Four Basic Trading Criteria for Investing in Binary Options
Four Basic Trading Criteria for Investing in Binary OptionsAugust 17, 2012
Dowe Bynum, Co-owner at Bynum Asset Management believes there are four investment criteria or strategies he uses to build his investment portfolio.
1. Circle of Competence: This means before you choose to invest in a stock, index, commodity, or currency, you must conduct proper research. The trick is to target hundreds of stock options and then slowly dilute the lot until you are left with 5-10 good options. Your circle of competence is basically your ability to predict and understand everything that particular stock did on a certain day or time.
2. The Business Logic: Behind every stock there is a fundamental business logic. Let’s take the oil sector for example. According to CNN Money the Petro River Oil Company had plans to engage in hydraulic fracturing or fracking in Kansas. Fracking involves pumping massive amounts of water into the ground and creating pressure.
Usually the companies either take this water from nearby water sources, or buy it from local farmers. However, due to the drought the farmers are not willing to part with their water, and transporting it is too costly. So the Petro River Oil Company hired Select Energy (FSENX) to pay farmers for water from their ponds and wells. The business logic behind a company like that complements the circumstances of the drought and creates a great money making business opportunity (See chart below).
3. The People: Meaning are the people behind this company serious about making money for their shareholders? When you purchase stock you actually buy the knowledge and experience of people who make the stock profitable. This is not relevant in commodities or indices for example, but with stock it’s a key component. This is why you see stock prices go down when a Head of Research and Development for a big company decides to leave, or for that matter anyone with significant influence on the performance of the company stock. I think the most clear example of that can be seen with AAPL when Steve Jobs left his position as company CEO.
4. The Price: To be more specific, the price you are willing to pay for the stock option. your margins and profit lines will be influenced directly by this decision. Its always a smart idea to get input from a few experienced portfolio managers or traders before buying a stock option.
Now, how do these investing principles tie in to binary options trading? I think it’s very clear to see that these principles are valid when drafting a strategy, choosing a binary options broker based on in-depth analysis and reviews, understanding how much to invest and the risks behind every trade that you make, and conducting the proper research and analysis of financial news.
Finally, if your are just starting out I highly recommend you stay away from 60 second trading in binary options because of the high level of risk involved, and as always open a demo account and start simulating trades before you even think about looking for brokers that accept Paypal, Visa or Moneybookers.