Binary Trading: Analyzing Risks in Forex
Binary trading offers retail foreign exchange investors the opportunity to make quick and easy trades in the forex market without having to perform a lot of technical analyses and other complex buying or selling processes. For forex trade beginners, binary trading is a good way to enter the market without exposing themselves to a lot of risks. Season traders on the other hand also use binary trading as a tool to gauge momentum as well as a hedge against volatile market behavior.
Binary trading in the foreign exchange market is simply an all or nothing investment arrangement wherein an investor “bets” on a prospective price movement of an asset for a specific period in return for a
Forex currency binary trading activities usually have the following characteristics that differentiate them from regular foreign currency trades:
Betting on future price direction
Unlike conventional foreign exchange transactions, binary trading does not involve actual buying or selling of any currency and earn money from the differences of the prices. What traders are actually investing on in binary trading are general price directions for a particular currency pair for a set time frame or an expiry period.
With forex binary trading, an investor can choose to “call” or bet/predict the increase of a certain currency pair price at the end of the expiry period or do the opposite which is to “put” or bet/predict that price would close lower.
Traders know exactly what to gain or lose with binary trading even before the actual transaction starts. This is because in binary trading the payouts are known and set beforehand. If the payout in binary trading is $400 then the trader will get the same amount if he made the right bet. If he made the wrong choice then he will lose his “bet money” by expiration time.
With binary trading there is no need for “stops” or making profit targets. Traders know exactly what the profits are in binary trading and how much the money is being risked unlike normal forex trades where gains and losses are amplified especially when lots of leverage is used.
Low Entry Barriers
It is not difficult to engage in binary trading in the forex market. Using online trading software, retail traders can use their credit cards to make the initial deposit which can be as low as $100. A trader can make a put or call starting at $30 and upwards to start his binary trading operations or open a position.
With binary trading traders can make trades on a specific time frame only depending on the option contract. It can be as short as 30 minutes to an hour or a week and even a month. In most cases however binary trading contracts are for shorter periods, usually within a day.
Binary Trading in Action
To better understand the binary trading process here is how a simple binary option trade works:
First, a trader needs to open a binary trading account and make the corresponding deposit to fund the account. Depending on the broker, initial deposit can range from a low of $100 to $500.
Once a binary trading account is fully funded and active, the trader then selects which currency pair he would like to open a position with. He can select a wide variety of foreign currency pairs or assets to start his binary trading activities. Normally, the following information should be available to traders interested in binary trading:
- Assets or currency pairs open for binary trading transactions
- Binary trading option expiry date or time
- Strike price for the binary trading option
- Binary Trading Call and Put Options
- Binary trading payout percentage
- In the money payout amount (correct prediction of price direction)
- Out of the money payout amount (incorrect prediction of price direction)
Interestingly some companies who offer binary trading services give small percentage as payouts or refunds even if a trader makes an incorrect call or put predictions. While this is a welcome development, it should be stressed that the idea of binary trading should result only in two outcomes: a big gain or a loss of the amount used to purchase the option.
Suppose the trader selects the USD (US Dollar) and JPY (Japanese Yen) pair at a strike price of US$1.000: ¥76.8085 for his binary trading option that expires in three hours, he will then need to choose the direction where he thinks the currency pair will go. He can decide to either Call or Put. He also needs to review the payout percentages and amounts involved for this particular binary trading operation.
If a particular binary trading option contract has a payout percentage of 70 percent and the trader decides to buy the contract for $200 then he will get 70 percent gain on his $200 or a $340 total payout if he is on the money. In case he is wrong, he will lose his $200 bet for being out of the money.
If the trader is satisfied with all the terms and conditions in binary trading, he can then execute his trade. It is important to note that in binary trading, a trader cannot stop the trade unlike that of a regular forex trade. All he needs to do is just wait for the expiration period and see if his prediction will mean profit or gain.
Forex Binary Trading as a Hedging Tool
While the concept behind binary trading may seem like gambling to people who are unfamiliar with the financial markets, serious traders and businessmen use binary trading as a potent business tool. In the case of foreign exchange, binary trading of option contracts offers unique opportunities to create profits and minimize losses readily not found in the equities and other financial markets.
Risk management and hedging is one major reason why investors participate in binary trading. A forex investor can offset any potential losses from his normal forex trades in a very volatile market using binary trading.
If for example a trader has made large commitments to the USD/JPY pair and foresees big downward price changes occurring in the short term or within the day, he can make use of binary trading to mitigate the negative effects to his position by making “put” on the US dollar. In case his prediction gets to be true then he can generate profits to offset his position’s losses.
Profiting from Binary Trading in a Down Market
Investors can create profits from foreign exchange binary trading regardless of any prevailing sentiments in other financial markets. Unlike with equities and commodities, the value of a country’s currency is determined mainly by supply and demand for that specific currency and is rarely affected by any panic
Since foreign currencies are always traded in pairs, it also means that whenever a specific currency price goes down it also means price of the other currency in the pairing increases. This creates opportunities to profit from other currency pairs without having to open regular forex trading positions via binary trading of currency options.