The new daily binary trading contest is one that is very intriguing, while it is not as exciting or as volatile as the forex market, it offers some great insight into how stocks are traded.
The main difference between the daily binary trading contest and the live trading of stocks is that we get the outcome of our Binary bets at the end of a trading session, while live stock trades can be held for several days.
Approaching the daily binary trading contest requires a full understanding of all the variables involved.
The first thing that is very apparent from the name of the contest, is that the daily binary bets have a live span of an entire trading session.
Each session represents a particular stock exchange market, and there are several stock exchanges around the world. This provides an abundance of trading opportunities, because as one market closes another one opens. Sometimes, we can have several exchanges open at the same time, and this occurrence usually leads to increased volatility in the markets.
In the daily binary trading contest, all the various stock exchange markets all over the world are represented.
With each exchange containing a list of selected companies.
An example is the Canadian stock exchange.
We can see the list of companies available for the daily binary trading contest as at the 10th of August 2015.
A key thing to remember is that this list is not constant. Unlike the forex market where the EURUSD is always available for trading, the list of companies listed in each exchange has the tendency to change. So because Yamana Gold Inc is available for the daily binary trading contest on the 10th of August, does not mean it was available on the 24th of July 2015.
The 24th of July had a list of companies totally different from the list we had on the 10th of August.
What this tells us in effect is that during the daily binary trading contest, we are not actually betting on the individual companies themselves, but rather we are betting on the exchange as a whole. So it is essential to understand the entire state of the exchanges, before we select companies to place our bets.
What is the state of an exchange?
When i mention the state of an exchange, I am actually referring to the market sentiment surrounding that stock exchange.
Investopedia defines Market Sentiment as "the feeling or tone of a market, or its crowd psychology, as revealed through the activity and price movement of the securities traded in that market."
So when when prices of stocks or securities are going up, we can effectively say the market sentiment is bullish, while falling prices would indicate a bearish market sentiment. This is what we want to identify in a stock exchange market, because by identifying the sentiment, we can know which bets (Calls or Puts) to place.
During the Greece crisis, within which Greece defaulted in its International Monetary Fund loan, and there were speculations of the country leaving the European Union; the market sentiment was very bearish. During that period, the Euronext market charts which had previously had a bullish market sentiment turned bearish.
The Euronext NV is a European stock exchange formed in 2000 by the merger of the Amsterdam exchanges (Brussels SE and Paris Bourse). It is also listed in the daily binary trading contest.
One of the best ways to determine the market sentiment of a particular stock exchange is to watch its stock market index.
Wikipedia describes a stock market index as "a measurement of the value of a section of the stock market". The data for the index is usually obtained from a selected group of stocks and does not give a full representation of the stock market, but it gives a strong impression of the general market sentiment.
To illustrate this strategy, I will use one of my favorite members of the Dukascopy community: Airmike. He is currently number in the Daily Binary trading contest.
Lets briefly do a quick analysis on some of his bets.
We can see that most of his bets were placed in the U.S stock exchange.
From the 3rd to the 6th of August, he placed PUT options on several U.S companies betting that their stock prices would drop. And he was successful and earned some profits from those bets.
What was the sentiment of the U.S stock exchange market at that time?
Below is a chart showing the S&P 500 index.
It is an American stock market index based on the market capitalization of 500 large companies, so as the stock prices of these companies go up, so does the index.
We can see from the above picture that from the 3rd to the 6th, the S&P 500 index was going down, indicating a bearish market sentiment. So it is no wonder that Airmike made profits from his bets.
Can it really be that simple?
Yes it is. By been able to gauge the market sentiment, we have an overall idea of what is happening to the stock prices in that particular exchange. So if the sentiment is bearish, we place PUT options, if the market sentiment is bullish and we expect prices to rally, we place CALL options.
Identifying the market sentiment is just the first step, we still have to settle the companies to bet on. For PUT options, I recommend betting on companies that are already in the red; this means companies whose stock prices are already dropping (follow the trend).
For CALL options, go with companies whose prices are already on the rise.
As traders, we can take some time to do more research on the individual companies, read the related news about the companies and get more information. All these coupled with our a good understanding of the general market sentiment would go a long way in ensuring successful bets in the daily binary trading contest.
I hope you all had a good read, and I gladly welcome comments and observations.