If you’re a Forex trader looking to expand his or her investment portfolio, there is a relatively new financial instrument that you may want to consider adding to your online investments: binary options trading.
What are Forex Binary Options?
Sometimes referred to as digital options – Forex binary options are options that can be purchased for foreign currency exchange rates that offer the opportunity to speculate on whether a Forex rate will finish a predetermined period of time above or below the exchange rate quoted when the option is purchased.
The option finishes in-the-money if the trader selects the correct direction (i.e. trader selects “above” – also referred to as a “call” – and the Forex rate finishes the option period above the rate quoted when the option was purchased) and pays out anywhere from 70-85% of the investment amount.
If the trader selects incorrectly, the option typically pays out 5-10% of the investment amount.
Why would you want to trade binary options?
This financial instrument can be extraordinarily profitable when employed correctly and can also help reduce a trader’s risk exposure in the Forex markets by allowing a trader to hedge his or her Forex positions with a Forex option.
How to invest in binary options
Those of you looking to begin investing in binary options should first try to find an options broker that you feel comfortable investing with.
Some things to look for when selecting an options brokers are:
- intuitive trading interface
- range of underlying assets offered for binary options
- livechat feature to customer support
- range of payment methods available to deposit and withdraw funds
Once you find a broker, you will then want to decide which underlying asset you will want to use for your options. Binary options are offered for stock indices averages, commodity and stock share prices as well as Forex rates.
Those of you who are first and foremost forex traders will most likely want to start with forex binary options since it is fairly easy to incorporate these into your regular FX trading. Most options brokers offer the major currency pairs as underlying assets for FX options so you can take your pick of which of the majors you’re most interested in trading.
Binary.com is a good place to start if you’re looking for an options broker in this field. Check out their offers here.
Once you’ve decided which pair to trade, you will need to decide when and how to speculate on the Forex pair. For this, as well as other trading research, the best thing to do is read technical and fundamental analysis on the currency pair.
Moreover, consulting an economic calendar that shows the upcoming news and events that are likely to affect the value of the forex rate in question can also be very insightful.
Executing your binary options trading strategy
After you’ve created a picture of how you believe the Forex pair you’ve chosen for your Forex binary options investment will behave in the immediate future, it’s time to execute your trade.
First, select how much you would like to invest. This should be determined based up on the payout offered for the binary option you’ve chosen and based upon your other open Forex positions.
Then, determine which direction the asset you’ve chosen is likely to move according to the analysis you’ve conducted on the way the asset has been trading as of late.
Afterward, you must decide which expiry time you would like for the option you are about to invest in. FX option expiries are typically offered in 15 minute increments for popular assets and 30-minute and one hour increments for lesser traded assets.
Finally, execute your trade. Once the expiry time is reached, you will be informed if you option has finished in-the-money or not and the payout will automatically be credited to your trading account balance.
Forex binary options can be a great way to give a trader more control over his or her risk exposure in the Forex markets by offering another tool to profit from movements in the Forex markets.
It may take a bit of time to familiarize one’s self with the way these relatively new financial instruments function, but it’s definitely time well spent if one is able to successfully use them to increase monthly trading profits.