Since successful binary options trading is based on knowledge of the assets you trade, using an index as your underlying asset might seem to be more of a challenge. An index is, of course, made up of stocks of many different companies, 3,000 of them in the case of the NASDAQ Composite Index, and you can’t possibly know about all of them.
Trading index options is more about applying general principles than researching and analyzing each component of the index. Usually, if a market is moving up or down, that’s because all or most of the companies that comprise it are moving in that direction. It’s very rare that the shares will be moving in different directions, with a good proportion going up, others going down and a fair number staying relatively unchanged. If a market is heading down, that’s normally because most of its shares are going that way.
Sometimes, particular sectors within an overall market index may be moving in the opposite direction to the index generally. For example, the market may be rising but there may be problems affecting banks that cause falls in the financial sector. Similarly, the manufacturing sector may be on an upswing while the index overall may be suffering a downward trend.
In order to trade indices successfully, therefore, you don’t have to analyze all the individual companies that are included. However, from a technical analysis point of view, you can maintain price charts of the indices you want to trade so that you can identify price patterns that will give a guide to future movements. In terms of fundamental analysis, you should check all the news items, announcements and publication that are likely to have any effect on the value of your selected market index.
Factors influencing indices
Market indices are influenced by global events so a worldwide recession is likely to drive down the value of all markets while conditions of economic growth will cause markets to rise. Some countries may be able to buck the trend to some degree and so their national markets may perform better or worse than the global average. However, they are unlikely to be able to escape from the effects of the overall trend altogether.
As well as the global situation, indices are influenced by the general economic performance of their country. You should therefore keep an eye on GDP figures, employment statistics, balance of payments results and a whole range of reports and forecasts. People and organizations that influence the markets will be taking note of the same data and their actions will be in accordance with what they read and how they interpret it. Obtaining and understanding this information early will give you a chance of anticipating how the market are likely to move as a consequence of it, enabling you to make successful binary options trades.
Each individual market index may be made up of several sectors and each sector’s performance will depend on the industry or market that it represents. The relative size of the sector will determine its level of influence on the overall index and so you should obtain all relevant information in relation to the largest and most important sectors. You can generally ignore the smaller sectors but need to be aware of happenings in the others because significant events there can result in changes that determine the way the overall index moves.
Markets are often driven by sentiment and irrational fear, with bad news in particular causing price drops that may then recover quickly. Sometimes these movements can seem illogical and go against all analysis and research. This may sometimes be due to no more than human fallibility and trends are often slow to change when sentiment takes over. Anticipating market sentiment is challenging but, if achieved frequently, allows you to trade index options successfully and make profits from market swings. You need to not only follow the news but also understand its likely effect on market sentiment.
One of the best things about trading market indices is that their movements are well publicized. At times of large falls around the world, they make headline news. Even when spectacular movements aren’t occurring, there are plenty of financial websites that give up-to-date information about each index and how it has moved recently. There are also lots of analyst reports and forecasts to give you some insight.
When you want to trade an index, it’s a straightforward process. Simply:
- access your trading account
- choose to trade indices
- select the index you have been analyzing
- purchase a call option if you think the value will increase or a put option if it is due to go down
- enter the amount of your investment
- confirm the trade
- wait for the expiry time to see if your forecast is correct.
Continue to analyze all the indices you wish to trade so you always have the latest information. In this way, you will gain knowledge and experience and will always be ready to trade when the opportunity arises.