As you engage in binary options trading, there are a wide range of asset categories you can choose from such as stocks, currency pairs, commodities and market indices. Trading with index binary options allows traders to place trades on a financial asset category that provide a benchmark for the stability of a market.

A market index is a method of measuring the value of a section of the stock market. It is a tool used by the trading community to describe the market at a point in time and to compare its performance to previous periods. It is computed from the prices of selected stocks, typically by using a market capitalization method or weighted average. For example, the German DAX 30 market index would be calculated by combining the value of the top 30 stocks traded on the Frankfurt Stock Exchange. Each stock would be weighted according to its contribution to the overall stock market, creating a subsequent value for the DAX.

Some History on Indices

Since indices act as one of the biggest indicators of the strength and stability of a market, it’s surprising to find out that they haven’t been around nearly as long as stock markets have. While stock markets themselves date back several hundreds of years, it wasn’t until 1884, when the Dow Jones Transportation Average Index was created, followed by the Dow Jones Industrial Average in 1896. Both were established by the financial journalist, Charles H. Dow. These two indices were established following the Industrial Revolution era and before the stock market crash in the late 1920s.

Indices across the Globe

In this day-and-age, the majority of stock markets have at least one index, with most having a range of indices. For instance, the Dow Jones Industrial Average operates as a U.S. market index for the 30 most actively traded stocks in the U.S. Binary options traders can also trade on other U.S. indices such as the S&P 500 and NASDAQ. The S&P 500 is based on the market capitalizations of 500 large companies having common stock listed on the New York Stock Exchange or NASDAQ. The NASDAQ is composed of a top firms, largely in the technology industry, that are listed on the NASDAQ Exchange.

Across Europe, the German DAX, the French CAC 40, and Spanish IBEX 35, are the most heavily monitored indices in the Eurozone. Additionally, the FTSE 100 is the primary market index in the U.K. representing the top 100 stocks traded on the London Stock Exchange. These indices provide insight into the stability of the European market and have provided an ongoing benchmark for traders worldwide.

Every major market across the Asia-Pacific region has a market index that traders are monitoring on a regular basis. On the EZTrader platform, traders can execute trades on indices from across this region including South Korea, Australia, Japan, Hong Kong and India. The Hong Kong Hang Seng is a heavily monitored index and provides insight not only into the stability of Hong Kong’s economy and the Chinese economy in general. The Japanese Nikkei 225 is an important global market index for traders as Japan is one of the largest economies in Asia and the world. Since 2013, the Nikkei has reacted strongly to changes made by the Japanese government around its monetary policy initiatives.

An Example

Let’s take an example where you want to place an index binary options trade on the Dow Jones Industrial Average. If you notice that the index traditionally rises following the release of increasing GDP figures, you may see this as a binary trading signal on the Dow Jones. If positive GDP is announced, you may decide to execute a binary call option on the value of the Dow. Of course, by placing a call option, this means that you believe the index will increase by the expiry time.

Alternatively, as you look to trade on indices, you may notice that a particular index has been experiencing a slump. For example, perhaps you have noticed that the value of the German DAX has declined after the release of poor German inflation data. If so, and you determine that the price of the index will fall by the end of the trading session, you may opt to execute a binary put option on the value of the DAX, which indicates your belief that the value of the DAX will drop by the expiry time.

As you trade binary options, you may ask yourself how you can determine whether these prices will increase or decrease at a particular time. In order to establish an accurate prediction, you will want to closely monitor the values of the indices you are following. By accessing financial news, reviewing historical trends, you can ascertain with more clarity the likelihood that the value will rise or fall at a given point in time.

If you are going to identify binary trading signals as you trade index binary options, you will need to know what information to monitor. First of all, when trading on indices it’s important to keep up-to-date on economic data such as the unemployment rate, GDP and other growth indicators. Additionally, you will want to monitor the performance of important company components of the index. Some stocks carry more weight when it comes to an overall market index value. For example, changes in the value of Apple’s stock can cause major shifts in the value of the NASDAQ, due to the fact that it has a larger influence on the NASDAQ’s weighted average.

With a diverse selection of global indices to choose from, the EZTrader platform can provide you with an outlet to make predictions on where you believe a particular market is moving. Trading on indices can add a new element to your binary options trading strategy and can help you achieve greater trading success.