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Published On: Thu, Nov 29th, 2012

Examples of Binary Options Trading

By analyzing the following trading examples, you will discover that trading currency pairs using binary options is a much more simple process than trying to trade Forex directly.

Some people consider binary betting (binary trading) as a safer way of betting when compared to spread betting and CFDs. This is because with binaries your risk is always limited to your stake while with spread betting and CFDs your losses or profits are open-ended. With binary bets you know the maximum loss from the outset and you also know the maximum potential payout.

Binary bets essentially trade between 0 and 100 and are quite easy to understand since these represent a simple yet or no outcome.

Dow Jones Example

If, for instance, the Dow Jones moved down but you expect it to recover its way back up, you could buy a binary bet at 45 for £2 a point. If you are right in your prediction and the Dow Jones index recovers, the binary bet will settle at 100, so you would win £110 (100-45 x £2). If you are wrong and the Dow Jones keeps sliding down further, the bet would settle at zero at the end of the day and you would lose £90 (45 x £2).

Gold Example

A spread betting provider might offer a spread of 43-47 on the gold price being above £1290 an ounce by the end of the trading day. Let’s say you bet £10 per point on this. If the gold price ends over this level, you would win £540 (100-47 x £10). If it does not, you lose £470.

It is important to note that the pricing of binary bets can also be volatile, even in quiet markets. For instance, in the gold example above, if the gold price were trading at $1289 just minutes before closing, the spread might move to say, 8-12 points mirroring the fact that the bet looked unlikely to payout. A movement of just $1 would lead in closing at 100 points which is a lot.

The next sample illustrates opening a new trade using the EURAUD currency pair as displayed in the following diagram.

 

If you had initiated this position by trading Forex directly,then you would have needed to make a number of quite difficult decisions. For instance, you would have had calculate the precise positions of profit-targets and stop-losses. You would also have had to determine a sensible deposit size accurately in compliance with your money management strategy, assuming you have one. You would have then had to pray that price would eventually hit your desired target. This waiting period can be quite stressful.

Alternatively, if you had opened a binary option using the EURAUD as its underlying asset, then you would have found that the process would have been fairly straightforward.  For instance, envisage that a signal from your broker recommends that you should instigate a new short EUDAUD position after price breaks below S1, as illustrated in the above diagram. As you know that your largest loss may be as high as 85% of your deposit, you can quickly calculate the size of your wager in accordance with your money management strategy, which advises, for example, not to risk more than 2% of your equity per trade.

You then need to instigate a PUT binary option, using the EURAUD currency pair as its underlying asset. An opening value of 1.2210 is registered. Your deposit is $2,000 and you opt for an expiry time of 1 hour. The payout ratio is 85%. At expiration, the EURAUD posts 1.2140 and you are in-the-money and collect a payout of $1700. If you had traded the Forex directly, you would have required a win of hundreds of pips in order to generate the same return using a $2,000 wager.

A crucial feature of binary options is that everytime you open a new position you will instigate a contract which defines the fixed profits and losses that you can expect to receive at expiration. For instance, you will collect a rebate as high as 15% of your stake in the eventuality of a loss. As such, if you plan to wager just two percent of your equity per trade then your stake must equate to your total account balance times 2.35%, which includes the 15% refund.

This is the only simplistic equation that you have to solve when trading binary options in order to fully safeguard your equity in compliance with your money management strategy. In addition, as you only need to predict the direction in which price will progress, you just need it to be at least one pip higher than its opening price for a ‘CALL’ binary option and one pip beneath for a ‘PIP’ option at expiration to finish in-the-money. As you do not have to undertake involved tasks such as determining accurate locations for profit-targets and stop-losses, the complete Forex trading procedure can be significantly streamlined by exploiting the advantages of trading binary options.

 

The second example illustrated on the chart above displays a SELL position on the NZDUSD daily chart. Again, a serious amount of involved decision-making would have been essential if you had initiated this position by trading Forex directly. In contrast, consider that a signal advises you that the price of the NZDUSD currency pair had just fallen below S1. You could now readily instigate a ‘PUT’ binary option by deploying the NZDUSD currency pair as its underlying asset with an expiry time of 1 hour and a wager of $5,000. As price proceeded to finish well beneath its strike value at expiration, as demonstrated on the above chart, you are in-the-money and receive a payout of $4,250. Not a bad profit for a single hour’s work.

As these examples vividly prove, you can attain very worthwhile returns with minimum exertion by trading binary options. In addition, the payouts are much higher while your risk exposure per trade is greatly reduced. You can boost your income even further if you invest your time to study the many proven strategies that are available to trade binary options successfully.

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About the Author

- Marcus Holland has been trading the financial markets since 2007 with a particular focus on soft commodities. He graduated in 2004 from the University of Plymouth with a BA (Hons) in Business and Finance.

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