The short duration associated with a binary option contract makes using and understanding intraday trading charts crucial to success. Here are several I look at (and one I have developed for personal use) that help me decide whether the market will go up, down, or sideways in the near future.
The VIX has a long history of being a good gauge of the current psychological state of sophisticated investors. We can say this because the level of this marker is a representation of the level of buy and sell insurance (call and put options) held in the stock market on the most representative index of large-cap stocks – the S&P 500.
A relatively high level on this gauge represents a more cautious investing public toward large equities, whereas a low-level indicates a more complacent populous. It is fairly well accepted that extremes (particularly on the high-side) of this marker represent likely inflexion / turning points in stock price direction. Any sensible equities-based strategy almost certainly takes into account the current VIX price.
Other Typical Trading Charts Used: 50DMA and 200DMA
Two of the other most common intraday trading charts used by active investors (binary options or otherwise) are the 50 and 200 day moving averages (DMA) – either of broad indexes as a whole, or for individual securities. Knowing the current price of a security relative to its 50 or 200 DMA can be an important clue as to whether that asset is reaching a cap or support level. Many books about charting have been written covering the various ways individuals and institutions use trend lines of support and resistance based on the moving averages – far too many written to cover here. Suffice to say it is important to know where those lines are because there are large volumes of trades that happen in the market based on those averages every day.
Understanding the Impact of Forex on Equities Markets
Non-US investors typically have had to be more sophisticated in their understanding of the impact of the relative strength of the dollar on their trading success. A non-US investor, for example, knows that the success of a trade on oil binary options depends not only the closing price of the contract, but also on how their home currency may have moved relative to the US dollar (on which oil contracts are priced). Some parts of a gain on the trade can be lost on the conversion of earnings back into the home currency. Mercifully movements of forex tend to be small enough so as the don’t wipe out binary options winning trades, but it does have some impact.
As markets and investors have grown more sophisticated, so to have technology and communications about price levels and information material to correctly establishing stock prices. This is one of the reasons I developed my own carry trade index to help me gauge the current bias of the best informed traders in the world (the forex traders).
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