Trading Forex using Binary Options
Introduction to Forex Trading
Trading forex involves the buying and selling of currencies. The principle behind the trading of currencies is that the value of one currency to another changes on a daily basis according to the perception of traders, speculators and users of the currencies on a large scale basis. A number of factors make a currency cheaper or costlier than another currency, and it is this difference that forms the basis of currency trading.
To understand this better, visit your local Bureau de Change operator and try changing your local currency with the US Dollar, then try using the US Dollar you just bought to buy back your local currency. You would have noticed two things:
a) There is a difference between the price at which you bought the USD with your local currency, and the price at which you use the US Dollar to buy back your local currency.
b) If you wait for some time and repeat the transaction, you would also notice that the prices at which you performed the transactions in (a) would have changed slightly. Indeed if you live in Iran or Venezuela, you would have noticed a remarkable change in the value of our local currency against other currencies.
If you can understand these principles, then you would have had the basic concept of trading forex.
The real world of forex trading goes beyond what operates in the Bureau de Change. Forex trading is a global enterprise that pulls together major banks, central banks, institutional; investors, retail investors and multinational corporations. Together, all these market players produce a daily turnover of about $4trillion, making it the largest financial market in the world. Market players are positioned on the buying and selling side of the market. If a trader A is on the buying side of the EUR/USD and player B is on the selling side of the EUR/USD, player B will win the trade if the EUR falls in value relative to the USD. The profits of player B will be paid by the losses of trader A. This is a simplified process of how money is made and lost when traders engage in trading forex.
In the real world of forex trading, it is the job of the broker to match the buyers of a currency to the sellers of that currency, and when the initial buyers want to pull out of the transaction (i.e. sell the currency they initially bought), the broker locates new buyers of the currency. This process is repeated several times a day in all the five trading days a week has to offer.
Trading Forex in the Binary Options Market
When trading currencies in the binary options market, the same principles are adopted with some slight differences. Rather than just trade on the basis of the movement of one currency against another, the trader is trading on the behaviour of currency pairs in the market.
a) Will a currency pair be higher or lower than a particular price (market price or a price chosen by the trader) after a particular time period?
b) Will the currency pair breach a price target or fail to reach the target?
c) Is the currency pair likely to trade within a price range or breakout of that range in any direction within a particular time frame?
The answers to these questions form the basis of trading forex in the binary options market.
Procedures for Trading Forex
The first step is to get a forex trading account with a broker (you can see our list of the top binary options brokers here). This will involve filling an account opening form, after which the trader will submit a proof of address (utility bill or bank account statement) and proof of identity (national ID card or international passport) to get the account activated.
Once the account is active, the trader will then be required to fund the account using any of the deposit methods offered by the broker. These include bank wires, credit cards, Moneybookers (or other digital currencies) and any other approved method such as PayPal.
Once the account is funded, the trader can then start trading any of the trade types available. Forex is a 24 hour market, therefore traders will be able to trade currencies at any hour of the day. The trader can trade technically or fundamentally. However, traders will see more success in technical trading as the volume matching requirements on brokers for fundamental trading of currencies in the binary options markets will mean that many currency pairs will be unavailable for news trading.