Fundamental traders look at the underlying drivers in markets in order to make long and short-term decisions on the direction of a financial market. This may sound like a fairly simple way to describe fundamentals, but what exactly are they and why are some events so connected to the markets? The truth is that they are far more influential than any other form of analysis and those who can analyse fundamentals correctly will benefit from taking binary options trades in the right direction.
The concept of ‘fundamental’ means the basis for basis, or underlying reason, for a financial market to behave as it does. Most fundamental data provide analysts with a very good idea of the longer-term market direction which does not only apply for traders looking to make as many pips as possible, but also to binary options traders simply looking for the market to move above or below a strike price. In order to understand how fundamentals can be used in binary options trading it is important to get a good grip on what these actually are.
Interest rates as a key fundamental indicator
Interest rates are set by central banks in order to control the supply of money in an economy by making it more or less attractive to borrow money. Low interest rates therefore often have a positive effect on stocks and house prices, but a negative effect on the value of a currency. This is because those looking to buy a house want the cheapest mortgage possible whilst those buying currency want the larges interest return on their investment. The opposite applies to high interest rates.
Interest rates therefore have a significant influence on the value of both stocks and currencies. For example, it can be assumed that the underlying trend of a currency with a falling interest rate will be that it falls against other higher-rate currencies. For binary options traders, this creates the opportunity for both long term trades in this direction, or short term binary options trades on news events which may affect future interest rates.
For news traders, the release of data related to the economy which may suggest that it is ‘overheating’, such as record house prices, high retail inflation rates or very low unemployment may suggest a future rise in interest rates to cool the economy. The immediate effect on many forex markets is often confusing given the large number of trades, but a downward trend in the affected currency following this news will usually provide a good opportunity for binary options traders to look for entries for short trades.
Fundamental events which can be traded intraday by binary options traders
There are a number of fundamental events aside from economic data which can be used profitably by binary options traders. This includes things such as global news, where threats to the stability of the Middle East and oil producing regions will almost certainly push oil prices higher as well as the US dollar and gold. National elections are also a very good opportunity for binary options traders to position themselves in the direction of the expected winner. As recently seen in the UK, the closer the election appears to be between right and left wing political parties, the increase likelihood that markets will become nervous until the result is announced.
Of course, trading the live news takes a large combination of luck and skill for both quick-thinking binary options trader. However, it is often not possible, or practical, to trade directly during the news event, or to take a position before the event is confirmed. Instead, these events should be seen as fundamental drivers of financial markets, allowing traders to trade in the direction of this following the event. They also act as a good warning to avoid investing in binary options against the trend, and allow corrections in the underlying momentum to be seen as opportunities for potential trades. Similar to a stock or currency rally, the fundamental sentiment of a market is a trader’s friend can be used successfully by binary options traders simply looking for the market to move fractionally higher or lower.