Plan Your Trade – Trade Your Plan
There is a saying in trading financial markets: “plan your trade and trade your plan”.
It all should start over the weekend with having a look at the economic calendar to see what are the major economic events to be released on the week to come and what currencies should be influenced. After all, knowing what makes a currency pair moving from a fundamental point of view is vital for the success of any option.
Amount to be Invested
The next thing a trader should do is to decide the amount of money it wants to trade that week as it is not mandatory to trade all your portfolio at once. After all, trading goes like life goes, with its ups and downs, and this means some weeks are positive, some not, but what is important is to be here on the long rung and, of course to be profitable. But this comes only with discipline and money management, and these two points are the pillars of this educational series.
What to Trade?
After deciding the amount to be invested in any trading week, next thing to do is to divide it into the currency pairs intended to be traded, and then again into different small amounts for having multiple entries. It makes no sense to trade one option with all the money for a respective week as putting all your eggs in the same basket is not the best decision to make.
Finally, probably the most important step is the expiration date to be chosen. Avoid short term expiration dates with all costs and trade end of week and end of month expiration dates. After all, binary options trading is offering around 80% rate of return on investment so waiting for a couple of days/weeks should not be a problem for the disciplined trader.
A trading plan is key when deciding where to invest and what the expectations are.
Choosing the Right Underlying Asset
The first thing a trader must do is to decide what financial asset it wants to trade and if it is offered by the binary options broker. There are multiple asset classes and they are influenced by different factors.
Currency market is the most generous one as currency pairs represent the bread and butter for fast trading and this bodes very well with binary options trading as short term expiration dates are favored.
However, it doesn’t mean that medium to long term expiration dates should be ignored as staying on the bigger time frames should be safer on the long run.
Currency market in general is difficult to be traded as there are a lot of factors to influence the way a currency pair is moving, from political and geopolitical factors, to mergers and acquisitions market, and from interest rate decisions to simple supply and demand theory.
To give you an example of how a currency is influenced by deals in the mergers and acquisitions market, imagine for example that a company from the United States of America is planning to buy a company in Europe. For that to happen, it should pay for it in local currency, namely in Euro, and therefore the Euro will be on demand.
It doesn’t mean that the whole amount will be bought on the spot market, but it means that a consortium of banks will simply buy each and every dip in the Euro with the intention to average a price that was agreed before.
Stock market is a nice place to find companies that are suitable for binary trading but in doing that one should know what moves the stock market after all. Jobs data in the United States and the NFP in the United States are the benchmark for global stock market as what is happening in the US economy is hardly influencing the stock market.
Federal Reserve Mandate
The reason for that is the fact that the Federal Reserve in the United States has a dual mandate: to keep inflation below or close to two percent and to create jobs. These two elements are influencing interest rate decisions and there is a direct correlation between stock market trading and interest rates: if interest rates are on the rising path, they should drag on the stock market, while a lower interest rates environment is always suggesting stocks will move higher.
The arguments above are valid for trading indices as well, as they are very well represented in binary trading.
Last but not least, gold and oil are also popular and having a trading plan when entering those markets is key as well. Oil is hardly influenced by the OPEC meetings and the level of inventories in the United States so make sure you know when those inventories are being released by checking the economic calendar as well as when OPEC is meeting.