How do binary options work?Binary options are financial derivatives that allow you to bet on the price of an underlying asset, such as a currency pair, to either end up higher or lower after a certain pre-defined time horizon
. For example, you can bet on the EUR/USD ending up trading higher in the next 5 minutes. The two-way price for such a market will look something like this, 49.50/50.50. That means you can buy the binary option for the 5-minute EUR/USD market at 50.50 (if you believe the price will go up) or sell (if you believe it will close lower) at 49.50. If you want to go long EUR/USD and purchase it at 50.50, for say US$10 per point, then you will make US$10*(100-50.50) = US$495 profit on this trade. However, if the EUR/USD price is lower after 5 minutes, then you will make a loss of US$10(0-50.50) = US$505. The value of a binary option at the end of its time horizon is always 0 or 100. Therefore, your losses are capped which helps you with your risk management. Choosing the right broker
When trading forex using binary options it’s important that you choose the right broker. That means a broker that covers all the currency pairs you want to trade and charges you low transaction fees. For example, you could trade binary options with optionsclick.com
, as it is a reputable broker with a large product offering and low trading fees. Alternatively, you could read reviews of the various online brokers that offer binary options trading, such as the Finpari Review 2016
, to find the optimal broker for your trading needs. Applying the right strategies
When it comes to currency trading using binary options it is absolutely vital to have a good strategy in place. As you are putting on short-term directional trades, when using binary options, you want to ideally find mini-trends in the market that you can capitalise on.
For example, just after US unemployment and non-farm payroll numbers have been announced and they have come in better or worse than expected, this will either strengthen or weaken the USD
against other currencies. So you could, for example, sell a binary option on the EUR/USD if non-farm payroll numbers came in much better than expected, as this would mean the US economy is doing better than expected, which would in turn lead to a further rate hike by the Federal Reserve sooner rather than later. This would boost the USD against the Euro. If you sell a EUR/USD binary options with a 10-minute time horizon just after such a data announcement you would be able to capitalise on that trend and make a profit.
Alternatively, you can also put on binary option trades on currencies just after announcements by central bankers about future interest rate decisions, as those create strong movements in currencies
. Interest rate decisions are traditionally the largest mover of the currency markets (except for severe geo-political turmoil such as war). Hence, any statements or indications about future interest rate decisions will create strong trends up or down in currency pairs. This is another way for you to capitalise on currency movements using binary options.
Binary options are a great tool to trade currencies, as your downside risk is always limited, and they are the ideal financial product for beginners to benefit off short-term market trends.