In this article we discuss a powerful trading strategy for binary options: trading the news. This is also called fundamental analysis. The strategy takes advantage of important developments in the news and their effects on prices. For binary options trading, the objective of fundamental analysis is to predict the direction in which a price will move after the release of important economic data. If you do this well, you can make a lot of money with this trading strategy.

Fundamental analysis of currencies

You can use fundamental analysis for many types of underlying assets. In this particular instance we focus on a short time frame (up to 30 minutes), and look at the effects of macroeconomic data on currency prices (forex). We obtain the numbers from the binary options economic calendar. All trading examples are real trades we made using the software from Anyoption.

In the economic calendar we search for announced news events with a high impact. That is, events for which a lot of volatility is expected as a result of the news.

For each economic event we look at 5 key indicators:

• Currency (2nd column): the primary currency that will be affected by the news event.
• Impact (3rd column): the expected volatility based on the news. We only trade on news events with a high impact (red factory icon or three bullsheads).
• Actual (3rd column from the right): the actual value of the economic indicator as reported in the news event.
• Forecast (2nd column from the right): the expected value of the reported economic indicator.
• Previous (rightmost column): the value of the economic indicator last time it was reported.

What we look for when making a trade is the difference between the actual and the forecast number. If the actual number is better than the forecast number, a rise of the currency price is expected. If the actual number is worse, a decline is expected.

One important thing is how much better or worse the actual number has to be to expect an effect. For that we use the previous indicator value. If the difference between the actual and the forecast number is bigger than the difference between the previous and the forecast number, then we expect a significant price movement. If the difference is smaller, the effect is too small to make a profitable trade.

Trading example with binary options on the US dollar

Here's an example using three news events affecting the US dollar:

The 'Core Retail Sales m/m' are an economic indicator that reflects how well the US economy is doing. If they go up, the value of the USD is likely to go up. If they go down, the USD also does worse. The CRS are expected to have declined by 0.4% in December (2nd column from the right). In November the same indicator had already declined by 0.9% (rightmost column). The difference between the previous and the forecast number is 0.5%.

Now, if the actual number is +0.1% or higher (0.5% better than expected), there is a good chance that the USD will go up. If the actual number is -0.9% or worse (0.5% worse than expected), the USD will likely lose value. So we wait for the actual number, and as soon as it appears at -0.9% we buy a binary option against the US dollar. That could be a call option on the EUR/USD, or a put option on the USD/JPY, for example. It turns out the actual number is -0.9%, so immediately after the data is released, we open a binary call option EUR/USD.

Next up are the 'Retail Sales m/m', which are similar to the Core Retail Sales. The last number was -0.9%, the forecast is -0.4%, and the difference between the two is 0.5%. The actual number turns out to be -0.8%. Since the difference between the forecast and the actual is only 0.4%, that's not enough to open a position.

Finally there are the 'US Unemployment Claims'. Here a higher number is worse for the economy. Last time the claims turned out to be 279k. The current expectation is 282k, and the difference is 3k. That means that if the actual number is higher than 285k (=282k+3k) it's a bad sign for the USD, and if it is lower than 279k (=282k-3k) it's a good sign. The actual number is 304k, so immediately after the data is released we buy a call option on the EUR/USD (remember, if we expect the USD to do worse, that automatically means the EUR/USD will do better, because it represents the euro pitted against the US dollar).

Putting the binary options trading strategy into practice

Let's say the US Unemployment Claims data is released at 14:30 exactly, and it is bad news for the US economy. Then we want to buy a binary call option on the EUR/USD as quickly as possible after getting the news. The quicker we act, the less time the market has had to react to the news, and the more we can profit from the price movement. Because with binary options you only have to predict the direction of the price movement, we don't need to be the very first to act. We just have to act before the movement is over.

So we open up the EUR/USD asset in the Anyoption trading software before the news is announced, ready to make a trade. We look for an option with expiry preferably between 5 and 30 minutes after the news event. Less than 5 minutes and the market may still be too volatile reacting to the news. More than 30 minutes and the normal price fluctuations may take over again. Below we see a perfect option with expiry at 15:00.

How much we want to trade depends on our appetite for risk and on the size of our trading capital. Generally you should not risk more than 5% of your trading capital in a single trade. (To learn why, read our article about risk management.) If we have $2,000 in our account, we can make a trade of $100, which will pay out $170 at expiry if we're right, and even if we're wrong we still get $15 of our investment back. To buy a call, press the UP button and the trade is executed. We can see the trade listed in our open trades now:

We opened the trade exactly at 14:30, immediately after the news release. Our strike price is 1.1342. If the EUR/USD is trading above that value at 15:00, we're in the money. All that's left now is to wait.

The Anyoption software allows you to actively monitor your open trades and see if you are in the money or not. But you can also just close your browser and go do something else. As opposed to other financial products, with binary options you do not have to worry about when to sell your position. The options expire automatically, and your return on investment is paid out into your account.

In this case, if we follow the EUR/USD for the next half hour, this is what we see:

In the first 5 minutes after the news, the currency fluctuates heavily, and dips below the strike price. Then we see the market react to the bad news for the US economy, and the euro starts to rise in value relative to the US dollar. At 15:00 the option expires, and the EUR/USD price at that moment is 1.1351. This value is above our strike price of 1.1342, so the trade ends up in the money.

$170 is automatically paid into our account, which means a profit of $70. Not bad for half an hour of work.

Conclusion

The news events on the economic calendar present a great opportunity for making profitable trades with binary options. Even beginners can successfully execute these trades, because no complex mathematical calculations are needed. The only drawback is that not every day has important news events. So sometimes you just have to wait. In a typical week there will be about 15 events that you can trade on. To make a long-term profit with this trading strategy, you need to end up in the money on 9 or more of them.

Remember to only look for news events with a high impact, to only make a trade when the difference between the actual and the expected value is large enough, and not to risk more than 5% of your capital on one trade. If you follow these principles and choose your trades well, you're on your way to becoming a successful binary options trader.