One of the ways that traders entering the binary options market can shorten the learning curve is by studying an analysis of trade examples. The trade analysis we shall be looking at today, is an example of a trade on a stock index.
Trading stock indices as binary options is not as complicated as most people think it is. It is a trade that can be concluded in a single trading day, as a stock index is open for just a few hours. Some indices are closely correlated with the movements of others, and time zone differences ensure that a trader who has the ability to predict market trends can make a correct decision on the direction of a stock index trade using the market events of the preceding hours. It is in this vein that we will analyse a trade that was done for the Nikkei 225 stock index on June 26, 2012.
The Nikkei 225 is the stock market index representing the 225 most capitalized Japanese companies. It is closely correlated with the US stock markets. The reason behind this is the close affinity that the Japanese economy has with the US economy. Japan is the largest trade partner of the United States, and the thirst for Japanese goods in the US has made this avenue of trade very important to Japan’s export-oriented economy. This is the same kind of correlation that makes the USDJPY the asset of choice when trading certain news data from the US such as the retail sales data and the US Non-Farm Payrolls report. As a result of this correlation, the Nikkei 225 closely mirrors the same moves made by the Dow Jones stock exchange. If there is a plethora or bad economic data that negatively affects the US markets, you can be sure that the same data will also affect the Nikkei 225 in the same direction.
With this in mind, we show you how we used this information to take a trade for the Nikkei 225 average on the Betonmarkets platform.
On June 25, some economic data came out very negative for world markets, mostly out of the Eurozone. This was the period when the Spanish banking system was revealed to be on very shaky grounds and this prompted a global stock market selloff. Due to the fact that the Asian markets close earlier than their European and American counterparts, the effects of this was not immediately felt on the Asian stock indices, including the Nikkei225. Following our discussion on the correlation between US markets and the Japanese market, the expectation for a sell-off in Japan was met on the following trading day, with the Nikkei 225 going down.
So what we did was to open a FALL contract for the Nikkei225 index asset, with the expiry set 1 day (i.e. to expire at the close of business for the Nikkei 225 stock exchange). The trade results are shown below.
It is not all the time that traders should set expiries to the end of the trading day when trading stock index assets. Sometimes, there is a need to trade just the first hour of the trading day in order to avoid bargain hunters who may drive prices in the final minutes of trading. Unfortunately, it is impossible to trade this way with Betonmarkets, but traders can use the OptionBuilder feature on the SpotOption trading platform to do this by setting the expiry to the first hour of trading.