Even if the trader chooses “High” in all trades, he has the opportunity to win 5 trades.
However, this way of thinking is very much consonant with gambling and it is far from investing for which the purpose is to make money. Even though the trader can have 5 winning trades, he still loses another 5 trades. It is impossible for him to make a profit. Therefore, the most important thing is to understand the basics of price movements and make predictions based on analyses. If a trader knows how to analyze the price movements, it is possible for him to win more than 50% of trades and end up making a profit. In brief, it is important for traders to be able to seize the chance when they place trades.
So how can a trader predict whether the price is going to rise or fall? The charts can help traders to visualize the price movements. By reading the charts and making analyses, traders can forecast the market directions. This chart analysis is often called “technical analysis” in the world of investing.
Repeatable patterns in price movements
Before talking about the basics of technical analysis, I would like you to remember that price movements tend to repeat themselves. This is the fundamental of technical analysis. When you read the charts, you can notice the repeatable patterns in price movements.
This is because that price movement is a sign of the psychological process of investors. The exchange rates are determined by demand and supply. For example, when the EUR is high against USD, investors would want to buy US Dollar. There is a rise in demand for US Dollar which leads to an appreciation of US Dollar. Then, when USD is high against EUR, investors would want to buy euros, which will lead to a rise in demand for euro. Investors from all over the world buy and sell currencies and it forms the exchange rate movements. These movements can be visualized by charts.
The chart, in which past price movements are shown, is an effective tool to analyze future price movements. The price movements tend to repeat themselves. Therefore, by observing the patterns of past price movements, one can figure out future price movements. This is the basic idea of technical analysis.
How to read a candlestick chart?
A trader can conduct technical analysis by reading a candlestick chart. Candlestick charts are widely used by investors from all over the world. In a candlestick chart, open, close, high and low prices for a certain period of time (e.g. 1 day, 1 hour, 1 minute) are displayed on each candlestick.
There are two kinds of candlesticks: bullish and bearish. The candlestick is a bullish candlestick if the close is above the open, and it is a bearish candlestick if the open is above the close. Although there are various candlestick patterns, a candlestick chart is basically formed by these two kinds of candlesticks.
If you find it difficult to understand the candlestick, you can refer to the above figure. It is a candlestick which shows the price movements in one hour (between 15:00-16:00).
The advantages of using candlestick charts are that traders can notice the strength and weakness of the market, as well as the price movement patterns. Given all the information, it is possible for traders to predict future price movements. In the case of binary options trading, if a trader predicts whether the price will go up or down 10 minutes later, he can read 1-minute candlestick chart to forecast the price movements.