For novice traders, it is of utmost importance to get a smooth start in this domain because with a strong start they will gain the confidence necessary to become a successful trader in future. Nowadays, a large percentage of neophyte investors along with some experienced ones tend to invest in binary options. Unlike other trading techniques, binary options come with some unique beneficial features such as:
- Significantly low transaction fees along with lightning fast returns of lucrative sums of money.
- The risk involved in this trading is lower in comparison with other trading procedures
- A simple and uncomplicated methodology
- Low investment range so that the trader doesn’t end up losing too much money.
- Shorter time span that allows the traders to conduct multiple trades within a day
- A vast range of available assets all around the world
- The liberty to trade form any place at any time.
Therefore, it is not remotely surprising that a large number of traders (both experienced and newcomers) will be interested in this form of trading. Despite so many benefits, a trader has to follow certain rules to be a successful binary options trader and that is where the trading strategies come into play. In this type of trading, mostly four types of strategies are used namely fundamental analysis, technical analysis, basic options, and co-integration. Among them, fundamental analysis is one of the most popular strategies as it minimises the risk of trading binary options to a significant extent.
In this article, a few aspects of fundamental analysis including the irrefutable advantages it offers to the traders will be discussed.
Definition and Working Mechanics of Fundamental Analysis:
Fundamental analysis (also known as News Trading) is a unique methodology that primarily examines the influence of other extrinsic factors on a particular asset. Through this method, a trader can thoroughly observe the impacts made by specific external factors on an asset and the way they change the price movement in future. Fundamental analysis follows certain market events on a global scale and provides a complete picture depending on economic events, interest rates, information releases, and various other factors.
The mechanics of this analysis largely depends on the extensive study of the underlying economic forces. Through this study, a trader can successfully foresee the future market developments and prices of different assets.
Tools of Fundamental Analysis:
This trading strategy comes with several efficient tools that traders use very often to predict the market price in future. Some of these tools are:
- Price to Earnings Ratio (P/E)
- Price to Sales Ratio (P/S)
- Price to Book Ratio (P/B)
- Dividend Payout Ratio
- Dividend Yield
- Book Value
- Return on Equity
- Earnings per Share (EPS)
Tips to Successfully Implement Fundamental Analysis:
For successful implementation of this trading technique, a trader must take the following matters into account:
- Current market events: As a binary options trader you need to have extensive knowledge about the current market events and other affairs happening all across the globe for fundamental analysis. For this purpose, it is better to focus on one asset at a time rather than immersing yourself in a large pool of data related to multiple assets.
- Various influences: The price of a particular asset varies according to numerous external influences such as major political events, market sentiments, natural events like calamitous disasters, and economic releases. As a trader, you need to take all these influences into account while doing fundamental analysis.
Benefits of Using Fundamental Analysis for Binary Options Trading:
This unique trading strategy comes with some irrefutable advantages for binary options traders. They are:
- Market drives: There are some trading signals and underlying economic forces that can only be properly analysed by fundamental analysis. In binary options trading, various companies provide a trading signal before spreading the actual information about the future price. With the help of fundamental analysis, the traders can successfully predict the future price that is about to hit the market beforehand and make necessary changes in their trading in advance. This sort of information is extremely important in binary options trading to minimise the risk of certain investments.
- Determining the true value of a company: As fundamental analysis takes all internal and external influences under consideration, it is the best method to determine the true value of a company. It also helps to distinguish between overvalued and undervalued options so that the trader’s investment does not go wrong.
- Making profit: Fundamental analysis can help an investor to make a huge amount of profit that is often termed as Abnormal Profit. In the domain of trading, abnormal profit refers to the inordinate amount of return for a certain investment. Fundamental analysis nullifies the probability of making mistakes in binary options trading and increases the amount of return significantly.
Although being familiar with the nuances of fundamental trading can be time-consuming, it is one of the safest and most efficient trading strategies for binary options trading. Therefore, choosing fundamental analysis and implementing it properly can be extremely effective for you.