Lesson 2. Can Economic Indicators Prove Useful In Binary Options Trading?
There are two basic ways to trade binary options. The first approach is to guess where the prices of various assets will move in the short run, and execute trades based on those guesses. This is essentially the same as flipping a coin. The difference is that the odds of winning are much lower.
The second approach is to do some homework. Here, you’re getting acquainted with the assets you intend to trade and conducting analysis on the markets they occupy. There are several ways to do the analysis. You can look at candlestick charts, watch for pivot points, and map out Fibonacci retracements to identify areas of support and resistance. You can also use economic indicators to give yourself an edge, a strategy we’ll discuss in more detail on this page.
Nearly every trader falls into one of these two camps. They either close their eyes and make a wish or run the numbers and take calculated risks. It shouldn’t come as a surprise that the latter group does much better over the long run.
Below, we’re going to focus exclusively on economic indicators and how to use them when placing trades. We’ve covered different methods of technical analysis elsewhere on this site, so there’s no need to rehash them here. If you want to get started trading binary options, we definitely recommend that you take the time to read through our tips and strategies section. Click here for that info
In this lesson, we will address the following questions:
- How Important Are Economic Indicators When Trading Binaries?
- The Durable Goods Report And Binary Options
- Trading Binary Options With The Retail Sales Report
1. How Important Are Economic Indicators When Trading Binaries?
One of the keys to making a profit trading binary options over the long run is to reduce your risk. Analyzing price charts and studying market trends will go a long way toward achieving that goal. The less you treat the binary options market like a roulette wheel and the more you consider the trades to be opportunities to leverage information, the better you’ll do.
That’s where economic indicators come in handy. These are numbers and statistics released by the government throughout the month. They represent the health of the economy, both in aggregate form and for specific segments. From the gross domestic product (GDP) and jobless claims report to the consumer price index (CPI) and durable goods report, they provide hints. They give you clues on the direction in which prices of select assets and markets are likely to move over the short run.
How important are these numbers? Consider that every time the government releases them, there’s a spike in market activity. The volume of trades on the various exchanges surges. That activity is stimulated by traders moving stocks, bonds, commodities, and currencies back and forth. The traders are reacting to the data found in the economic indicators.
Here’s the good news…
A long time ago, these numbers were only available to professional traders and economists. By the time a layperson got his hands on them, the data were old, and thus virtually useless for executing trades. Today, you can tap into these numbers from home shortly after they are released. You can get them as soon as the pros, who no longer have a first-mover advantage.
Of course, the “trick” is knowing how to interpret them to make profitable binary options trades. Let’s pull back the covers on a couple important economic reports and take a look at how to use them.
2. The Durable Goods Report And Binary Options
Durable goods are those that are used over a long period of time. They don’t wear out or spoil quickly. For example, cars are a durable good. Heavy machinery fits into this category, as well. Dishwashers, semiconductors, and even passenger airplanes are also considered durable goods.
The U.S. Census Bureau releases a durable goods report around the 20th of each month. It presents sales data from thousands of manufacturers that make such goods. The Census Bureau is nice enough to calculate the percentage changes from the previous report along with the changes from one year ago.
A rise in durable good sales signals to traders and investors that the demand for products in this segment of the economy is strong or gaining strength. This signal is often interpreted as confidence in the future. Confidence usually leads to increasing sales, which prompts traders and investors to bid up the prices of stocks and other assets.
As a binary options trader, you can use the data found in the durable goods report to take calculated risks on trades. The data can offer hints on the short-term movement of prices for the broad market indices, such as the S&P or DJIA, or for specific stocks and commodities.
Here’s a real-life example:
On March 27, 2013, the Associated Press reported that the latest durable good report saw a 5.7% rise in durable goods orders compared to the previous month. Traders responded to the report by pushing the S&P northward, close to its all-time high. One trader was quoted as saying, “Unless something major comes along to derail this rally, it just seems like the market is going to keep climbing higher.”
3. Trading Binary Options With The Retail Sales Report
Around the 13th of each month, the government – technically, the Census Bureau and Department of Commerce – releases a retail sales report. This report is watched as closely by traders and investors as the durable goods report. It just deals with a slightly different segment of the economy.
Retail sales are generated by consumer purchases. Think of the products and services you buy on a regular basis. They include pens, trash bags, toilet paper, and household cleaning supplies. They also include haircuts, dinners at restaurants, and tickets to see your favorite baseball team. The retail sales report captures these sales.
Interpreting the data in this report can be daunting to the beginning binary options trader. But if you learn to do it accurately, you can gain insight into the movements of market indices, specific stocks, and even commodities.
For example, suppose retail sales for the month spikes sharply compared to the previous month. At first glance, this seems to be a positive sign of economic strength. As such, you might be tempted to rush out and execute call binary options for the S&P and certain consumer-driven companies like Walmart.
But hold on a second. Let’s dig deeper.
The Federal Reserve might look at the major spike in sales, and see inflation looming on the horizon. In response, it might institute a hike in interest rates to head it off. A rise in interest rates is often bad for stocks in general since people tend to pull money out of the market and stick it into interest-bearing instruments, where it’s safer. Given that scenario, a better move might be to move cash into put binary options on gold. The price of gold tends to move in the opposite direction as interest rates.
There’s a lot more to say about the monthly retail sales report in the context of using it to place binary options trades. For now, realize that it’s an important piece of data and start getting acquainted with it. (You can grab a copy at http://www.census.gov/retail/)
Remember, trading binary options is risky. You can lose your money. That’s the reason you should leverage every tool at your disposal to make a profit. Doing so helps to stack the deck in your favor.
Can you make a consistent profit with binary options without even glancing at the government’s economic reports? Absolutely! Lots of traders do exactly that. But why not use every advantage available to you to minimize your risk and improve your odds?
That’s the mark of a successful binary options trader.