The topics that are discussed in the education section will mainly pertain to the contents of my trading journal. I mentioned in the about me section that I come from a stocks background, so I’ll talk a bit about equities (aka stocks). Whereas most of the trading journal consists of binary options and forex (foreign exchange). Among those 3 listed financial instruments/vehicles. Stocks and forex are the only two “real” instruments. Binary options is a part of the derivative markets. The “real” instruments here are the independent variables whereas derivative markets are the dependent variable.Changes in binary options or any options for that matter don’t affect the result of stocks or forex. Whereas stocks and forex affect how binary options outcomes. Hopefully that makes sense, if not, you can also disect the word “derivative” as in derived from, the options are derived from the stocks give you stock options. These stock options are broken down into several different categories but I’ll talk about two.
Options
Vanilla options are the regular options vs binary options which would be considered an “exotic”. Although I’ve read about options and how they work, I never really understood how they were traded. I never bothered spending the time either to fully learn it, mainly because learning options is learning a whole new instrument.The trading techniques that you use for charting etc can usually be used throughout the different instruments out there. But to actually trade it is different. For instance, options have something called a time value decay. Meaning as time goes on the value of the option goes down. For example, I thought that buying a $60 call option at a current stock price of $58 would benefit me when the stock reaches $60, but it does not. I never went into why or how this works. But do know this, not many people are good at trading even 1 single instrument let alone multi tasking multiple instruments successfully.
Onto binary options, these unlike vanilla options are really simple. You have a smaller timeframe expiry ranging from as little as 5 minutes out to a whole week (very few brokers offer this range of timeframes). The most popular timeframe offered by brokers are 1 hour in length. As with vanilla options, you have 2 choices either a call or a put option:
- You place a call option when you think the underlying instrument is going to go up in price.
- You place a put option when you think the underlying instrument is going to go down in price.
Depending on what the broker offers, you could be trading commodities, forex, stocks or indices. So for example, current price of Apple stock (AAPL) is at $349.75 and you’re betting at a 1 hr timeframe, you think it’s going to break resistance today due to news release or some kind of catalyst info to send it up; therefore, you place a call option. FYI: This is just a hypothetical example. So you place your trade at 10am, it expires at 11am. Your strike price is $349.75 (aka entry price), by 11am the price is $352.5. Since the expiry price > strike price, your call option wins and you get a predetermined (fixed) payout from the broker. In a nutshell, that’s basically how options work, binary options is fairly simple to grasp as a whole, the only thing you have to figure out is when to enter the trade, and to do that, you have to master the independent variable.
Forex
I focus on forex, I haven’t figured out how to trade stocks in the short run yet that’s why I don’t trade stock binary options. That’s why I mainly focus on forex, but even that only lasted a short while. My success was short-lived. For time being, I’ve been resorting to demo/paper trading to try and figure out how to trade forex properly. But having done that for a while now, it’s made me want to just trade forex as a whole and not even bother with binary options. For now, I only plan to trade FX-demo, once I get good, I’ll go to FX-live, then once that’s smooth sailing, I’ll figure out how to add binary options back into my arsenal.
Forex unlike equities which are based on individual companies. A currency’s strength or weakeness is based on the economy and how it compares to other economies. That’s how the FX pairs are made up, each currency is traded against another currency. For example USD/CAD is how much CAD it would cost to exchange for one USD. I won’t really go into why it is what it is, or even how it is. But basically, this is macro economics. The value of the currency relies on everything that’s happening in the world. Whenever there’s a world crisis, you’ll see major fluctuations in the USD or other major dollars. Some others are more stable, some more volatile, etc etc. The list goes on, the thing I’ll get into in the next couple sections is that, we as traders don’t influence the markets. We’re like surfers riding the wave, we can’t affect it. The big money controls how the markets flow, all the banks around the world, hedge funds etc. They control how the currency moves, that’s why when you positive news like unemployment went down, dollar still tanks, just means the people in control don’t like the news or don’t care.
I could go on and on about this, but this page is actually starting to turn into one big blog post instead of a page. So I’m going to stop, the focus of this blog is how to trade, if you want more details on the mechanism behind how trading works, I suggest you google it and find out.