Binary Options Trading and Forex
Another way of trading currencies that has been gaining ground in the last few years is through Binary Options.
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Binary options trading is a type of “bet” on markets where the gain is a fixed amount of cash if the option expires at the target price. They are called binary options, because there are 2 possible outcomes- win or lose. It´s basically a bet on the markets, but can be a much simpler way of trading the currency and stock markets.
They are also called all-or-nothing options, digital options and Fixed Return Options (FROs). There’s a binary options school at bnoptions.com that explains these different options further.
So you might buy an option on EURUSD to hit 1.45 on a binary cash-or-nothing call with a binary payoff of $1000. Then, if at a future agreed maturity date, the currency is trading at or above $1.45, $1000 is received. If the currency is trading below $100, nothing is received.
Types of Binary Options or Binary Bets
Digital options are the most popular type of binary options traded today. You make a bet on whether the price of an asset will move above or below (higher or lower) a predetermined strike price during the time of the contract . For example, if you were trading EURGBP, you would have to predict if the price of the currency pair EURGBP would increase or decrease before the time of expiration, over one hour for example.
If you decide that EURGBP will increase after one hour, you buy a Call option. If you decide that EURGBP will drop after 1 hour, you buy a Put option.
The amount of money you can win or lose is set at all time, which makes it easier to manage your risk. If the price movement does not move in your favour during the hour, you can generally buy a “Close Now” options, which is basically an option in the opposite direction to minimise your risk.
You can also generally extend the contract timeframe (for a fee) if the movement you predicted hasn´t materialised within the timeframe.
Touch trading is a relatively new type of binary option trading and is one that is likely to be of most interest to forex traders.
In touch trading, you need to predict if an asset will “touch” a set price any time before the time of expiration. If you forecast the price movement correctly, and the price of the asset hits the strike price before the time of expiration, you win the bet and receive a pre-setpayout, usually between 75% – 81%.