Learning to use the Economic calendar in binary options trading

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How To Make Money Trading Binary Options

Now that we have a basic idea on how binary option trades work, let’s take a look at a simple example.

Let’s say, you decide to trade EUR/USD with the assumption that price will rise.

You then look at your trading platform and see that the broker’s payout is 79% on a one hour option contract with a target strike of 1.3000.

After much deliberation, you finally decide to buy a “call” (or “up”) option and risk a $100.00 premium.

You could say it’s similar to going “long” on EUR/USD on the spot forex market.

Ending Scenarios After Entering a CALL Option Gain/Loss
Expiry price is above the strike price
(in-the-money)
$100.00 x 79% = $79
$100.00 + $79.00 = $179.00
You gain $179.00 on your account.
Expiry price is equal to or below the strike price
(out-of-the-money)
You lose your stake and your account declines by $100.00.

As you can see from the calculations above, the risk you take is limited to the premium paid on the option.

Payouts in Binary Options

Now that we’ve looked at the mechanics of a simple binary trade, we think it’s high time for you to learn how payouts are calculated.

More often than not, the payout will be determined by the size of your capital at risk per trade, whether you’re in- or out-of-the-money when the trade is closed, the type of option trade, and your broker’s commission rate.

In the example given above, you bet $100 that EUR/USD will close above 1.3000 after an hour with your broker offering a 79% payout rate. Let’s say that your analysis was spot on and your trade ends up being in-the-money. You would then get a payout of $179.

$100 (your initial investment) + $79 (79% of your initial capital) = $179

Easy peasy, right? Don’t get too excited just yet! You should know that there’s no one-size-fits-all formula for calculating payouts. There are a few other factors that affect them.

Factors in Payout Calculations

Each broker has its own payout rate. For starters, Forex Ninja’s intel shows that most brokers offer somewhere between 70% and 75% for the most basic option plays while there are those who offer as low at 65%.

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Various factors come into play when determining the percentage payout.

The underlying asset traded and the time to expiration are a couple of big components to the equation.

Next, the broker’s “commission” is also factored into the payout rate. After all, brokers are providing a service for you, the trader, to play out your ideas in the market so they should be compensated for it.

The commission rate does vary widely among brokers, but since there are so many binary options brokers out there (and more coming along), the rates should become increasingly competitive over time.

When a Binary Option Trade is Closed

As mentioned before, binary options are typically “all-or-nothing” trading instruments in that the payout or loss is only given at contract expiration, but there are a few brokers that allow you to close a binary option trade ahead of expiration.

This usually depends on the type of option, and usually it’s only available within a certain timeframe (e.g., available 5 minutes after an option trade opens, up until 5 minutes before an option expiration).

When trading with a binary option broker that allows early closure of an option trade, the value of the option tends to move along with the value of the underlying asset.

For example, with a “put” (or “down”) option play, the value of the option contract increases as the market moves below the target (strike) price.

This means that, depending on how far it has moved passed the strike, the closing value of the option may be more than the risk premium paid (but never greater than the agreed maximum payout).

Conversely, if the underlying market moved higher, further out-of-the-money, the value of the option contract decreases and the option buyer would be returned much less than the premium paid if he/she closed early.

Of course, in both cases, the broker commission is factored into the payout of an option trade when closed early.

So before you decide to jump head first into trading binary options, make sure you do your research and find out what your broker’s payout rates and conditions are!

HOW TO USE THE ECONOMIC CALENDAR IN BINARY OPTIONS TRADING

The decision to trade a financial product comes because of either technical or fundamental analysis. Or, both.
While technical analysis deals with interpreting chart patterns or technical indicators, fundamental analysis consists of trading based on interpreting the economic news.
For this, the economic calendar is key. Consulting it should be part of every trader’s ritual.

The thing is that the economic calendar is for free. Simply go on the Internet and search for it. The information is the same and the interpretation similar.

How to Interpret the Economic Calendar

A binary options trader uses the same information when buying a call or an option, like any other trader. It doesn’t matter if you trade equities, gold, oil, indexes…the economic news part of the economic calendar will move the overall markets.

As such, traders must know what to look for in the economic calendar and how to interpret it. It all starts with the red events.

Find the Central Banks Meetings

The economic calendar comes with a color code. This code splits the news into three categories: red stands for very important ones, market-moving news, orange for 2nd tier data, and yellow for 3rd tier news.

From the start, you can scratch the yellow news. Focus only on the red ones. These are the ones that will make prices travel.

When trading, everything is about the interest rate. Namely, what the central bank will do next time it meets to set the monetary policy. As such, the first piece of economic data you’ll have to mark in the economic calendar is the central banks meeting dates.

These meetings have different names in different countries. In Australia, the RBA (Reserve Bank of Australia) interest rate decision is called the Cash Rate, in Eurozone is the Minimum Bid Rate, in the United States is the FOMC (Federal Open Market Committee) Meeting and so on.

Central banks meet regularly to set the monetary policy for the period ahead. Some major central banks meet monthly (RBA, Bank of England), and others meet every six weeks (ECB – European Central Bank, Federal Reserve in the United States), or even quarterly (SNB – Swiss National Bank).

From a trader’s point of view, these dates are crucial. Any economic news or piece of economic data in between these dates, allow for traders to have an educated guess about what the central bank will do next.

Focus on the Red Events

After the main central bank’s meetings are identified, traders focus on the red events. These economic news show how an economy changed between two central banks meetings.

As such, traders use them to form an idea about the next move in the central bank’s interest rate decision,

The economic calendar gives the time when the news is released (this is very important because trading algorithms are responsible for the huge spikes right at the top or bottom of the hour), the currency it refers, and the interpretation: why the news matters, why the traders care, and so on.

Moreover, the previous data is known in advance, together with an estimation or a forecasted value for the current data. And then the interpretation is made between how the actual differs from the forecast.

Look at What Matters

For all traders, no matter the financial product traded, interpreting news is the same. For any economy, simply search for the red events that show the changes in inflation (CPI), jobs data (actual numbers and the unemployment rate), GDP (Gross Domestic Product – the total value of goods and services an economy produces), retail sales, and the PMI’s (Purchasing Managers Index).

Next, look at their evolution when compared with the previous central bank’s meeting. If the general tendency is bullish, the chances are that the central bank will have a hawkish tone at the next meeting. Hence, this is bullish for the currency, economy, and so on.

If not, look for the opposite.

Conclusion

There’s plenty of information that can be obtained from the economic calendar. Binary options traders must understand that the market, in general, is highly dependent on this news.

We live in a time when humans follow robots in trading, as algorithmic trading dictates price action. As such, we must look at the same things as robots do, and interpret them on their own.

It is the only way to set the proper expiration date for your binary options.

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In the EU, financial products are offered by Binary Investments (Europe) Ltd., W Business Centre, Level 3, Triq Dun Karm, Birkirkara, BKR 9033, Malta, licensed and regulated as a Category 3 Investment Services provider by the Malta Financial Services Authority (licence no. IS/70156).

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