Trading Binary Options is a much more simplified process than trading conventional Forex: you simply choose the market that you want to trade, for example Currencies. Then you choose the asset, for example EUR/USD. Finally you decide whether the EUR/USD will end above or below its current price at the end of the hour. If you decide above, choose a Call Binary Option. If you decide below, choose a Put Binary Option.
There are 2 cases in which you can win your trade. You will be “In the Money” if you choose a CALL Binary Option and at expiry the closing price closes above the price that you purchased. You will also be “In the Money” if you choose a PUT binary option and at expiry the closing price closes below the price that you purchased.
Forex binary options offer several obvious advantages that attract conventional Forex traders. Binary Options only need to close within the smallest fraction of a pip over or under your strike price and you immediately win up to 81% profit in less than 1 hour. By comparison, a conventional Forex trader with a maximum leverage of 100x placing a $1000x100 leverage trade would have to gain 81 pips to create the same profit! This is an amazing difference.
Another interesting feature of Binary Options is that expiry occurs hourly, like European style options, with no possibility of exercising before expiration. This can be very advantageous because conventional Forex traders are forced to place a Stop-Loss which can be easily shaken out. Particularly in the case of a news event in which volatility is very high, it can be advantageous to use the risk management of the hourly expiring Binary Option, rather than place a Stop-Loss.
Perhaps the most interesting application of Binary Options to conventional Forex traders is as a hedging tool. Conventional Forex traders are accustomed to taking losses when their Stop Loss is hit. Lately it has become customary to transfer the risk from below the buy point to above it by using Binary Options.
For example, if you take a conventional EUR/USD long position combined with a Stop/Loss and simultaneously buy a Put Binary Option, you can cover your losses or even be profitable in the event that your long position fails. This effectively transfers the risk from below the Stop Loss to above it. This can be very advantageous if you believe that your trade will succeed if a rally continues in the right direction, as is often the case for rallies.
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