Previously in the article "The Importance of Analyzing Charts in Binary Options Trading" we discussed which type of charts are most practical to use when doing your research. In this article we are going to discuss the effects of volatility on prices and on your analysis of the markets.
What is Market Volatility?
Simply put Market Volatility is a term used to describe the markets or a single Asset whose price is extremely erratic; sharply rising one moment then dramatically dropping the next. Often times, it is hard to identify the Trend Line as the price of the Asset changes so rapidly.
Day Traders love volatile markets as they will buy when the price drops then wait a few minutes and sell when it dramatically swings higher. However, Binary Options traders need to be very cautious during times of a volatile market as these dramatic price swings could swing Out-of-the-Money at the very last second of the Trading Period.
Selecting the Right Asset
Selecting the right Asset during a volatile market is essential to a successful trade. Carefully study the Trend Lines of all of the available Assets and find an Asset that is not affected by the large price swings. The ideal Asset is one where the chart shows the Trend Lines are long and steady and not switching up and down every few minutes.
As of the time of this article Binary Option brokers offer a limited number of Assets for trading. Brokers are continuing to add more Assets each month as they develop their market profiles. As a result it may not be possible to find an Asset which hasn't been affected by the market volatility. If this should happen just sit back, do your research, and do not trade that day.
Ride Out the Storm
Often, traders refer to high volatility as a market storm. It is easy to see why people would feel this way as it is best for the arm chair investor to leave this type of market movement to the professional traders.
Many professional investors have told me that when the market starts to swing wildly and the volatility level rises dramatically trading is being accomplished by automated trading programs that are using preset values to make the instantaneous trades that are needed to keep up with the wildly swinging market prices.
Controlling High Volatility
Fortunately, most market authorities will start to slow down trading by restricting the number of trades allowed in a given time period and by slowing down the data streams of trading results. In rare cases market authorities have halted all trading in their respective trading house.
In most cases, the market authorities will halt trading on one or more Assets that appear to be driving the volatility instead of halting the whole trading house. Halting one or more individual Assets is the most preferred action since it has less of an effect on other global trading houses. When a whole trading house is halted it tends to start a ripple effect throughout the whole global economy.
Watch for the next article in the Binary Options Trading series, "Bollinger Bands and Moving Averages Used In Analysis". We will discuss how to use Bollinger Bands to analyze market volatility.