How to use binary options to trade forex markets ?

Remember that thing called the stock market? We were all taught at some point in time that when prices go up, we make money, but when prices come down, we lose money. In essence, aside from a few small changes in this area over time, it is exactly right.

The reality is that making money on the stock market is in general a one-way street. Unless you are an advanced trader, and hence able to short the market, you will rely on prices to increase so that you realise a capital gain when you sell your stocks.

Unlike the stock market, foreign-exchange markets are different. Indeed, you are able to profit regardless of where the price goes. For example, let's say that the currency pair EUR/USD - the most popular currency pair in the world – trades higher. If this was the case, people who had bought the Euro at lower levels would have profited, whereas people who had bought US dollars would have lost.

The opposite is true if the currency pair fell. For example, people who owned the Euro would have lost money, and people who owned the US dollar as part of its currency pair would have gained. Overall, the actual figure quoted for this currency pair can go up or down - but in each case, someone is able to make a profit.

CONFUSED?

If you are confused by the examples we gave above, it is clear that you need to do a little bit more research before you get into the foreign exchange industry. Unfortunately, using such financial instruments can be dangerous if you do not have the right set of skills available to place such trades.

Many new traders lose money at first, simply because they have not done adequate training to ensure their success.

Fortunately however, there are many courses and instructional programs available through the Internet which can teach you the ins and outs of everything to do with foreign exchange.

We have even recommended one on this website, so that you are able to instantly move on to the educational failures, rather than being stuck trying to find an education provider in the first instance.

You will find a recommendation on the front page of the site. Take a look, and if you are interested sign up. You have nothing to lose, but a wealth of knowledge to gain.

HOW TO USE BINARY OPTIONS TO TRADE FOREX MARKETS ?

When we refer to Forex trading, many people automatically assume that the spot FX market is the only one in which an investor can make money. Indeed, buying and selling currency is an excellent way to take advantage of currency movements – but it is certainly not the only way.

Another interesting way of profiting from Forex is using something called "binary options". These are special contracts which predict the future movements of a currency, and then pay out if that movement does indeed eventuate.

Let's take a closer look at binary Forex options to see how they can be of benefit to a trading strategy – and how you can actually use them to make a profit.

How Binary Options Work

Basically, a binary option is a contract that you enter in to with a set outcome. It is almost like playing Blackjack at a casino table – except the odds can be significantly swayed in your favour.

For example, let's take a binary option with the following criteria:

EUR/USD currency pair.
EUR/USD is currently at 1.3400.
You think that EUR/USD will appreciate in the near future.
You buy a binary option which pays out if EUR/USD reaches 1.3500 in 30 days.
The price you pay for the binary option will reflect the NUMERICAL probability that the currency pair will reach the target price in 30 days. This is calculated through volatility, average daily range, and other factors. However – you immediately have an advantage. You are not a computer, and therefore you might have a better idea of where the currency pair is going in the future.

If this is the case, you can exploit the numerical probability, and use a binary option to profit from your opinion.

The Binary Option Example

Continuing with the example above, someone might buy the contact for $60 – with a return of $100 if the criteria are met. Hence, this represents a $40 profit. However, if EUR/USD fails to reach 1.3500 as predicted – the price of the contract is lost – i.e. $60 loss.

Some people, however, are more accustomed to use binary options than others. Specifically, the trading style which most reflects the use of binary Forex options would probably be the medium to high risk investor. This is simply because of the profit to loss potential ratio which is involved.

Conservative account holders might want to stick to the easier, and more understandable spot Forex market when trading.

WHAT ARE TRADING BENEFITS WITH BINARY OPTIONS ?

In this article, we'll take a look at the 5 significant benefits which traders in the binary options market can realize, versus the Forex spot market. Remember – financial trading is not for everyone, so we are already assuming that you are willing to take on the risk associated with the financial Forex market.

No "Half Success"

One of the key issues with spot market Forex trading is that many people look upon their trades as "partially successful". That is – when a particular position accumulates a said profit – the gain is not quite big enough to celebrate, but not small enough to ignore.

Traders often find themselves stuck in the middle of the market in this respect. With binary options however, these half successes are eliminated. This is because an options contract either wins or loses (if you hold it to maturity), and therefore there is a feeling of total gratification if one of your contracts expires "n the money".

Easier to Understand

Binary Forex options are extremely straightforward. Profit and loss is indicated before the contract is entered in to, and the account risk is therefore predetermined. Additionally, you don't have to understand the inner workings of the Forex market to understand the concept of options. Everything is very self-explanatory.

Highly Flexible

Options can be bought on almost every currency pair known to man. This makes it far more versatile than the spot market, where many currency pairs are not liquid enough to trade. Additionally, the costs of binary Forex options trading are the same, regardless of which pair you are trading.

This means that where you might have been paying 70 to 80 pips on a spread for an exotic currency cross, you will be paying the equivalent of a 1 to 2 pip commission on every pair.

Transparent Pricing

Still on the topic of pricing and cost, as you adjust the parameters of each option, you are actually able to see the changes in price before your eyes. In this respect, binary options' trading is much more transparent and the pricing models are easy to pick up.

Any Account Size

Much like with a spot Forex account, positions are completely scalable, depending upon your account balance. If you have $50, for example – you can take out a contract costing $6, with an expected payment of $10, and only be risking 12% of your account. Or, if you have $1,000,000 – you can again adjust the trade or contract size to reflect this.

BINARY OPTIONS TERMINOLOGY

Financial markets can be extremely confusing – especially when terms are thrown around which mean absolutely nothing to you. Learning the lingo is an important part of financial trading, especially if you want to be able to discuss the topic with other people and peers.

To make the binary options industry a bit easier for you to understand; we've gone through and reviewed some definitions for you to understand. Hopefully these will help.

Call Option

A contract which is bought when the price of the underlying instrument is expected to increase. If the price does increase – you will make a profit. However, if the price decreases, your loss is equal to the amount that you paid for the contract and no more.

Put Option

The exact opposite of a call option. This is bought when the price of the underlying instrument is expected to decrease. If the price does decrease, you profit. However, if the price increases – your loss is only equal to the amount you initially paid for the contract.

In the Money

When the expiry date of the binary option comes around, there are a number of positions that the option can be in. If you are sitting on a profit (i.e. if the contract has been successful and you have made money) this is referred to as being "n the money".

Out of the Money

If your contract has gone against you, and you have made a loss, the option will expire "out of the money". Thankfully though, the maximum amount you can lose is equal to amount you originally paid to buy the contract.

At the Money

If there has been no movement in the underlying price over the course of the option – the contract will expire "at the money". This is often referred to as the break-even point, and this is often determined before you buy the contract.

Expiry Date

The date at which the option will expire. You can buy or sell an option for almost any duration, from 1 month right through to 10 years. However, be aware that the longer the term, the more you will have to pay to buy the contract (because of the time value of money).

As you can see – there are a number of terms you need to familiarize yourself with before venturing in to the binary options world. Hopefully, this article will get you started.