Introductory Video – What are Binary Options


This quick introduction to Binary Options was produced by UK FSA regulated GFT in order to promote their (actually very good) Binary Options platform. But if you ignore all the details relating to the particulars of the GFT platform, what you get is a good little introductory video outlining the basics of what a Binary option is.  

Introductory Video – How does Spread Betting Work

Found this on Youtube today, and felt that that it might be beneficial to people who want to understand the difference between standard share trading and financial spread betting. While a introductory video Tim Bennett does a good job explaining the concept at hand. A must watch for anyone who wants a basic understanding of how a Spread bet works. 



What is a Binary Option?

Binary Options are becoming ever more popular with adverts for the product popping up all over the internet. Binary Options which once were considered exotic instruments have witnessed huge growth in the over the counter market in the last couple of years. A part of the reason is the simplicity of such a options contract as offered by the major market providers, with a fixed cost and fixed payoff if the contract is matured. 

A binary option is an option where the payoff is fixed at certain amount or there is no payout at all. So they can almost be seen as a kind of fixed odd bet. For example you could buy an binary option on Oil prices going up above $100 with it maturing at the end day, with a fixed pay off of say 60% (different providers price pay off differently, with some OTC providers providers using a percentage). So if the option you bought cost you $100 and Oil prices rose above $100 you would make $60 and get your original 100 dollars back. But if you lost and Oil Prices failed to rise above $100 before the maturity date of the contract you would lose the initial amount you paid to buy that option. That is pretty much how a standard binary option contract works. 

The simplicity of such a contract has led to many becoming very popular  OTC instrument. Numerous books have been provided to help those who are interested in trading binary options. There are various positives and negatives, to Binary Options which I hope to discuss at a later date. 

RAFMM is it really a regulatory authority?


The RAFMM which stands for the Russian Association of Financial Markets Members which describes itself as a noncommercial organization which was founded for the purpose of strengthening the basis of civilized interrelations between all domestic participants of the international financial markets, the trading volume increase of the Russian financial market segment, the rise of the deals’ profitability and safety, as well as every possible assistance to the development process of the international financial centre in Russia. For this goals achievement the RAFMM, as official partnership of the financial markets companies-participants, uses a voluntary certification and licensing of its participants, as mutually advantageous confidence and partnership system. 

Sounds good? Well once you cut through all the jargon, trust me it doesn’t sound quite as good.  Essentially the RAFMM is an organization set up by a number of trading sites and investment companies, in order to give their sites a certain air of legitimacy. While it  might be true that the organization is noncommercial, the organization is non governmental meaning that the sites that are part of the association receive no governmental regulatory oversight. Just look at the extremely small membership list with only four members being listed, two Forex trading sites and two investment companies. It is also unclear whether the Association is even based in Russia with the two Forex trading sites both based in tax havens.  
According to reports complaints made to the RAFMM about members are then simply referred back to the organization in question. This hardly represents a tough regulatory environment for these sites and organizations to operate in and essentially allows them to get away with whatever them deem fit. I would never personally put money into an account with one the members organizations of the RAFMM as it appears that the organization has simply been created for the benefits of it’s members. 
Not everyone who has had dealings with sites who are members of the RAFMM have had bad experiences, but there are many complaints surrounding the dealings of its members. It is my personal opinion that opening a real money account with one their member sites is taking a huge a risk one I personally wouldn’t dream of taking. 

Strategy Development for Trading System’s I – Introdcution

Technical or Fundamental 
When creating a new trading strategy their are two distinct approaches. The first and more popular when individuals develop strategies is Technical analysis which uses past indicators as a tool analyze previous and expected price movements. The other option is fundamental analysis which looks at the fundamentals behind a company or instrument to determine what will be the likely effect of future price changes.  The majority of Strategies use technical indicators though it is possible to use fundamental analysis.

Picking Your Indicators 
There is a wealth of different indicators that can be used when you decide to build a trading strategy, here we are going to run through some of the most common indicators used by those who build trading systems. 

  • ADX, is generally used to determine whether a particular instrument is trending or not. Quite often used in conjunction with Directional Movement which can make it possible to work out whether the instrument is trending up or down. 
  • Stochastic’s, a controversial indicator which many contend has no predictive power. Attempts to work out whether an instrument is overbought or oversold, doesn’t work well when prices are trending and suffers from not being able to determine the point at which the instrument is at the end of the period of being overbought or oversold. 
  • Moving Averages, there are various ways Moving Averages can be worked out with the most popular being exponential and simple Moving Averages being the most popular. 
  • ATR, a indicator used measure the volatility of price action. 
  • MACD, a very popular indicator can also be used as an independent trading strategy or can be used for analyzing divergence and convergence. 
  • Pivot Points, a popular indicator primarily used for instruments with high levels of liquidity such as forex or Indices.  

What do you want from a strategy? 
When you start developing a system for trading it should be in the forefront of your mind what exactly do you want the system to do. Things you might want to consider include how often you desire to have trading signal generated and the risk level that is acceptable to you. Choosing the correct time frame is particularly important, if your looking for constant action then strategy that produces signals often will be best for you but if you have other commitments you may want a daily indicator. Then there is the possibility of creating a fully automated system. These questions should be answered before you begin creating a system. 

Part II at Trading System’s Strategy Development II- Trade Entry 
Part III at Trading System’s Strategy Development III- Trade Exit

What is Pairs Trading?

Pairs trading sometimes also known as a hedge trade, involving going both long and short on two shares with in the same sector. The theoretical backdrop for this is if both shares are within the same sector they will both move in the same direction. But if one company is believed to be stronger you would expect this share perform better than the weaker company.

An example of a Pairs Trade would be taking a long position on Rich Oil Drilling, while taking a short on a similar but poorer performing Speculative Oil Drilling. Suppose both shares were trading at 100p at the time you placed your original order. If the sector performed well, an outcome might be that Rich Oil Drilling rises to 110p, making a 10 point profit. While your short side Speculative Oil Drilling made only 105p only making a 5 loss. Overall you will come out on top, even though you lost on one side of the trade.

The benefit is that you would expect a profit if the sector began to move against you as you would expect the better company to make less of a loss than the company you shorted. Pairs Trading allows you to hedge your risk often very effectively. But there are also potential pitfalls with such a strategy, to make a successful Pairs Trade you need to make sure that each the performance of each company is correlated with each other. You also need to establish which represents the strongest company out of the pair which is a task that is much more difficult than it might sound at first. 

Pairs trading can also been undertaken in a different way, a pairs trade can be undertaken on companies from different sectors for example one from a cyclical sector and another stock from a sector that is safe from cyclical concerns. An example of such a pairs trade might be pairing a utility with a retail sector stock.

Documentary Film: Floored

Floored is a fantastic documentary about the slow death of open outcry trading. The documentary looks at both the dying open outcry system and the rise of algorithmic trading and computer trading. Many successful floor traders have been unable to cross over to the brave new world. A worthwhile watch for anyone interested trading. Thankfully the film is available to watch for free online at Babelgum but is divided up into small 10 minute episodes. Watch the trailer and the first episode here:

Hope you enjoy the film.

The Argument for Sentiment Based Approach to Trading: Media Sentiment Indicators

Those who have read the first two posts of The Argument for Sentiment Based Approach will have seen that those who argue for such an approach say that you must make the most of herd mentality. The next step is how to determine what the overriding market sentiment will be. This is where the task becomes trickier for those who advocate taking a sentiment based approach to trading. In Today’s post we are going to look at some of the suggested methods, those who endorse a sentiment based approach to trading adopt.

At first glance it may seem hard to understand how it’s possible to determine the sentiment of a market place without being right in the center of the action say on the trading floor or based within a trading firm. While being down in the action on the trading floor certainly would give you a good sense of the market sentiment there are also other ways to determine market sentiment. But mass media can give an indication into what the overriding sentiment in the market it is.

Magazine Covers 

It is frequently argued that Magazine covers are one of the best indicators of mass psychology. It is argued that a major financial magazine would not devote its front cover to a particular story if that story was either not extremely important or was of particular interest to it’s reader. These covers therefore are meant to express examples of extreme sentiment. Studies haves been down suggesting that often a contrarian approach should be taken towards Magazine covers that take a directional stance on market. A particular famous example of such a contrarian magazine cover was Business Weeks 1979 cover proclaiming The Death of Equities. Which came at a point when stocks were near there cheapest since the Second World War, the cover was followed with one of the strongest Bull markets in the 20th Century. A study of this phenomenon was undertaken in 2007 by a group of Professors at the University of Richmond, Virginia. The study concluded that “positive feature stories headlined on business magazine covers follow extremely positive company performance and negative headlines follow extremely negative performance. In both cases, however, the appearance on a cover of Business Week, Fortune, or Forbes tends to signal the end of the extreme performance.”

Using News Headlines 
Again some have argued that some News Headlines particularly those talking about performance in the previous day trading provide a great opportunity in the same way as Magazine covers. If a news headline talks about a companies poor performance in the day before the information that caused the significant downward movement has already been priced in before the headline has been published. Other types of news headlines such as breaking news will often not effect the market in the same way, with the market pricing in the breaking news.

Basic Economics for Spread Bettors: US Non-Farm Payrolls

As a spread bettor or CFD trader you will want to monitor changes in US Non-Farm Payrolls for the same reasons as you would want to monitor changes in Jobless Claims figures. The level of employment in an economy and the level of pay has a direct effect on the likely amount of consumer spending. Consumer spending is a key economic signal and plays a vital role in determining the state of the economy. 

The US Non-Farm Payrolls report indicates what the basic hourly wage is for major industries. It also shows who is unemployed, who are working, the hourly pay of the worker and how many hours a week they are working. US Non-Farm Payrolls figures keep the markets anxious and on their toes both sides of the Atlantic Ocean.

The report also is of interest to those who want to predicate or anticipate any change in interest rates. Vital if your interest lies in Forex markets. Lower levels of unemployment and increasing wages is an indicator that wage inflation is present in the economy. One of the remits of the Federal Reserve is to control inflation and signs of inflation may be responded with a rise interest rates. Conversely falling levels of employment and decreasing wages suggest the economy is struggling and the Fed may decide to lower interest rates in order to stimulate growth. Interest rates are both important to stock and currency prices, this is why the US Non-Farm Pay rolls figures are  another important indicator to monitor. As UK or European spread bettor it is important to monitor US indicators due to how interlinked economies are now due to globalization and due to the simple fact the US economy is the largest in the world. 

Part of the Beginners Guide to Strategy and Analysis for Spread Betting

The Argument for Sentiment Based Approach to Trading: What’s Wrong With Fundamental Analysis

Two forms of analysis dominate the market place as you may very well know; Technical and Fundamental Analysis. Those in favor of a sentiment based approach to trading believe that fundamental analysis is fundamentally flawed. But rather state that it is emotions or sentiment that lead the markets.

Some of those that have promoted the sentiment based approach point to the fact that 90% of Forex trades involve the US dollar, so you would suppose that it would be possible to work out a clear correlation between US economic indicators and the value of the US dollar against other currencies. But it appears that no such link exists, if such a link did exist we could correctly assert that are decisions were led by rational thought rather than emotion. In my opinion the US dollar is not just effected by US economic indicators but it is also effected by US indicators relative to the indicators in other countries. Though it is clear that sentiment does play a role in the movements of currencies.

Those in favor of sentiment based trading have used scientific evidence to back there claims. Claiming that is evidence shows that the rational parts of are brain overridden by our emotional urges and that this can be clearly explained by evolutionary biology quoting works in the field.

”As a primitive tool of survival, emotional impulses from the limbic system
impel a desire among individuals to seek signals from others in matters of
knowledge and behavior and therefore to align their feelings and convictions
with those of the group.”1 
The claim lies that even if we do understand what the economic indicators seem to suggest, we are led by our brains to follow the lead of the market place. As we naturally follow the herd and align are convictions with the rest of the group (the group being the trend in the market place).  
Through analysis of historic data many who argue for adopting a sentiment based approach to trading have shown what would normally be considered key indicators of how an financial instrument may move do not have the kind correlation you would expect. If decisions were made on a truly rational basis. It is often the case that there is no consistent correlation between one economic indicator and currency prices, it would seem that those arguing for a sentiment based approach are onto something. But it is important to remember not to be blind to such indicators as sometimes these news about these indicators will move the market much in the way expected. Understanding and using sentiment can be one of the tools in your trading arsenal and in further posts we will explain some of the things those in favor sentiment based trading suggest you look for.
1.R. R. Prechter, Jr., The Wave Principle of Human Social Behavior
(Gainesville, GA: New Classics Library, 1999), 152