While fi nding the predominant sentiment for the markets is important for selecting the direction of trading in the coming week, basic fundamental economic forces also affect the movement of prices. These forces are often in the background and remain important to monitor. The objective of this chapter is to provide a basic understanding of the fundamental forces that a binary option trader should know and track.
Rather,price action is more chemical in nature, similar to what chemists refer to as a reaction-diffusion event, where an acid is dropped into a base and then the reaction follows a non-linear path. The globalization of the world economy promotes, of course, a gliding effect, where a change in growth, infl ation, or interest rates in one country, or market, triggers a reaction and glides or cascades across the world. The gliding medium is the World Wide Web.
A trigger event could be an earthquake, a sell-off in metals, a remark by a fi nance minister, or many other exogenous events. The fact is that there is no place to hide in the world economy. Once an event occurs, what is predictable is that there will be a reaction. The reaction may vary and some markets might be impacted more than others. After the reaction, the market digests the news and experiences a diffusion of its impact.
The Fundamental Forces:Let’s begin our tour of fundamental forces and relationships by reviewing the most global of all forces—China. We will then review the impact of commodity markets, gold, U.S. dollar, crude oil, and other forces that need to be understood to build skills in trading binary options.China and the Global Markets:There is no doubt that economic expectations on China’s growth are and will be key drivers in the global economy.
China is the world’s production hub. It imports resources and exports consumer products for the rest of the world. The binary option trader needs to monitor China economic news. If growth in China is strong, it will directly impact the entire world economy. But some underlying markets are more directly affected by China’s economic surprises than others. China imports key resources from Australia and therefore trading the AUD/USD, and the copper binaries should be considered fi rst when China economic data releases relate to these markets .
Global Growth and Commodity Markets:In reviewing global market conditions, the trader will notice that an overreaching theme is global growth and global slowdown. A good way to look at growth is to visualize it as a process of cause and effect. Global growth or expectations of growth generate infl ation, higher consumer prices, higher commodity prices, and increased interest rates. At some point the increased interest rates start slowing down the growth to damper infl ation.In a scenario of a global slowdown the key fundamental forces reverse.
Low GDP leads to lower demand for crude oil, lower commodity prices, and equity markets become less attractive. The big fear there is defl ation .Commodity Markets as a Global Fundamental Force There should be no doubt that commodity markets are a valuable leading indicator for binary option trading. A rise or fall in commodities should be used to select and shape binary option trades.
Depending on the size of a move, a drop or spike in commodities spills over into the equity markets. One of the most recent commodity market sell-offs during the week of May 2 provides some further insight into the relationship between commodity, equity markets, and market sentiment .Beyond the overall fundamental forces, the binary option trader should learn about specifi c correlations between different markets and instruments.There are swings in correlations for any two instruments and the trader needs to become aware of these swings.