Published On: Wed, Nov 17th, 2010

Trading Forex using Binary Options

Trading currency pairs on Forex has increased substantially in popularity in recent times. One of the prime reasons for this magnetic attraction is that many beginners are enticed by Forex because of its gigantic daily turnover, which is alleged to be in excess of $3 trillion. They believe that with such a huge sum of money in the offering that they should easily be able to acquire a small percentage of it.

However, statistics present an opposing viewpoint by revealing that only a small minority of investors are successful. This is because many influences strongly affect the creation of the price formations and structures of currency pairs making them difficult to evaluate and hard to trade profitably. As such, newbies are confronted by a steep learning curve that they need to conquer in order to acquire success.

One of the biggest obstacles that they face is that they always have to evaluate not just the direction that the price of a currency pair will progress but also its magnitude or size. This can be a quite nerve-racking task for the inexperienced. As an alternative, many investors begin using binary options to trade Forex because of the many simplifying advantages that they possess.

For instance, by activating binary options using a currency pair as its underlying asset, you can then just concentrate on predicting the price direction of a currency pair without the need to evaluate the size or magnitude of the movement. This important attribute infers that, for a ‘CALL’ binary option, if price is just one pip higher than its opening price at expiration then you will be in-the-money.  Similarly, you need price to expiry at least 1 pip lower than its opening or strike price for a ‘PUT’ binary option in order to register a profit.

Another vital job that you must perform when you trade Forex directly is to develop a well-proven risk and money management strategy so that you can restrict your risk exposure per trade. However, if you trade Forex using binary options then this task can be avoided because you will always know precisely what your pre-defined profits and losses will be even before your options are activated.

Let us now study an explicit binary option trade in order to demonstrate precisely what you need to do in order to undertake such an investment. Envisage that your broker has just advised you that you should activate a new long (buy) position using the EURUSD currency pair. Consider that the value of the EURUSD is currently 1.2800 and that you deduce that price will continue to climb during the next hour. As such, you activate a CALL binary option using the EURUSD as its underlying asset with an expiry time of 1 hour. The strike price is 1.2800 and your deposit is $2,000. The payout ratio is 85% and the refund is 10%.

When you trade binary options, there can be only two possible results. Either you will receive a pre-advised profit or lose a significant portion of your deposit. After one hour has elapses, the EURUSD stands at 1.2850 which is above its opening price and you are in-the-money. Your broker pays you $1,700. However, if the EURUSD had finished beneath 1.2800, then you would have been out-of-the-money and lost your deposit but would have collected a rebate of $200.

Over the years, experts have developed a set to rules which they always apply when Forex trading. For example, their top priority when trading currency pairs is to minimize their losses. They achieve this objective by developing faith in their trading strategies. However, mastering such skills involves an extensive amount of time. Using binary options to trade Forex solves this problem since their structure has been specifically design to minimize risk exposure per trade.

Consequently, binary options will help place you in more control of your trades by enabling you to base important trading decisions on your trading strategies as opposed to gambling on your gut instincts. You will then be able to focus on identifying fewer but better quality trades as opposed to seeking adrenaline rushes by trading as many as possible. You will discover that trading Forex using binary options will increase your chances of success.

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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.