Tag Archives: binary options

What is Binary Options Trading?

binary option trading

When it comes to forex trading, there is a plethora of options available to you. Of these options, binary options trading has become quite popular among investors in recent years, because of the low level of investment needed and the potential to score higher profits is there. As such, this realm of forex trading is particularly useful for novices who are just getting started in this investment practice and want a little more experience and knowledge building before dumping larger amounts of your money into forex accounts.

Unlike traditional models of investing, such as purchasing stocks or bonds, binary options are contracts in which your income relies on the direction of the given asset within a certain time frame. This is known as a less-risky option in forex trading, as you, the investor, get the same set income regardless of how much the value rises in the contract. The only thing that matters in binary options forex trading is that you were correct in your predictions.

To simplify matters even more, there are just two options in binary forex trading that you need to be concerned about: put options and call options. A put option is an investment made when you believe the price of the contract will be below the original price upon expiration. Meanwhile, a call option is the exact opposite, with you expecting the overall price to rise above the original value upon the expiration date.

This can easily be applied to forex trading. For example, if economic indicators are looking bad for the European Union, you could purchase a put option on a Euros contract, with the expectation of the currency’s value to drop by the time your contract is up. Likewise, if the value of the US dollar looks like it could be rising in the near future, the best way to capitalize on this while minimizing personal risk would be to purchase a call option on the USD and profit when the value does in fact, go up. Your leverage would not be as high as, say, a traditional forex trader relying on the currency’s consistent value and no set asset ceiling to be gained (or lost). However, binary options are essentially one of the safest bets you can make as a forex trader.

In a highly volatile market such as forex trading, it’s quite beneficial for newer or small-time investors to have the binary options available in order to minimize the risk on their investments. This allows them to learn the ropes of forex market practices and learn to read forex trading signals without suffering heavy losses along the way. It has all of the same currency pair mechanisms of traditional forex trading, but with smaller caps and less risk factor.

This article was written by Will from Forex Trading Finder. Visit Forex Trading Finder for more information on Binary Options Trading.

Binary Option Versus Forex Trading: When One is More Favorable Than the Other

The relatively recent availability of online binary option trading has made taking binary option positions in a major currency pair just about as easy as trading the spot forex market.

Although this adds another possible risk taking tool to the forex trader’s box of tricks, it remains important to distinguish when trading binary options is preferable to trading spot forex, and vice versa.

Risk and Reward Characteristics of Binary Options Versus Spot Forex Positions

To start with, the primary feature of purchased binary options is their absolutely limited risk that can easily be quantified as soon as the binary is paid for. Basically, the risk in holding a binary option is just the upfront cost or premium that you paid for the binary option.

Furthermore, the reward from buying the binary option is also limited to the pre-determined payout of the binary. This limited risk and reward characteristic of binary options makes assessing the risk to reward ratio of a binary option trade especially easy.

On the other hand, a standard spot forex position has virtually unlimited risk and reward potential, unless offsetting stop loss and take profit orders have been left in the market with a reliable forex broker.
Nevertheless, even if protective orders have been placed, the risk exists of slippage on stop loss orders in fast markets, as well as the risk of a broker’s failure to execute a take profit order despite the order level having been traded at.

Conditions When Holding a Binary Option Might be Preferable to a Spot Forex Position

A significant risk with holding a spot forex position involves trader error. For example, a busy or inattentive forex trader might think they have entered their protective orders, but they actually did not. They might also have forgotten to enter the orders, have had a system failure when entering the orders or lost their trading discipline and moved their orders when they should not have.

Each of these risks can be overcome and effectively eliminated by using a purchased binary option to take a market view on a currency pair, rather than a spot forex position.

Another situation when holding a binary option may be preferable is over the release of a major economic number, like the U.S. Non-Farm Payrolls, or during an important news announcement. Since considerable market volatility can occur immediately after such events as market makers discount the new information into an affected currency pair’s exchange rate, the sharp swings can prematurely trigger a stop loss order, perhaps even incurring unanticipated slippages losses, when the spot position would otherwise have been profitable shortly afterwards. Holding a binary option would allow a trader to weather this storm safely and still come out ahead, if their view turned out to be correct.

Conditions When Holding a Spot Forex Position Might be Preferable to a Binary Option

Although binary options offer considerable security advantages to a forex trader, as illustrated in the section above, this security comes at a price, which is the premium a trader pays to hold the option.

On the other hand, trading spot forex only costs a trader the bid offer spread, which is only a few pips these days. This cost is therefore is pretty much negligible for all but the shortest time frame trading strategies, like scalping perhaps.

As a result, well disciplined forex traders operating in a relatively peaceful and predictable market — and who have taken the time to double check that their protective orders are properly placed with a reputable broker— might feel secure enough to wish to minimize their costs by trading spot forex, rather than purchasing a safer binary option to hold instead.

After all, if the market moves in their spot position’s favor, as they expect, they will not have paid the premium to hold the binary and this will enhance their return by the cost of the binary.

In addition, since the binary only offers a limited payout, the trader using a spot forex position to take a view can follow a trend by trailing their stop loss orders to increasingly more attractive levels behind their position. This strategy would keep their losses limited, while still allowing their profits to accumulate to higher levels than a binary option’s limited payout would have yielded.

Source: BinaryOptionsNow.com is the most comprehensive resource for binary options information and forex binary options broker reviews.