Binary Options and Forex
Binary options simplify forex trading to two choices: up or down.
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Do you wish the world was black and white? ☯️
It can be hard to move through a complicated, nuanced world full of grey areas. Whether you’re dealing with the needs of your family and friends, finding your own place in the world, or trying to find the best path forward in your career, there are rarely easy solutions.
The forex market is no different – if it were easy, everyone would be making millions from it. There are always tons of factors and news to be aware of, from the Dollar remaining strong in spite of fading global momentum, to Sri Lanka declaring an economic emergency. Some people thrive off analyzing many layers of meaning to make the most educated guess they possibly can – but sometimes, you just want to throw down your bet.
That’s where binary options come in. While they’re certainly a simpler way to trade forex, it’s still a good idea to have a solid understanding of what they are and how to trade them so you can make informed decisions. That’s what this guide is here for.
Let’s dive in! 🚀
- How Binary Options Work in Forex
- How Binary Options are Priced in Forex
- Binary Options vs. Regular Forex Trading
- How to Trade Forex Using Binary Options
- Hedging Forex Trades with Binary Options
- Conclusion
- Binary Options and Forex FAQs
- Get Started with a Binary Options Broker
How Binary Options Work in Forex 🤔
In the simplest terms, a currency pair can do one of two things: go up, or go down. Now, there’s a whole lot to be said about the way it goes up or down, and that’s what the wide world of technical analysis is for. But as the name suggests, right now we’re keeping things binary: so a pair can go up or it can go down.
Ultimately, this is the closest to gambling that you can get in the forex market if you use it as such. But before you call your bookie, know that prudently using some of the top brokers for trading binary options instead can increase your odds a lot. Moreover, you can trade this way in all kinds of markets, including forex.
Let’s look at an example. Say you’ve been reading the news, and know that Russian investors now prefer Bitcoin to gold or forex. Maybe you have a prediction about how that is going to affect the value of the ruble against the US Dollar. You would then buy a binary option on the ruble that will reach a certain amount by the end of the day. If it does, you will get a payout. If it does not, you will lose the price of the option (provided you hadn’t made any side bets to hedge your position).
How Binary Options are Priced in Forex 💡
Binary options are bought and sold – but who determines the price? For buyers, the cost is the price the option is trading for. For example, say you are analyzing the pair EUR/USD. If it’s quoted at 49.00/54.00, then you pay 54.00 for each contract you buy. For the seller of the option, the price is 100 minus the option price (in this example, 46.00).
The price for the buyer essentially represents how likely the trade is to be successful. The higher the price, the safer the bet: a high price indicates that buyers have faith that this is going to pay off. Probability for sellers is the opposite: the lower the buy price, the higher probability a sale will go in their favor.
The more obscure a currency pair is, the more unpredictable its fluctuations are. This means that they will often have lower buy prices, because the probability of them being successful is harder to determine.
Of course, with lower buy prices, you stand to have a higher payout. But make sure to approach binary trading rationally: you are also assuming higher risk when you go for higher reward. As U.S. forex reserves rise to an all-time high and forex trading grows globally, it’s important to enter the market with a cool head and a strategy.
Binary Options vs. Regular Forex Trading ⚔️
Binary options trading is quite different from regular forex trading. Deciding which is right for you will depend on your trading style and goals. Forex trading has higher potential for profits and more flexibility, while binary options are more straightforward, require less time to research, and have a more defined risk level.
Flexibility & Availability ⚙️
Trading forex is more flexible – and therefore more accessible – than binary options. The forex market crosses many financial centers in every time zone. This means that forex traders can be making trades 24 hours per day if they want to. However, binary options are traded during regular market hours.
Risk & Volatility ⚠️
Binary options are less subject to market volatility than forex trading is, simply because the binary options trader is setting their profit and loss window up front. In forex, the trader doesn’t quite know where their pair is going to go, especially in times of more volatile markets. Because of this setup, the binary options trader has a clearer sense of the risk they’re taking on than the forex trader.
Profitability 💰
That same market volatility in forex means that the potential for profits is much higher. Traders can also leverage forex trades, allowing them to reap larger profits (and sometimes, larger losses) than their capital would normally allow. Binary options are potentially less profitable because they cannot be leveraged.
Fees 💸
When you’re trading forex, you’ll be paying the lowest-possible spreads and commissions to a premium forex broker. In binary options, overhead costs are usually taken out of the final payout, and traders have a stronger sense of what they will be upon closing.
How to Trade Forex Using Binary Options 🧠
To start with, make sure you’ve got one of the top binary options brokers in the United States. Note that binary options brokers are not always regulated by legitimate authorities—but in the US, you can find CFTC-regulated exchanges that offer binary options. Other countries, such as Australia, are also prioritizing binary options compliance.
Before using any binary options strategy, you’ll need to get practiced at recognizing signals. Basically, sometimes in the market there will be a signal that a position is going to go up or down. One way to tell is by following the news: major economic news such as inflation data or new regulations might affect the value of a currency in predictable ways.
Another way to predict signals is by understanding technical indicators when trading binary options. There are many indicators in forex that predict a reversal in price, and you can use these for binary options just as well as for regular forex trading.
Following Trends 💭
One simple strategy for binary options trading is to bet that a trend will continue. This is very accessible for beginners. If you look at a chart and see a position is going down – you might assume that it will continue to go down, and bet on that. Make sure you analyze the ups and downs of the price line, and see where you think it will be at the expiration time based on its previous behavior.
This strategy is the simplest if you set a longer expiry, such as end of day or end of week. This makes you less likely to catch the trade in one of its upswings (if the overall trend is down).
Saddle Strategy 📝
This strategy requires following the news, and specifically monitoring when major announcements are about to be made. The value of a position may increase after a major announcement for a brief period of time, but then it will likely come back down.
In this strategy, you can set an option anticipating the price to rise before the announcement. After the announcement, you can buy an option anticipating that the price will come back down. This way, you have potential to profit on both directions of the announcement’s impact on the market.
💡 Looking for a broker? See our Binarycent review.
Fundamental Analysis 🔬
We’ve said in this article that binary options require less knowledge and research than regular forex trading. However, that doesn’t mean that research and analysis can’t help you succeed as a binary options trader. The more information you have about a particular asset, the better predictions you will be able to make about its future behavior.
For this strategy, pick an asset and do a deep dive. Read up on the position and learn as much as you can about the economies of the two nations the currencies belong to. Then, you will be able to understand the impact of world and national news on your particular position, and be able to place options on it.
Momentum 🚀
Momentum indicators can help you figure out how fast a trend is going. If a position’s price is rising very quickly, that’s a good sign that it will continue to rise – and that information will help you place the right bet on a binary option.
There are a few indicators of momentum available to you. One of the most popular is Average True Range, which calculates the average distance the price point has moved through a certain set of time periods. Some indicators compare current momentum with previous momentum of the security. Momentum indicators will usually be expressed as a percentage.
If a trend has momentum, you are very likely to make a profit on the trade. Some claim that binary options are the only type of option where you can win a trade based on momentum.
Hedging Forex Trades with Binary Options 💲
If you’re concerned about losses in the short-term, it can be a good idea to hedge your forex trades. Binary options are one way to do that.
Say your money is tied up in EUR/USD during a highly volatile market. You’re expecting EUR/USD to go up – but just in case it doesn’t, you can buy a low-cost binary option that will pay out if EUR/USD takes a major nose-dive.
In this way, binary options can protect you from hectic price fluctuations that can result from high volatility. There are plenty more ways to hedge your forex trades if you want to; binary options might be a good choice when you find an option with a very low premium that works to hedge your original position.
Conclusion 🏁
So, now your wish for the world to be simple is granted! Right? Okay, maybe not quite – but we’ve given an overview of how you might get into forex trading without quite as much heavy lifting on researching world news and economies and all that jazz.
Remember, binary options can resemble gambling in a lot of ways – and in gambling, if something is too good to be true, it just might be. (Or you might strike it big – who are we to tell you what’s going to happen?) Keep a clear head, make rational choices, and be consistent and logical in your binary options trading, and you just might turn some money into more money. And isn’t that why we do all this?
Forex with Binary Options: FAQs
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What is the Difference Between Forex and Binary Options?
Forex trading refers to taking a position on a currency and holding that position over long or short periods of time. Binary options trading simplifies the system, so that you choose whether you think a pair will go up or down over a certain amount of time.
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How Do You Trade Binary Options in Forex?
First, set up with a binary options broker. Next, pick a currency pair, and decide whether you think it will go up or down. You can then purchase the option and set your terms and the expiration time. Once the time passes, you will either gain your profit, or lose your investment.
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Are Binary Options More Profitable than Forex?
Forex trading has greater potential for profitability than binary options, but traders are able to be more aware of their risks in binary options trading.
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Is Trading Forex Binary Options Risky?
There are risks involved in trading binary options, but the risk is generally easier to define than forex trading, and more contained thanks to limits set on the trade.
Get Started with a Binary Options Broker
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All reviews, research, news and assessments of any kind on The Tokenist are compiled using a strict editorial review process by our editorial team. Neither our writers nor our editors receive direct compensation of any kind to publish information on tokenist.com. Our company, Tokenist Media LLC, is community supported and may receive a small commission when you purchase products or services through links on our website. Click here for a full list of our partners and an in-depth explanation on how we get paid.
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