News events are a major factor in determining market direction in any financial market, and binary options trading is no exception. To be able to trade the news effectively in binary options, you need to know how to trade and what to trade. You also need to identify which platform you will be using to trade, as trading the news on American-style binary options brokers is very different from doing same on European-style binary options brokers.
Trading the News on American-style Binary Options
If you are going to be trading the news on NADEX or Cantor Exchange, then you need to understand what trading the news is on these platforms. You can trade certain news items directly on these exchanges. The US Jobless Claims data and the Non-Farm Payroll report are the two major news events you can trade on NADEX or Cantor Exchange directly. Unlike most binary options assets, the news releases do not track any underlying markets. You just need to understand what the news is all about, what it traded and how to set the trades accordingly.
About the News Events
The Jobless Claims measures the change in the number of people in the U.S. who are applying for unemployment insurance (jobless benefits) for the first time. The data is published every week at. You will be presented with a consensus number, a previous number and when the data is released, an actual number. You need to know the following:
- The difference between the actual number and consensus number. Is the present figure worse or better than the previous week’s numbers?
- Is the difference between the actual and consensus numbers greater or less than the difference between the consensus and previous numbers? This is known as the deviation and it will determine the extent to which the USD will react to this news release.
- Keep in mind the present employment situation in the country as well, as it will determine how the markets react to the figures.
The NFP measures the change in the number of new jobs created in various sectors of the US economy except the agricultural sector. You will also be presented with a consensus number, previous number and when the news is released, the actual number. This news release creates volatility on the USD/JPY. The same questions you must answer as written above for the Jobless Claims report, must be answered by the trader before trading the NFP. It is released on the 1st Friday of the new month by 8.30am EST.
The following resources can be used to predict what the news release numbers will look like:
- Index of Leading Economic Indicators
- Survey of Professional Forecasters
- WSJ’s Economic Forecast Survey
Trade Strategy for News Releases
Certain trade strategies must be used when trading the news on American-style binary options. These are as follows:
- The Out of the Money (OTM) strategy is used to trade situations of surprise. So if the recent releases for the Jobless Claims and NFP show the actual numbers beating consensus estimates, an OTM strategy should be set on the Monday before news release, using the consensus number as strike price.
- If the trend shows that actual numbers are recently falling below consensus, an in-the-money (ITM) strategy is used, and this trade is setup on the day of the news release.
You may also trade the currency pairs associated with these news items. The USD/JPY is the preferred currency pair to trade the NFP, while the EUR/USD and USD/JPY are used to trade the Jobless Claims report. You can trade these currencies on the basis of BUY if the news releases beat estimates (better than expected), or SELL if the news releases disappoint.
Trading the News on European-style Binary Options
If you are trading the news on European-style options, used by platforms such as 24option or OptionFair, you have to be extremely careful. This is because if the number of orders on one side of the trade far outweighs those on the other side of the trade equation, there is every likelihood that trade on that asset will be frozen and it will be impossible to trade the news.
Therefore, the focus should be two-fold:
- Avoid trading on an asset directly and rather trade correlated assets
- Trade after the news has been released to profit from the longer term effect.
Here is how to deploy these trade strategies:
Correlated Asset Trading in Response to News
To illustrate this, we will cite the example of the Australian Dollar and Copper. Australia is the home of raw materials production and most of this goes to China where 40% of the world’s manufacturing takes place. So there is an integral link between Chinese manufacturing data (such as the PMI), Chinese GDP figures, the value of the Aussie Dollar, and Copper prices. A boost in Chinese manufacturing or Chinese growth will trigger a demand for commodities such as copper which are mined in large quantities in Australia, and will also boost the value of the Aussie Dollar.
So one news item I would follow would be the Chinese manufacturing data, or the Chinese GDP data. But rather than try to trade the pairing of the USD and the Chinese Yuan (wherever it may be found), it would be better to trade copper. Copper and the AUD/USD have a direct relationship to the Chinese data on manufacturing or growth, so they track it wherever it goes. By trading correlated assets, you avoid a scenario where every trader can almost guess the direction of an asset, push the order flows out of balance and force the brokers to freeze trades in that asset.
There are other correlated assets that could be traded. Try to look for the connections. For instance, what is the relationship between the Japanese Yen, the Nikkei 225 average and the Dow?
The snapshot above can give you a clue as to what the relationship is. You only need to read news about the recent surge of the USD against the Yen, and the gains made by the Nikkei 225 in that time frame to understand the relationship.
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