Trade Forex with Binary Options

Forex binary options’ trading is a new player in the world’s financial trading markets. These trading tools provide less risky ways of investment and allow the traders to limit their loss as per their tolerance level. It is one of the most beneficial and valuable tools developed in the financial trading arena. Since binary options are a recent development in the Forex industry, therefore traders hesitate to trust their money with it. Also trading of Forex with binary options is thought to be a very complicated procedure whereas it as easy as conventional trading of Forex. Let’s see how it differs from traditional Forex trading and the simplest way to get in this field.

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Forex Binary Options vs. Conventional Forex

Let’s start with basic definition of binary options as hedging tools to minimize the probability of loss. But how can they be used as financial derivatives in conjunction with the traditional Forex trading?

  • The most important and attractive application of binary options is that they give you two predetermined and fixed returns. These two scenarios are further elaborated in the next section.
  • Unlike conventional Forex trading, binary options hedge your invested amount. In worst case scenario, the maximum loss that you could face is your principle amount.
  • Binary options do not require any leverage or extra margin account.
  • Binary Options are also known as directional hedging tools. Here you are trading in one direction that is the closing price of the currency at the time of expiry. You can hedge in the other direction by using a Call or Put option.
  • Another interesting feature of these options is that they expire on an hourly basis. The fact that the next hour market trend is more stable and easy to forecast as compared to the monthly or yearly prediction has made it possible for the new comers to invest large amount of money in this arena.
  • Unlike traditional Forex, Binary options allow you to transfer the risk or change the trading position from above the strike point to below it or vice versa.

How to Trade Forex with Binary Options?

Now that you know the benefits of binary options over conventional Forex, it’s time to take your first step in this field. Here is a simplified example to explain the process of trading Forex binary options on hourly basis.

The first step is to decide on a trading market and select the currency pair that you want to trade in. Let’s assume you decided to trade in £/$. Now the next step is to forecast or guess the value of this currency pair by the end of the hour. Hourly trades are usually made on the basis of sentimental analysis since you don’t get enough time for technical charting. Once you are done with the prediction, now choose the binary options for hedging your trade. If you think that the value of £/$ will increase by the end of the hour, then go for ‘Call Binary Option’. In case of opposite predictions, take a position in ‘Put Binary Option’.

The hour passes and here comes the result time. Did you make any money out of your trade?

Here is how you can interpret the results. You can make a profit in two conditions.

  1. If you hedged your trade with call options, and the closing price of £/$ is above the price at which you bought, it means you are ‘In the money’.
  2. If you went for put options, and the price of £/$ currency pair closes below the spot price, you are ‘In the money’.

Binary options have emerged as a better alternative to stop loss orders, as they may backfire sometimes. Suppose you assume a long position in £/$ currency pair in conjunction with a Stop Loss option. No matter how accurate your forecasts have been in the past, probability exists that you may fail this position. Contact your broker and have him combine your trade with a ‘Put Binary Option’. This will hedge your trading position against any possible losses. By exercising your binary options, you can transfer your risks from below the stop loss point to above it.

Whether you are a newbie or an experienced trader, binary options are the perfect way to secure your investment in today’s highly competitive and risky trading environment. Start off with low and simple trades, as illustrated in the aforementioned example. Binary options are easy to befriend. Just experience a couple of practice trades and soon you will find yourself playing big in the market and you will enjoy the advantages of Forex binary options.