Are you having trouble predicting market movements? The opening price can provide you with a quick and secure indication of market sentiment that will help you make money with binary options. But how do you make money trading the opening price?
As with anything in life, fundamentals are the most essential part of your technical analysis that will allow you to become successful. Still, many traders overlook fundamentals and start learning about technical indicators and price formations before they have mastered the fundamentals.
One of the fundamental elements many traders overlook is the opening price (or short: open) of each day. While the opening price seems trivial to many, it can provide you with a number of valuable information that can benefit your trading.
Any trader should learn to master interpreting the opening price before he learns advanced techniques such as trading candlestick formations near Bollinger Bands. Anything else is like trying to learn how to write a novel before learning how to read and write: It is destined to fail.
What does trading the opening price really mean?
The opening price is the first price of a new trading day. For stock markets, there is a new opening price every day when the stock market opens. Currencies and commodities are traded continually throughout the week, which is why they do not generate an opening price with every day, but with every new week. Opening prices are especially visible on daily charts (for stocks) and weekly chart (for currencies and commodities).
In theory, the opening price should be the price of the first trade of the day. Since determining a relatively important statistical number many traders use for their decision making on one single trade can greatly distort the market, most statistical providers now use an average of the first five trades to determine the opening price.
Opening prices are interesting for binary options traders, because they allow some insight into the market sentiment that was created since the market closed. Sometimes, a strong opening price with a gap indicates an expectation that will keep pushing the market for this and the next days.
Knowing this can greatly benefit your binary options trading. When you already know the dominating market direction, you only need to find the right opportunity to enter the market, and you can win your trade, whilst trading the opening price.
Sometimes, however, a strong or weak opening can be due to big investors buying or selling an asset. Mutual funds, for example, have a predefined amount of assets they own. When traders buy or sell the mutual fund, the fund’s manager has to buy or sell the fund’s assets accordingly. A larger number of these orders over night can create a significant opening gap in either direction.
How to trade the open with binary options
To use the open and in trading the opening price, you have to understand what a significant opening gap means for the asset in front of you. Is it merely a coincidence or a real indication of market sentiment? The only way to find this out is to study the assets past. Did an opening gap indicate a strong movement in the direction of the gap, or did the gap close quickly?
Depending on the answer to this question, you know whether you should trade the opening gap in the direction of the gap, for example with a High / Low option, or if you should use the gap strategy to speculate on a closing of the gap. Either way, the opening gap will provide you with a trading opportunity.
As a general rule of thumb you can remember that opening gaps tend to indicate market sentiment more reliable with big assets. With a stock like Microsoft or Google, many traders will place orders over night, which makes the orders placed by big investors like mutual funds less influential, and a true indication of market sentiment more likely.
With smaller stocks, on the other hand, there are fewer orders. Banks and mutual funds can therefore create a significant market movement with only one order. In reaction to the resulting opening gap, many private investors will take their profits, which is why the gap will close. Therefore, the gap strategy is likely to create better results with smaller stocks.
Your final decision about which strategy to use, however, should always depend on the stocks historic price movements.