Binary Options and Forex Trading

When compared to Spot trading along with leveraging which is widely used by Forex traders, binary options is an alternate technique which is less risky and has a lot of benefits than spot trading. With binary options trading you will know how much potential loss you might incur before investing and hence it’s safer than spot trading in Forex. Binary options which are also called Digital options or all-or-nothing options are a new method of investment in which the payoff could be either a fixed amount of cash (or pre-determined units of some asset) or nothing at all.

Binary options is a method of investment in which investors will speculate on future value of various assets traded under stock market such as Currency Pairs, Indices, Commodities and Stocks. For successfully trading with binary options investors should carefully analyze their trade assets and place the trade at right time use different strategies. In order to trade using binary options successfully lot of knowledge and skill sets are required.

  1. Binary options trading involves 5 easy steps as below,
  2. Select the asset you wish to trade
  3. Select the length of time you want the trade to be open also called “Expiry Time”
  4. Select the price of assets while you start the trading also called “Strike Price
  5. Decide how much money you want to invest on a particular trade.

Select a “Put” or “Call” option – You should select “Put” option if you believe trade will expire below strike price or select “Call option” if you believe the trade will finish above strike price.

With Binary optionstrading, all you have to do is follow the above simple steps and then just wait for trade to expire to know your results. The main difference is that you get a fixed payoff or nothing from binary options unlike other modes of trading where the loss/gain is unpredictable. For people interested in Forex trading using Binary options, NADEX (North American Derivatives Exchange) is providing a platform to trade across different currency pairs such as USD/JPY, USD/CAD, GBP/USD, EUR/USD and USD/CHF. There are different types of trading options including daily, intraday or weekly expirations and you could use binary options for creating hedges, news event trading or just directional play.

Let’s consider a small example for Binary options Forex trading to illustrate how it works. Let’s say that the manufacturing data in US is going to be released today and you are expecting that dollar value will get weakened against Japanese yen once these figures are released. Currently with spot forex trading, the USD/JPY is trading at around $75.08. If you are going to use spot trading along with leveraging option, you will be always under high risk as you can potentially lose huge amount of your capital if your prediction goes wrong. Hence you decide to go for binary options forex trading which is much safer as the loss is completely predictable.

So based on your assumption that Dollar value will depreciate once the manufacturing figures are announced, you select the binary option USD/JPY > 75.08 (3 PM) and decide to bid against it. You opt for selling since based on your market assumption the rate will go below 75.08 at 3 PM. You purchase 12 binary options for bid price of 52.00 and each contract will be valued at $1 per pip.

The trading platform will monitor the spot forex rate at 3 PM and based on the current value your binary option will get settled at 0 if the value is less than 75.08 or 100 if the value is above 75.08.The binary options trading platform will automatically display your Maximum profit and loss at same time before you go ahead with the purchase.

The maximum profit you can make with this trade is calculated as below,

Difference between Opening price (52) and settlement price (0) [52 – 0 = 52] x No. of contracts purchased x value per pip which is equal to 52 * 12 * 1 = $624.

The Maximum loss you can incur through this trade is calculated as below,

Difference between Opening price (52) and settlement Price (100) [100-52=48] x No.of contracts x Value per pip which is equal to 48 * 12 * 1 = $576.

Since you are very clear about how much profit/loss you can incur before investing your money, Binary options forex trading is the most legitimate and low-risk trading method for new investors. If you want to know more on how to trade currencies with binary options you can read various articles on same and start planning your investments.

Author: Richard Casteel

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Richard is the chief author of this blog. He worked as a financial advisor in money market form last 10 yrs. His financial sense in Share trading and any other trading is just outstanding. He just shares his knowledge and experience through this blog. You can contact him directly though CFD-Providers.com.

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