Analyzing News Events in Binary Options

News events are the major determinant of trade direction in the financial markets. The NADEX platform offers the opportunity to trade certain news items directly. If you study the article we published earlier on the contract specifications available on NADEX, you will see a list of news items that can be traded on NADEX.

However, the US Jobless Claims and the Non-Farm Payroll reports are the two major news events that command the most volume and greatest liquidity, and so these are the news releases worth trading.

These two news events are released by the US Bureau of Labor Statistics.

The unique nature of the news events is that they do not reflect any underlying markets. The Jobless Claims has as its underlying market the data record on those who are applying for US U.S. unemployment insurance for the first time. Simply put, these are those who are applying for jobless benefits, and the results are published on a weekly basis. The NFP has as its underlying market, the reported monthly change in the employment numbers in all sectors of the US economy except the agricultural sector.

Trading the binary options on these event data releases is a lot different from trading binary options on other assets. Here, technical analysis does not take precedence over fundamental analysis as is the case with other assets. There are frequent surprises and many times, the news release may produce a different outcome than is expected in the market.

Certain tools must therefore be employed in order to try to predict how these trades will turn out. Google Trends is one such predictive tool used for these news event binaries. The Google Index is an Internet job search indicator and so understanding what the index is saying when it comes to job searches can give the trader some advance notice on how the Jobless Claims and NFP numbers will turn out.

Here are some other resources that may be of help in looking up information that could be of predictive value:

• The Conference Board’s Index of Leading Economic Indicators
• Institute for Supply Management (ISM)
• Survey of Professional Forecasters
• Wall Street Journal Economic Forecast Survey
• The Gallup Poll
• Business Insider:  a site with and other industry news.

When trading these news events, certain questions must be asked and addressed by the trader. These are the standard questions news traders in any financial market must address when trading the news.

What is the Consensus on the Upcoming News Release?

Usually, several market analysts and economists are polled by Thomas Reuters and Bloomberg to give an opinion of what they think the news numbers would be. A look at a standard economic news calendar will show the column under which the consensus numbers are published. Considering that Thomas Reuters and Bloomberg are the two major news outlets for economic data releases, these polls are significant and provide a benchmark on which the actual news numbers are judged. The deviation of the actual numbers from the consensus will determine how tradable a news item is, and in what direction the trader should set the trade, if the news event is deemed to be tradable.

In addition, Gallup polls on new employment can be found on www.gallup.com.

Is There a Trending Pattern in the Data?

The Jobless Claims report will feature a section on the four-week moving average seasonally adjusted (SA) figures. This is key information to be considered.

The trader should look at the trend over 4 weeks and determine if the moving average of unemployment insurance claims is heading up, down, or sideways? It is also possible to use a trend line on the data to see whether there will be a break of trend lines or not. In addition, knowing the trend of the news release numbers over a few weeks will determine if it is better to use a trending strategy (in-the-money), a ranging strategy (at-the-money) or other strategy.

Traders must strive to get data that will be of predictive value for the data releases on jobless claims and NFP. One such piece of data for trading the NFP data release is the ADP National Employment Report, released 2 days earlier. The ADP National Employment Report is a measure of employment derived from an anonymous group of 500,000 U.S. business clients. The question here is whether the results of the ADP report are truly predictive of the Non-Farm Payroll report.

• If the most recent actual numbers for the Jobless Claims and NFP beat estimates, the trader should trade out-of-the-money strike prices on the next release. In this case, the consensus numbers should be used as the strike prices.
• If the recent actual numbers are below estimates (consensus), the strategy play is to go for in-the-money strike prices.
• If the employment data is very choppy or shows conflicting stats (e.g. NFP and Unemployment rate are going in different directions), find the strike prices that are above and below but closest to the result, and use a breakout strategy.
• If the jobless claims data breaks out of a trend line, use a trend-following strategy (in-the-money or deep-in-the-money) to follow the direction of the breakout.
• If the jobless claims data breaks uptrend, or is getting close to breaking it, consider an out-of-the-money sell position.

Putting Strategies and Tactics Together: Timing and Managing Trades

In addition to the news releases, the days of the week on which trades are done will constitute another factor that will impact trade outcomes. Certain strategies work better on certain days of the week. Here is how it all plays out:

1. Mondays: The Contrarian Move

   Mondays are the days of contrarian trades. The time distance from market open on Monday morning in Asia to market close in the US on Friday afternoon gives a lot of room for a lot to happen in the market. The initial opinions prevalent on Monday morning are the most likely to unwind because of a lack of current basis for events. Information used to trade on Monday is usually that of the previous week, which is lagging. Usually as the week moves on, things happen that can lead to better and more informed trade decisions. Contrarian trades tend to have high returns of up to 500%, and Mondays are the day to put these trades on.

2. Tuesdays: Initiating Trades

   For those who hate the contrarian style and prefer to act with more information, then Tuesday represents the day to start trading. By Tuesday more information about the week is available, providing for lesser risk. However, lesser risk will translate to lower returns on investment. Ask prices of $30 to $45 can still provide good returns for Tuesday trades.

3. Wednesdays: At-the-Money Day

   By Wednesday, bias for the week has been established. Price patterns have solidified, resistance and support areas have formed, emotions have cleared Monday morning trades have started to show some direction as to where they will end up. However, midweek in the market still holds uncertainty, so the strategy is to set at-the-money (ATM) trades.

4. Thursdays: Follow the Trend

   By Thursday, it would have become clear where the market will head to for the week, so it pays to follow the trend with deep-in-the-money trades. It would take some dramatic new to trigger a reversal of the trend. With 75 percent expected probability of success, the trend is much more reliable on Thursday. With only two days left to expiration, a binary option trade with a $75 Ask price represents a 25 percent return in two days. Not bad by any standard.

5. Fridays: Very-Deep-in-the-Money

   Initiating a trade on Friday is appropriate for loading up on a position. By Friday market opportunity has narrowed to very deep-in-the-money plays, with Ask prices as high as $85 to $90. This leaves only 0 to 15 percent returns up for grabs in a few hours, but also means that the trader has to risk 85 to 90 percent. Trading this strategy requires a high level of technical confirmation.

Conclusion

There is also the opportunity of setting up monthly trades, which news releases such as the non-farm payroll data will offer. A breakout strategy put on in the first week of every month to trade this data may be all you need to rake in some good returns for that month.