Fundamental Analysis

When it comes to long term value investing, no strategy is as successful as using Fundamental analysis and indicators. Espoused by ace investors such as Warren Buffet and Charlie Munger, fundamental investing is the basis by which many companies make returns for their investors over an extended period of time. These factors are fundamental corporate metrics like PE ratios, Price/book, enterprise ratios etc. From a Macroeconomic standpoint, these include factors such as current interest rates, GBP growth and consumer confidence.

The important question is whether this analysis can help Binary Option traders make similar returns over shorter time frames. In fact, it seems as if industry norms seem to place a great deal more emphasis on technical analysis when it comes to trading Binary Options. In fact, most of the analysis that we have seen relates more to tools and analysis that is applicable only for technical analysis.

Although fundamental analysis is usually seen as a strategy for a longer-term trade, it can be used in order to profit from shorter term movements in asset prices. This is indeed possible, assuming that the investor chooses to trade economic and company news events. These are fundamental in the sense that they impact on the financial position of a company as well as the economic conditions of a country. The latter can be used in order to trade options on currency and the former on a company’s stock price.

Trading Binary Options with Fundamental Analysis

If you were going to trade options on forex pairs, you would take a look at important economic statistics that were being released. Economic data impacts on currency prices when it provides a shock that is contrary to the consensus. For example, in a recent trade we were monitoring the inflation levels out of Canada. There was a consensus view on at what level inflation would have come in. However, given our own research and forecasts, we were of the opinion that inflation would not be at the level that the market was expecting. We therefore knew that there would be considerable volatility after the release of the figures. We then entered a 24 hour option the day prior to the release hoping to profit when USDCAD reacted to the news.

We also used economic indicators out of China in order for us to determine how to trade the Australian dollar. This mainly comes down to the effect of the Chinese steel demand on Iron ore prices and hence the value of the AUDCAD. One could either enter a 24 hour call option on AUDUSD or a PUT option. Which one they decide will depend on their view of how which way the currency will react to the announcement. However, a trader could also enter a straddle trade and purchase both a CALL and a PUT option on the pair. This Binary option strategy could result in a profit irrespective of the direction of the pair. As long there is a volatile reaction, the trade will end in the money.

Company Fundamental Analysis

When using fundamental analysis to trade Forex, one usually focuses on Economic news and announcements. However, when looking at Stocks of individual companies, the company itself can be analyzed. Unfortunately, not many trading platforms offer company level analysis. However, other news services such as Google Finance offer this analysis. It is well known that companies that have a lower PE ration are cheaper relative to their earnings power. If you are convinced about the growth opportunities of the company, it may be advantageous to enter a binary option trade that is over the longer term. This would mean entering options with expiries ranging from 6 months to 1 year.

Assuming that you are a proponent of the efficient market theory, other investors and traders will eventually price in the discrepancy that you observe and buy the stock. For example, assuming that one was looking at technology companies, Apple seems to have a lower PE ratio than most of it’s peers. One could hold the view that iPhone 7 sales will be alot stronger than anticipated. In this case, you are taking the view that Apple is quite cheap given it’s current and expected earnings. Hence, one could place a 6-month CALL option on AAPL stock. In this case, Apple earning announcements on the sales results will fall within this timeframe.

Company Earnings Multiples

Binary Option Fundamental Analysis

Follow other Investors

There is also no harm in following cues from some of the world’s greatest investors. One of the “oracles” in the investing world is Warren Buffet. He has consistently used fundamental analysis to inform his investing decisions. Assuming that you had a view on a particular company and Warren Buffet was investing in the same company, then you would have more conviction in your trade. Carrying on with the example trade above, Warren Buffet recently increased his stake in Apple’s stock by 55%. We are usually able to see this because investment companies are required to disclose their investment holdings.

A Complete Trading Strategy

Most successful traders don’t rely on only one strategy in order to make their trading decisions. It usually requires a combination of both Fundamental and Technical indicators to take a view on the direction that the asset will go. Over the longer period, technical analysis may be less relevant but it does give an important indication of the short-term direction of the currency pair or stock. This will ensure that should you embark on a trade based on a fundamental viewpoint, you enter at the right level based on technical indicators.