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How to decide whether an option’s price will go up or down

So, how can one tell whether an option’s price will go up or down?

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How to decide whether an option’s price will go up or down. Source: shutterstock.com

Offering the chance to be involved as much or as little as you like, investing comes in dozens of different forms, meaning there’s something to suit everyone. Little wonder then that it has become increasingly popular in recent years, with lower entry prices and an enhanced online presence combining to make it more accessible than it has ever been before.

To meet this need, there are now numerous different financial instruments in existence, ranging from those that even the most uninformed layperson knows about, such as stocks and shares, to more abstract (and less familiar) concepts like binary options.

Interestingly, the latter in particular has held interest, with many investors drawn by their unique format. Allowing them to trade on assets without actually purchasing them, binary options involve limited risk but can still deliver potentially significant returns –so long as you know what you’re doing.

What is binary options trading?

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In case you’re not entirely familiar with what binary options are, it’s worth beginning this article with a brief outline. Binary options are a particular kind of financial instrument – one that allows you to speculate on the price movement of the underlying market. Traders can do this without having to purchase the physical asset, which allows them to potentially benefit from both increases and decreases in value. As an additional boon, this type of option offers the investor a chance to fix their risk, so they can tailor this to their own personal preference; there are only two potential outcomes and the investor can never lose more money than they put in.

Three top tips for understanding pricing

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This leads to the question we started this article with: how can you decide whether an option’s price will go up or down? Unfortunately, there is no magic formula, or else we’d all be making our millions by trading the financial markets.

However, by brushing up on your knowledge and doing your research, it can be possible to predict what might happen. Here are three top tips to help you do that.

1. Keep a close eye on the news

In large part, market movements are determined by what your fellow traders think will happen. Their actions are likely to be molded by a series of extraneous events, which means you’ll want to keep an eye on what’s happening in the wider world – at least insofar as it impacts your investments.

If we imagine for a second that you want to purchase an option on Netflix stock, it’s a good idea to do your due diligence and keep an eye on what the media is reporting. Negative stories, for example, are likely to lead to a dip in prices, while positive articles outlining innovative technology are likely to have the opposite effect.

2. See what the experts are saying

In addition, remember this important saying: ‘no man is an island’. Yes, each and every trader has an eye on their own interests, but you don’t have to do all of the legwork yourself. There are lots of experts who make their money from predicting what will happen in the markets, so pay attention to what they have to say. While we wouldn’t suggest that you follow their recommendations unquestioningly, they can be a good place to start with regards to carrying out your own research and developing a viable strategy.

3. Analyze previous market movements

While there are lots of different ways to try and predict what’s ahead, history has its own lessons to teach. Yes, use the data, news articles, and expert insights that are at your disposal, but also try and look into previous market trends to see if your theories have previously panned out as you’d expect them to. How have similar assets reacted to the same sort of stimuli in the past? Such information can and should be invaluable in guiding your next move and helping you to accurately work out what’s ahead.

Are you interested in binary options trading? Then follow our three top tips today. Designed to help you develop a strong and successful strategy, they’re a great starting point for improving your investing and avoiding potentially costly mistakes.

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