One method that many binary options traders use to help them focus their efforts over the course of a day is to look at sector trends within the stock market. This can be a helpful “cheat sheet” so to speak on how to get started. For example, let’s say you aren’t sure where to start for the day, so you go and see which sectors have the most activity. You see that technology has been moving steadily downward for the day, so you decide to focus on tech companies like Apple and Alphabet. All you do is look at the sector, see that it’s down, then start taking out put options on the major companies within the sector. It’s an easy strategy, and there’s some good potential for profits if everything goes well.
However, this is not the smartest strategy to employ, simply because companies don’t need to move in lockstep with their sector. Yes, they often will, but it’s far more complicated than this. Look at Tuesday, August 16th’s market activity for a clear example of this. The sector as a whole dropped by 0.51 percent, which is a fairly substantial move. This implies that the trend was downward, but not in a major way. Market demeanor as a whole was slightly bearish on this trading day, and the tech sector moved slightly more aggressively in a negative manner than the market as a whole. The Dow Jones Industrial Average move downward by 0.34 percent on this same day.
Now, remember that some of the bigger tech companies, like Apple, are accounted for in the Dow. However, Apple actually boosted the Dow’s performance upward as they only moved down by 0.23 percent on the day. What’s more, Apple’s drop in price on the day was not a slow and steady one. Taking out a series of put options on Apple could have had disastrous results. Much of the losses that the company saw occurred between 10:30 AM and 2:00 PM New York time, and trading put options on Apple outside of that timeframe would have likely resulted in a loss. Even within that timeframe, there were periods were gains were realized. However, the company traded at such a tight range over the course of the day, despite leading the sector in dollars exchanged, Apple would have been a very bad binary options trade on Tuesday, either as a call or a put. Movement over the short term was far too unpredictable for the average trader to accurately foresee with an acceptable level of certainty.
The tech sector dropped over the day, but the stock within the sector that saw the largest amount of volume on a dollar basis saw less than half of the losses that the rest of the sector saw, skewing the overall data upward. If you blindly traded with the sector, or even blindly traded on the overall trend of the leading asset within the sector, you were far more likely to see a loss for the day than you were a gain. Sector information is important when looking at binary options, but it needs to be further analyzed before you do anything with that information.
Following sector trends is a dangerous signal for binary options traders only if they stop their analysis short at this point. Rather than using it as the sole guide for how to execute your trades, it should be a starting point. It should help you to find ideas, not to make decisions for you. When this starts happening, you are operating on incomplete information, and that will only lead to losses over the long term.