Introduction to Forex Binary Option Trading
Binary Options Trading
Binary options are an increasingly popular way for investors to access and trade financial markets around the world. Once off limits, your everyday investor can now easily and affordably trade currencies (forex), crypto, stock market indices and commodities from a single platform on their PC or smartphone.
One of the main reasons behind the growing popularity of binary options is their straightforward nature. They offer relatively high payouts on small price movements, for example upto 200% on 0.1 pip change in price. They also have a fixed investment and payout amount, meaning the investor also knows their risk and reward before they execute a trade.
What are Forex Binary Options?
Whilst there are various asset classes you can trade with binary options, forex is one of the most popular with investors. Being the largest financial market in the world, there are many factors which move forex prices and present opportunities to trade When trading forex binary options, the investor is predicting the movement in value of one currency versus another, for example the value of the Euro vs. the US Dollar.
Time is also a component in trading binary options. When the investor places a trade, they’re trying to predict whether their chosen asset will be trading higher or lower at the end of a predetermined period of time. As an example, will the EUR/USD forex pair be higher or lower than the price it’s currently at in 15-minutes time?
Trading is done via an online platform using a PC or smartphone device.
Zentrader offers a wide variety of markets, including stock market indices like the Nikkei 225, German DAX, commodities such as GOLD, major forex pairs and crosses like EUR/USD, USD/JPY and GBP/JPY to name a few, all of which can be traded directly from your smartphone using the Zentrader app.
Trading Forex Binary Options
Serious binary option traders will generally place forex trades according to their own strategy or trading plan. Common trading strategies are based upon charting (technical analysis), indicators such as RSI or MACD, market psychology and news and economic data releases.
Once the trader has selected an asset to focus on, say for example the GBP/USD forex pair (commonly known as the “cable”), they need to select a time frame in which to place the trade. Time frame is a very important component when trading the forex market, often this is chosen based on what the investor feels most confident with; for example Zentrader’s platform offers options from 30 seconds up-to 1 day on most assets.
The investor then selects “High” or “Low”, depending on the future direction they believe the underlying forex currency pair will trade. Once the trade has been placed, the option may move “in-the-money” (ITM) or “out-of-the-money” (OTM) as the price of the underlying asset fluctuates relative to the investors purchase price. When the option expires at the end of the chosen time frame, the investor either receives a fixed payout of up-to 200% if the option is ITM or consequently loses the initial investment amount if expiry is OTM.
On the Zentrader platform, the investor also has the option to close the forex trade out before the option expiry time, to take partial profits or as a stop loss and risk management measure.
Forex Binary Options Brokers
Forex binary option brokers offer a platform for investors to attempt to generate a profit by speculating on the value of one currency compared to another. Your broker is responsible for giving you access to these markets and providing you streaming pricing, around the clock, each trading day of the week.
The Zentrader platform has been designed and constantly refined over a number of years to streamline the whole forex binary options trading process. To do so, select a forex pair, your time frame, High or Low and Invest.. As always, these components should be selected based on your trading strategy. The web platform also provides research tools and market news, such as economic data and updates through a live streaming ticker.
Whilst the above features are important, trust is perhaps the most important aspect when dealing in financial markets. When you choose a broker, they not only facilitate your trades but are responsible for receiving and crediting deposits owed to you, paying out profitable trades, and processing your withdrawals in an efficient manner when requested.
How are Forex Binary Options Different?
Forex binary options differ from other methods of trading. Binary options have fixed risks and rewards. The investor can receive a maximum return-on-investment of up-to 200% if they predict the direction correctly whilst only risking their predetermined investment amount. The profit or loss are predefined and fixed prior to entering a trade and determined by the direction of movement of the asset relative to where the trade was entered.
In contrast to CFDs, Spot-FX, Spread Betting, or Futures trading where profit or loss is dependent on how much a security moves, Binary Options trading does not open the investor up to additional risks such as gap-risk. Gap-risk refers to an event in financial markets where there is a sudden and large change in asset prices, usually on news or data releases. There have been instances where regular forex traders’ accounts have entered into negative balance as stop losses are sometimes rendered useless. Due to the fixed investment nature, forex binary options eliminates this risk for the trader altogether.
Spot-FX or forex is traded in specific amounts called lots or lot sizes, which is basically the amount of currency you will buy or sell, also called your position size. The most common size for a lot is 100,000 units of currency. This adds to the complexity of trading forex because 100,000 units of one currency can be very different to another which impacts the amount of capital you have at-risk on any one trade. You will often see professional traders punching away at a calculator to understandtheir position size or how much capital they have at-risk.
Whilst there are some key differences and tradeoffs as highlighted above, more and more experienced forex traders who have been trading through other methods such as Spot-FX and CFDs are turning to forex binary options. Some, particularly shorter term day traders, find it suits their style of trading and strategy, others will use forex binary options as just another tool in their trading toolkit.