Indices binary options are derivatives that allow traders to speculate on specific stock indices without owning the underlying asset, in this case, the distinct index.
In this tutorial, we will dive into the fundamentals, including the key aspects you need to remember, popular indices to trade binary options, the pros and cons, a step-by-step process with analysis on how to day trade indices binary option, how to pick the correct expiry time and investment amount to start, reliable brokers that support indices binary options, trading strategies applicable, as well as some of the most significant risks for this type of binary option that you need to be mindful of.
Key Facts You Must Remember About Trading Incides Binary Options
- Underlying Asset – You do not own the asset (the specific stock index in this case); you only track its price movement. The indices you can trade typically represent the largest stock markets worldwide.
- How it Works – You bet on the stock index price direction (whether it will go up or down) within a fixed timeframe. If you are right, you will gain the predetermined profit. Conversely, you will lose your total invested amount.
- Value Proposition – Indices binary options offer a simple way to gain exposure to a specific stock market without owning any stocks. Likewise, you can still benefit from the micro-trends that occur in a short amount of time.
- Limitation – While direct ownership of traditional stock indices allows you to use longer-term investment strategies (such as in-depth fundamental analysis), index binary options force you to bet on price direction within a much shorter fixed time frame (as short as a few seconds).
- Country-Specific Considerations – Since indices are the benchmark of different countries’ major stocks or equities, they are subject to their country of origin’s unique economic and geopolitical risks. Hence, you must pay close attention to these “home” events to make the most informed decision.
A Summary Of How You Can Start:
Step 1: Choose a Broker
Step 2: Conduct Market Analysis
Step 3: Decide on Your Position
Step 4: Select Expiry Time and Investment Amount
Step 5: Execute the Trade and Journal Your Results
How to Day Trade Indices with Binary Options: A Detailed 5-Step Process with Analysis
Suppose you are already acquainted with trading fundamentals such as a basic trade system, technical analysis, and risk management. Here’s a simple 5-step guide you can follow to start trading indices binary options:
Step 1: Choose a Broker
First, you must select a broker facilitating indices binary options trading. It is essential that you choose a reliable and well-known binary options broker to ensure your capital is protected. We recommend the following two brokers (including their background information):
- Welcomes International Clients
- Offers High Payouts: 90% – 97%+
- Professional-grade Platform
- Swift Deposit Process
- Enables Social Trading
- Provides Free Bonus Incentives
- Min. deposit $10
- $10,000 Demo
- Fast Execution
- High Profit up to 95%
- Fast Withdrawals
- Free Signals
- Welcomes International Clients
- Offers High Payouts: 90% – 97%+
- Professional-grade Platform
- Swift Deposit Process
- Enables Social Trading
- Provides Free Bonus Incentives
- Min. deposit $10
- $10,000 Demo
- Fast Execution
- High Profit up to 95%
- Fast Withdrawals
- Free Signals
1. Pocket Option
Background: Prominent among the binary options community for its website’s and mobile applications’ friendly user interface (UI) and a comprehensive range of assets and markets for trading, the platform is particularly favored among beginners in binary options trading.
Supported Indices: All ten indices in the list are supported
Trading Schedule: Available on both regular trading days and weekends through OTC
2. Quotex
Background: Another well-known platform in the binary options community (on top of offering a beginner-friendly setup) is highly regarded for its more advanced offerings, which consist of extensive analytical trading tools ideal for experienced and advanced traders.
Supported Indices: Similar to Pocket Option, all ten indices are supported
Trading Schedule: Available on both regular trading days and weekends through OTC
Step 2: Conduct Market Analysis
Besides the use of technical analysis, you can consider the following factors:
a. Country-Specific News and Events (Internal Factors): This covers the current and projected economic and geopolitical developments in the index’s home country.
b. Major Macroeconomic Developments (External Factors): Conversely, external major developments (e.g., those happening in other major indices) are also crucial to consider.
Step 3: Decide on Your Position
Based on your market analysis, you can now decide which direction you anticipate a specific index’s price. Consider the following:
Trend Analysis: Use specific technical analysis tools to pinpoint the stock market’s current and potential short-term trends.
General Market Sentiment: Survey the prevailing market sentiment towards that specific index, incorporating internal and external factors.
Our Tip For Binary Traders:
(Risk warning: Your capital can be at risk)
Step 4: Select Expiry Time and Investment Amount
Choosing the appropriate expiry time and position size is vital in aligning with your market prediction’s timing while managing your exposure.
Shorter Expiry Times (e.g., a few seconds to minutes) are best suited when anticipating an immediate price reaction to a specific event or development.
Longer Expiry Times (e.g., 1 hour and above) are better when you expect more “gradual” market shifts.
Investment Amount: Despite your confidence level in any given trade, it is crucial to manage your risked capital. A good starting rule is to risk at most 1-2 % of your total capital in any specific trade.
Step 5: Execute the Trade and Journal Your Results
a. Execution: Place your trade with the appropriate expiry time and investment amount.
Bullish Projection = Select Up or Call
Bearish Projection = Select Down or Put
Note: As always, ensure you accomplished your due diligence and factored in the latest available information.
b. Journal: After each trade, keep a detailed record of each trade, containing your analysis, the rationale of your decision, the outcome, and the lesson/s you discovered. This exemplary habit is crucial for improving your “trading edge” over time.
Popular Indices to Trade with Binary Options
The following are ten of the most available indices that you can trade binary options with:
1. AUS 200 – represents the top 200 companies listed on the Australian Securities Exchange by market capitalization.
2. AEX 25 – comprises 25 of Neatherland’s most highly traded securities on the Euronext Amsterdam (Amsterdam Stock Exchange).
3. SMI 20 – includes 20 of Switzerland’s largest and most liquid stocks.
4. JPN225 – represents the top 225 companies in the Tokyo Stock Exchange in Japan.
5. US100 – comprised of the 100 largest non-financial companies listed on the NASDAQ stock exchange in the US.
6. SP500 – composed of 500 of the largest companies listed on stock exchanges in the US.
7. DJI30 – includes 30 of the largest publicly-owned companies based in the US.
8. E50EUR – represents 50 of the largest companies across 11 Eurozone countries.
9. CAC 40 – comprises 40 of the biggest stocks among the 100 largest market caps on the Euronext Paris in France.
10. FTSE 100 – comprises the 100 most highly capitalized blue-chip companies listed on the London Stock Exchange in the UK.
- Relatively less volatile
- No short-selling restrictions
- Availability of major indices
- Simplified version of equities trading
- Trading flexibility
- Lower volatility
- Higher proficiency level requirement
- Uniqueness of each index
- Psychological pressure and stress
- Tendency for oversimplification
Strategies for Trading Indices Binary Options
1. Trend Following and Price Pattern Trading
Definition: This strategy relies on technical analysis to identify trends and unfold price patterns to take advantage of. Familiarity with chart patterns, price trends, volume, and relevant indicators is needed to fully capitalize on the extremely short-term nature of indices binary options.
Rationale: The main argument for this strategy is the advantage you gain by fully utilizing your “market understanding” represented by technical analysis. Since indices are relatively more stable than other asset classes, trends, and price patterns are more reliable.
2. Range Trading
Definition: Range trading pertains to taking advantage of a relatively predictable “bounce” on a given range’s support or resistance area. In contrast to the first strategy, range trading thrives in non-trending (consolidation phase) market conditions.
Rationale: The primary argument for this strategy is that indices are relatively less volatile, and many periods of “consolidation” (with clearly defined support and resistance areas) are often present in the chart.
3. Sentiment Trading
Definition: Sentiment refers to the general mood of market participants (investors and traders). At a given time, sentiment can be bullish, bearish, or indecisive. A bullish sentiment in indices occurs when optimism and demand in a particular stock market exceed the supply of available stocks, leading to an upward price trend.
In contrast, a bearish sentiment occurs during gloomy periods (e.g., lower earnings of blue chip stocks, lower economic growth, etc.) when market participants are more inclined to sell. Lastly, an indecisive sentiment happens when there is no clear trend (i.e., in range trading).
Rationale: Since sentiment is considered “King” in short time frames, trading according to what the market is leaning toward allows for a statistically higher probability that the price will tend to go where the prevailing view of the market is.
Key Risks of Trading Indices Binary Options
1) Psychological Risk – Since the timeframe of indices binary options trades is much shorter than the usual trades done in traditional stock markets, many traders, particularly beginners in binary options trading, might be drawn to take excessive risks or trade compulsively.
2. Internal Environment Risk – Traders are exposed to unique internal factors stemming from the index’s country of origin, such as their political and economic situation.
3. Macroeconomic and Geopolitical Risk – Traders are also exposed to external macroeconomic factors and geopolitical instability that happens on other countries, particularly those it has a significant correlation with.
4. Interest Rate Risk – Changes in interest rates (whether from the US, their own country, or the EU for those indices in Europe) can shift market sentiment. A rising interest rate often leads to lower stock prices (which translates to lower index value), while a reduction in interest rate tends to be viewed in a bullish manner.
5. Inflation Risk – A higher-than-normal inflation can compel central banks to increase their interest rates to fight inflation, leading to a potential shift in market sentiment.
Conclusion
Overall, indices binary options provide an alternative to traditionally “owning” equities.
Yet, since binary options are highly short-term, they present a unique set of advantages and disadvantages, as well as new use cases, and demand a different approach than traditional equities trading. Thus, a thorough and more deliberate learning process on what we covered in this article is vital.
Most Asked Questions:
What are indices binary options?
Indices binary options are derivatives that allow you to bet on the future direction of stock market indices, such as the S&P 500, within a fixed time frame without directly buying the underlying asset.
What strategies can I use for trading indices binary options?
Three of the most usual strategies used to trade indices binary options include trend following and price pattern trading, range trading, and sentiment trading strategies. You can practice these strategies on a demo account to see what suits your style the best.
Can I trade indices binary options on weekends?
Similar to other binary options, the availability to trade indices binary options on weekends primarily depends on the broker. Traditional equities markets are closed during off-market hours, including weekends, but brokers such as Pocket Option and Quotex offer off-market hours trading on more than ten different indices on their Over-the-Counter (OTC) platforms.
Are indices binary options suitable for beginners?
Yes, index binary options are relatively less volatile than other binary options types. In addition, binary options are more straightforward than asset classes. Nevertheless, if you are a beginner, we recommend starting with a demo account to better understand the index market dynamics before committing.
What are the benefits of trading indices binary options?
Some key advantages include capitalizing on rising and falling index prices and simplifying trading since you only need to predict the direction of price movement and not identify key price levels to set your specific cut loss and target price points.
