Indices are one of the popular asset categories which can be traded under binary options. As more and more beginners prefer trading with binary options because of the higher returns and easier accessibility, Index trading has also gained significant attention among these newbies. Stock Indexes are usually computed as a weighted average of the market prices of some chosen stocks. It is used by investors to determine whether a market is doing well or not and to determine the return on investment. The stocks are chosen depending on the market sector which the Index is used to track. For instance, if the index is designed to measure the performance of IT sector, the stocks of the market leaders in IT sector will be chosen for that particular Index.
Stock Indexes are asset derivatives based on the exchange where stocks are trades like Dow Jones, NYSE, and NASDAQ etc. Dow Jones Industrial Average is a popular stock index in US which reflects the investor sentiment and overall economic situation of the country. It was the first ever created Index and encompasses the stocks of top 30 corporations of the United States. Similarly the NASDAQ-100 is a weighted Index of the largest 100 technology and pharmaceutical companies listed in NASDAQ. Another popular market index of the United States is S&P 500 (abbreviated as Standard & Poor’s 500) which is based on the market cap of 500 largest publicly traded companies whose stocks are listed in either NASDAQ or NYSE. Similarly European and Asian markets have their own Indices that indicate the performance of stocks in respective regions. For example, N 225 Index which represents Nikkei 225 is a popular Index in Japan which is listed in Tokyo Stock exchange and comprises the stocks of top 225 companies in Asia. FTSE 100 is a popular Index of London Stock Exchange which is based on 100 of the top performing stocks in Europe. These market Indices are used to indicate the market situation and overall economy while acting as an asset in its own. They fluctuate constantly from their baseline value based on the market conditions and performance of their constituent stocks.
Index trading with binary options can be highly profitable since indexes fluctuate often based on the changes in stock prices. As a binary options trader, you should follow the market trends and read the economic news regularly to understand how the Indexes are likely to move based on which you can place your trades. It’s always good to trade based on Indexes with fewer components such as DAX 30 since the price movement of few stocks will have greater effect on the Index when compared to bigger Indexes like S&P 500 whose value depends on the movement of around 500 stocks.
Factors Impacting movement of Market Indices:
It is important for binary option traders to understand the various factors which influence the price movement of stocks and Indices so that can they determine whether to place a “Call” or “Put” option when placing their trades.
The various factors which influence the price movement of market indices include,
- Manufacturing and production data will directly impact the movement of stocks and Indices.
- Investor and consumer sentiment which is measured based on survey of how consumers are feeling about the overall economy. Positive consumer sentiments will result in more investments and boost the Index value.
- Important financial announcements like US jobs report, interest rate hikes etc.
- Gross Domestic product (GDP) figures will indicate the status of the economy which can have direct effect on market Indices.
- Unemployment data and release of US jobs report, Non-farm payrolls report etc.
- Housing and real-estate data can also impact stock prices which can indirectly cause the movement of Indices.
- Crude oil prices also impact various sectors of the economy and performance of certain stocks. Also fluctuation in currency prices and major commodities like Gold and Silver will also impact the trends followed by Indices.
- Credit rating upgrade or Downgrade – Whenever a credit rating agency issues an upgrade of stock rating, the indexes will rise up and similarly a downgrade in Indexes will cause a significant fall in Index value.
- Quarterly earnings reports of various companies whose stocks are part of the Index.
- Overall global economy and various geo-political factors can also determine the price movement of stocks.
Trading Tips for beginners:
As a binary options trader, you should understand the various pros and cons of trading Indices as an underlying asset. You should understand the factors which influence the movement of the index and components which build it. Always prefer trading an Index with fewer components since it is easier to predict the movement of smaller index with less contributing factors. You should know that not all financial news will have direct impact on the stock prices or Index. You should understand the market sentiment and how investors are reacting to such news. News such as quarterly earnings reports of the contributing stocks can give you some reasonable idea on how the Index is likely to move in future. You should keep track of the past movement of the Indices based on various financial events which can help you speculate the future direction of price movement. You can also make use of technical indicators like candle-stick charts, MACD, Relative Strength Index etc. to predict the movement of stock Indices and place your trades accordingly. You should follow effective trading strategies like hedging strategy, straddle strategy, risk-reversal strategy or Trend trading strategy in order to increase your chances of success with binary options index trading.
Steps to start Index trading with binary options:
The various steps you need to follow in order to start trading Indices using binary options are as below,
- Open a trading account with a reliable and trusted binary options broker. The broker should be regulated under a trading commission like SEC or CypSEC. Choose a broker who offers both Mobile and Online trading platform and who does not charge any hidden fees.
- Login to the trading tool and choose your preferred index. It’s always good to choose smaller indexes with fewer components as it’s easier to predict their movement.
- Now decide your trading strategy and betting amount to be placed on the trade. Never place a huge amount on any single trade since that can only lead to big losses. You should always start with very small amount and increase your investment gradually.
- Choose an Expiry time and Strike Price for the particular trade.
- Now choose either a “Put” or “Call” option based on whether you expect the Index to rise up or go down.