Binary Option Insights – Your Guide to Binary Options Trading, Brokers and Forex Trading

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Trading Forex with Binary Options

Binary options are an alternative way to play the foreign currency (forex) market for traders. Although they are a relatively expensive way to trade forex compared with the leveraged spot forex trading offered by a growing number of brokers, the fact that the maximum potential loss is capped and known in advance is a major advantage of binary options.

Defining Binary Options

Binary options have two outcomes: They settle either at a pre-determined value (generally $100) or at $0. This settlement value depends on whether the price of the asset underlying the binary option is trading above or below the strike price by expiration.

Binary options can be used to speculate on the outcomes of various situations: Will the S&P 500 rise above a certain level by tomorrow or next week? Will this week’s jobless claims be higher than the market expects? Or will the euro or yen decline against the U.S. dollar today?

For example, say gold is trading at $1,195 per troy ounce currently and you are confident that it will be trading above $1,200 later that day. Assume you can buy a binary option on gold trading at or above $1,200 by that day’s close, and this option is trading at $57 (bid)/$60 (offer). You buy the option at $60. If gold closes at or above $1,200, as you had expected, your payout will be $100, which means that your gross gain (before commissions) is $40 or 66.7%. On the other hand, if gold closes below $1,200, you would lose your $60 investment, for a 100% loss.

Binary Option Buyers and Sellers

For the buyer of a binary option, the cost is the price at which the option is trading. For the seller of a binary option, the cost is the difference between 100 and the option price and 100.

From the buyer’s perspective, the price of a binary option can be regarded as the probability that the trade will be successful. Therefore, the higher the binary option price, the greater the perceived probability of the asset price rising above the strike. From the seller’s perspective, the probability is 100 minus the option price.

All binary option contracts are fully collateralized, which means that both sides of a specific contract – the buyer and seller – have to put up capital for their side of the trade. So if a contract is trading at 35, the buyer pays $35, and the seller pays $65 ($100 – $35). This is the maximum risk of the buyer and seller and equals $100 in all cases.

Thus the risk-reward profile for the buyer and seller in this instance can be stated as follows:

Buyer

  • Maximum risk = $35
  • Maximum reward = $65 ($100 – $35)

Seller

  • Maximum risk = $65
  • Maximum reward = $35 ($100 – $65)

Forex Markets

Binary options in forex are available from exchanges such as Nadex, which offers them on the most popular pairs such as USD-CAD, EUR-USD, and USD-JPY, as well as on a number of other widely-traded currency pairs. These options are offered with expirations ranging from intraday to daily and weekly. The tick size on spot forex binaries from Nadex is 1, and the tick value is $1.

The intraday forex binary options offered by Nadex expire hourly, while the daily ones expire at certain set times throughout the day. The weekly binary options expire at 3 P.M. on Friday.

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For forex contracts, Nadex calculates the expiration value by taking the midpoint prices of the last 25 trades in the forex market, eliminates the highest five and lowest five prices, and then takes the arithmetic average of the remaining 15 prices.

Examples of Binary Options in Forex

Let’s use the EUR-USD currency pair to demonstrate how binary options can be used to trade forex. We use a weekly option that will expire at 3 P.M. on Friday, or four days from now (or Monday). Assume the current exchange rate is EUR 1 = USD 1.2440.

Consider the following scenarios:

1. You believe the euro is unlikely to weaken by Friday and should stay above 1.2425. The binary option EUR/USD>1.2425 is quoted at 49.00/55.00. You buy 10 contracts for a total of $550 (excluding commissions). At 3 P.M. on Friday, the euro is trading at USD 1.2450. Your binary option settles at 100, giving you a payout of $1,000. Your gross gain (before taking commissions into account) is $450, or approximately 82%. However, if the euro had closed below 1.2425, you would lose your entire $550 investment, for a 100% loss.

2. You are bearish on the euro and believe it could decline by Friday, say to USD 1.2375. The binary option EUR/USD>1.2375 is quoted at 60.00/66.00. Since you are bearish on the euro, you would sell this option. Your initial cost to sell each binary option contract is, therefore, $40 ($100 – $60). Assume you sell 10 contracts, and receive a total of $400. At 3 P.M. on Friday, let’s say the euro is trading at 1.2400.

Since the euro closed above the strike price of $1.2375 by expiration, you would lose the full $400 or 100% of your investment. What if the euro had closed below 1.2375, as you had expected? In that case, the contract would settle at $100, and you would receive a total of $1,000 for your 10 contracts, for a gain of $600 or 150%.

Additional Basic Strategies

You do not have to wait until contract expiration to realize a gain on your binary option contract. For instance, let’s say by Thursday the euro is trading in the spot market at 1.2455, but you are concerned about the possibility of a decline in the currency if U.S. economic data to be released on Friday are very positive. In this case, your binary option contract (EUR/USD>1.2425), which was quoted at 49.00/55.00 at the time of your purchase, is now at 75/80. Therefore, you could sell the 10 option contracts you had purchased at $55 each, for $75, and book a total profit of $200 (or 36%).

You can also put on a combination trade for lower risk/lower reward. Let’s consider the USD/JPY binary option to illustrate. Assume your view is that volatility in the yen – trading at 118.50 to the dollar – could increase significantly, and it could trade above 119.75 or decline below 117.25 by Friday. You, therefore, buy 10 binary option contracts (USD/JPY>119.75, trading at 29.50/35.50) and also sell 10 binary option contracts (USD/JPY>117.25, trading at 66.50/72.00). Therefore, you pay $35.50 to buy the USD/JPY>119.75 contracts, and $33.50 (i.e., $100 – $66.50) to sell the USD/JPY>117.25 contracts. Your total cost would be $690 ($355 + $335).

Three possible scenarios arise by option expiration at 3 P.M. on Friday:

  1. The yen is trading above 119.75. In this case, the USD/JPY>119.75 contract has a payout of $100, while the USD/JPY>117.25 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  2. The yen is trading below 117.25.In this case, the USD/JPY>117.25 contract has a payout of $100, while the USD/JPY>119.75 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  3. The yen is trading between 117.25 and 119.75: In this case, both contracts expire worthlessly and you lose the full $690 investment.

The Bottom Line

Binary options are a useful tool as part of a comprehensive forex trading strategy but have a couple of drawbacks in that the upside is limited even if the asset price spikes up, and a binary option is a derivative product with a finite lifespan (time to expiration).

However, binary options have a number of advantages that make them especially useful in the volatile world of forex. For starters, the risk is limited (even if the asset prices spikes up), the collateral required is quite low, and they can be used even in flat markets that are not volatile. These advantages make forex binary options worthy of consideration for the experienced currency trader.

Binary Options Academy for Beginners – Binary Option Trading 101

Education and experience are the main constituents that ensure success in any venture. The same holds true for binary options trading as well, unless you are among the lucky few individuals who can make a considerable amount of profits out of sheer fortune alone. However, don’t entrust your savings on blind luck, as even the luckiest gamblers in the world face massive losing streaks from time to time. Binary Options trading does not reward gamblers, or luck for that matter, unless traders are willing to take calculated risks in their trading decision.

As a beginner, it is imperative for traders to be well-versed about their investment opportunities, and have a thorough knowledge of the different aspects of binary options trading and the trading strategies in general. Our innovative binary options training program is designed for beginners and traders who are just starting out in the industry and provides comprehensive information on all aspects of binary options trading. Our binary options guide for beginners is designed to offer a relaxed learning platform that reduces the learning curve for all types of traders, irrespective of their trading expertise.

Beginner Level Table Of Contents:

Getting Started In Binary Options Trading

It is relatively easy to get started in binary options trading and does not usually involve any complicated procedures. Unlike the traditional financial markets, traders can open a binary options trading account for a very small initial investment, with several binary options brokers offering their services for a very insignificant amount. The average investment required for a binary options account is $250, but some companies offer binary options products and services for a small investment of $1.

There are countless binary options brokers in the market that cater to beginner traders, and we have reviewed some of the leading and reputed companies in the market to offer you the best option for your investments. You can open an account within minutes, and make a deposit to your trading account using multiple online payments. Some brokers may also require its traders to send in verification documents before commencing trading, while other brokers may request for identity proofs and other documents at the time of withdrawal.

Nevertheless, traders should make it a priority to open a demo trading account and practice their trading strategies before putting real money on the line. Beginner traders are largely unaware of the dynamics of the financial markets, and even though it may be exciting to dive into the markets without any precaution, you should consider the implications of losing a significant chunk of your trading capital within the matter of a few seconds. Therefore, we can’t stress the importance demo trading enough before commencing your live trading journey.

Grasping The Different Concepts & Components In Binary Options Trading For Beginners

As a first step, traders must learn binary options trading by understanding the different terminologies and concepts used in the exotic financial market. Binary Options trading involves making a call or put option to bet on the movement of the market. The call option is simply the possibility of buying an underlying asset in the hope of the price going up, while the put option is the option of selling an underlying asset to take advantage of the price moving down.

Binary options trading has only two outcomes and is entirely different from the traditional forms of investing. In conventional FX, CFD, and Stock trading, the profit and loss of trading are determined by the money invested in a trade, the magnitude of movement, and the cost of trading. On the contrary, binary options trading has two outcomes, a fixed ROI for in-the-money trade and a loss of the entire invested capital for out-of-the-money trade.

Binary options trading is a unique concept in financial investments that involve different components that contribute to the overall trading environment. Traders will have to understand the core trading attributes such as expiry times, payouts, binary options products, entering trades, exiting trades, rollover, double up, and refunds, in order to ensure clarity of trading. One must only attempt to trade the markets after gaining a proper understanding of the multiple components and concepts in binary options investments, which can indeed pave the way for deeper market analysis and enhanced success in trading.

Trading Strategies & Money Management

Although the binary options market has a very straightforward concept that basically comes down to a call or put option, there are multiple strategies available in the markets that are aimed to offer different trade outcomes. Not all trading strategies are guaranteed to be profitable, as it depends on a wide variety of conditions. One trading strategy might be profitable for one trader, while the same strategy may not work for another. It depends on different trading factors such as the psychology of the trader, market conditions, money management, and trade management. The strategy can also vary depending on the underlying financial instrument, the expiry times, and the type of analysis performed by a trader.

Even if a trader is disciplined in his/her approach to learning by keeping track of all the technical analysis, fundamental factors, and the different strategies in the market, he/she can only enjoy profitable trading by exercising proper money management and reducing the risk by controlling the capital outflow. A trader can gamble a huge sum of money and win quite a few trades consistently, but that doesn’t make him/her a complete trader. In stark contrast, a trader that can be profitable despite having a string of profits and losses in their account can guarantee of long-term profitability without succumbing to severe account drawdowns.

Money management is a result of extensive practice, emotional strength, and a capability to withstand market pressures without acceding to greed and emotional instability. A majority of successful traders in the market stress on the importance of having a trading plan, and being able to stick with it, despite the adverse market conditions. At times, even the most lucrative trading strategy won’t work, but it is up to the trader to go in and tweak their strategies to get back to their winning ways. Of course, during times of drawdown, a trader must have the strength and the tolerance to keep the losses to a minimum, which can indeed help in preserving the trading capital for taking advantage of the winning streaks in the future.

Inherent Risks Of Binary Trading

It is essential for traders to know the risks of binary options trading before investing. There are multiple risks associated with binary options trading and is not exclusively reserved to losses incurred in trading. Other risks include loss of trading capital due to broker scams, loss of money due to faulty trading signals, losses induced by trading platform malfunctions, and outright financial malpractices perpetrated by trading companies. Each of the risks outlined here is all detrimental to the profitability and bottom line of a trader’s career, as even a profitable trader can find it difficult to acquire profits if faced with adversities.

In our binary options school and training academy, we cover a wide range of risks associated with binary trading. We will not only offer better insights into mitigating risks, but we also give advice into being proactive against financial scams. It is always a better option to take the safer route in the investment market, rather than taking the risk with your hard-earned money.

Binary Options Robots & Trading Signals For Beginners

Automated and social trading is an integral part of the financial markets and is proving to be insanely popular with binary options traders. Automated trading is usually an established trading strategy among professional traders, but these trading concepts can be replicated in a beginner’s trading account for improved profits. Beginners can take advantage of the trading robots, trading signals, and even social trading to enjoy better returns for their trading ventures, all the while using all the binary options learning resources available in our Binary Trading Academy to learn the trading concepts.

How Can Beginner Traders Benefit From Our Learning Resources

All of our binary options tutorials are created with the beginner trader in mind, and can not only make the job of learning easier but can also help traders to stay safe in the binary options market. We cover all the major aspects of binary options trading, which in turn help you to stay informed, despite the uncluttered information that is available through online sources. We don’t want to confuse our readers, and we have taken every precaution to create a feature-rich binary options education program for beginners.

Our beginner binary options training program is not only suitable for amateur traders but can also come in handy for intermediate and even expert traders. During the course of a trading career, it is natural for traders to miss out on several basic concepts of trading. It is also possible for traders to forget what they have learnt from their earlier days of trading, and might want to refresh on some of the beginner concepts in trading. Therefore, our beginner binary options courses should also be of greater assistance for all categories of traders, without any distinction.

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