Choosing Instruments to Trade
In the binary options market, the instruments traded cut across several asset classes, and there are different types of trade contracts. As such, the trader cannot simply trade any asset with any trade type. It is important to be able to match the right kind of technical analysis with the right kind of trade.
For instance, gold is a much more volatile asset than a currency like the USD/JPY. With at least four trade types to choose from, what kind of trade would favor the USD/JPY and what trade would favor gold?
The USD/JPY has been range bound for close to two years, ranging between $75.00 and $82.00. Gold has experienced wilder price swings, oscillating between $1,500 an ounce and above $1,800 an ounce. This equates to movements of close to $350 - $400 as opposed to a mere $8 on the USD/JPY. A trader who wishes to trade both instruments can certainly not do that using the same method of analysis. The USD/JPY would be more suited to a range trade, while gold may be better suited for the Up/Down or Touch option trades.
We give examples of trades involving these two assets for illustrative purposes on how technical analysis can be adapted to an instrument type.
This was a Touch trade set for Gold. A technical analysis was performed on the asset at a time the price was heading downwards. The entry spot price for the trade was at 1644.66, and the strike price was 1690. Eventually, the asset gained $80 and exceeded our price. This trade was taken with confidence because the analysis for the Touch trade showed that the price range of gold was capable of touching that strike.
In contrast, the ranging behavior of the USD/JPY does not provide for profitable opportunities for a touch trade. Any strike price set for a Touch trade on USD/JPY would be too close to the market price and this would make the trade more costly with a reduced profit. As a rule, the closer the strike price is to the market price, the costlier the bet would be priced by the broker, thus reducing the trader?s profit margin. Since the USD/JPY would not be suitable for a Touch trade, we decided to use another trade type, the simple High/Low trade:
The analysis of the chart for the USDJPY showed that the asset was expected to ride higher, and we were able to place a HIGH bet with confidence, believing that the trade would expire with the USDJPY still higher than a strike price we had chosen below the existing price support. The trade played out as had been predicted.
These two examples are not rules that are set in stone for the two assets. The point we are trying to make here is that the behavior of the asset in the market at the time of analysis would provide an insight into the sort of trade to be used for that asset in the binary options market. This in turn would determine the sort of technical analysis that would be performed for the asset at that time.
