Foreign exchange markets are the largest traded market with a daily turnover of $6.6 billion. Also known as currency markets, traders with high-risk appetites turn to forex markets for quick profits.
However, with binary options, traders can limit risk at the expense of restricting profits when trading on forex.
Forex markets are one of the four markets that you can trade binary options in. Currency markets tend to be dynamic and trade in high volumes, giving traders at all skill levels several profit opportunities around the clock.
But the best part about binary options currency trading is that it makes trading immensely straightforward.
This exhaustive guide covers everything you need to know to trade binary options on forex.
How to Trade Forex with Binary Options
Getting a grasp of how trading binary options on forex markets works requires you to understand the functions of binary options and the workings of forex markets individually.
What is Foreign Exchange Trading?
In foreign exchange markets, traders buy and sell currency to one another to make a profit. These transactions are known as forex spot transactions.
Trading on forex markets does not require ownership of currencies. Instead, traders can buy and sell contracts to speculate on price action on foreign exchange markets.
Here’s how it works:
Let’s say you’re buying USD/CAD in the foreign exchange spot market. By doing this, you’re effectively buying USD and funding the trade with CAD.
If you were to sell EUR/JPY, you would sell EUR and back the trade with JPY. Doing this will make you a profit if the value of EUR were to decrease relative to JPY.
Binary options contracts allow you to speculate on the forex markets by making suppositions about the relative price movements of various currency pairs.
These contracts limit both the risk and the profit; however, binary options typically have high risk-to-reward ratios, making them a comparatively safer financial instrument to trade.
How Does Currency Trading Work?
Currency trading is facilitated via currency pairs. The first currency in a currency pair is the base currency, whereas the second is the quote currency.
Currency pair charts reflect the movement of the base currency with respect to the quote currency. The base currency is assumed worth one.
In simple words, if you see that GBP/JPY = 151.70, it means that one pound sterling is worth 151.70 yen.
Besides higher volumes, one of the more prominent reasons behind the popularity of currency markets is that they provide profit opportunities around the clock.
Forex markets are open 23 hours a day, Sunday afternoon through Friday afternoon. Different markets open at different times, allowing you to trade binary options on forex with many currencies.
The lack of a pattern day trader rule enables traders to trade as often as they like regardless of account size.
Traders also have the flexibility to trade short-term and long-term contracts depending on their trading style and skill level.
The currency market is considered to be open at 8 a.m. E.T. since the U.S. market opens then. Markets tend to be excessively volatile at the time of the U.S. market opening.
Overview of Binary Options
Binary options contracts are financial instruments that boil trades down to a yes or no question:
Will the market rise above a specific price at a particular time?
If you speculate that the price will rise, you buy contracts. If it seems to you like the prices will fall, you short contracts. With binary contracts, you’re speculating on the market rather than buying or selling shares of the underlying market.
Besides forex markets, binaries can also be traded on stock indices, commodities, and events.
How Binary Options Work
In addition to picking a market to trade, there are two other considerations to make when trading binary options: the strike price and the expiration date.
The strike price is the price level that a trader speculates that the market will rise above or fall below.
After deciding how much capital you want to risk, you can find a contract that you think will make you money. Every contract shows you the maximum profit you could make.
The maximum you can lose when trading binary options on forex is the amount of your order. Therefore, with binary options contracts, you cannot lose more than you invest.
All binary options have an expiration date, and some also have an expiration time. If the underlying asset’s price moves in agreement with the trader’s speculation, the trader will make money when the contract expires.
If the price isn’t above or below the strike price as the trader stipulated, they will lose the money they invested in the contract. Contracts can expire in as little as 60 seconds or remain valid for weeks.
Traders can exit a binary options contract before expiration. This can help lock in profits and sometimes limit losses.
Trading Binary Options on Forex Markets
Binary options contracts offer only two outcomes when they expire: you either make a predefined amount or lose your investment.
Since the risk is defined and the outcomes are clear, binary options make it easy for novice and experienced traders to make money. That said, trading binaries on forex markets can still be an exciting way to trade options.
You can carry out binary options currency trading in four steps:
Step #1: Find Market Trends
The easy part of trading binary options is to choose whether the price will rise or fall at a particular time. If yes, you buy contracts, and if no, you short them.
That said, it is vital for you to trade after you’ve gathered all the information you can and made an educated prediction about the price action. If you lack market knowledge, there’s a high chance that you will make the wrong speculation.
Every trader has a unique perspective on markets based on past experiences and knowledge about what’s coming up.
It’s not possible to look into the future and make the right decisions every time. Expert traders who have been speculating in the markets for years, too, cannot predict price movements with absolute certainty of success.
However, it is possible for any trader to make strong predictions. Financial events and market forecasts by experts are open to interpretation – it is up to you to form an opinion.
The activity in currency markets is often influenced by the same events that impact our daily life. Business developments, politics, international relations, and current affairs can potentially affect markets.
For you to become a well-informed trader, you must first become a well-informed individual. You must have up-to-date knowledge of world affairs and learn how they can affect the markets.
Carrying out fundamental analysis, following the financial news, and monitoring the economic calendar are some of the primary ways to stay informed and make intelligent trades.
Learning technical analysis is an excellent idea for any trader that wants to make money trading continually.
Step #2: Choose a Strike Price and Expiration
While binary options contracts have a simple structure, you must remember that you cannot just set any strike price and expiration you like. The exchange you trade on will give you a limited number of price and expiration options to choose from.
For this reason, picking the strike price can be one of the most challenging obstacles of options trading for new traders.
There’s always a risk of you losing money when you trade in any market. But the likelihood of losing money increases if you trade binary options on forex without thinking everything through.
There are two factors you need to consider when selecting the strike price: probability and risk. You must choose the strike price that is most likely to make you money and allows you to take on a comfortable level of risk.
You can approximate the probability of a successful trade by calculating the mid-point between the bid and offer prices.
Step #3: Place A Trade
After you choose the strike price, placing the trade is usually simple. The order ticket should appear when you click and select the price on the exchange’s web portal.
You can click either the buy or sell buttons depending on how you want to proceed. You can then select the type of order you wish to place. Most exchanges allow you to place limit and market orders, while some offer additional order types.
Next, you will need to fill in a size box to indicate the number of contracts you want to buy or sell. Toggling between order types will show you the profit potentials of the various order types.
After you’ve entered all of the required information, you can click on “place order.”
Step #4: Close Out or Wait for Expiration
Forex markets tend to be liquid, so when you click “place order,” the order typically gets filled instantly. It will appear in the positions window in the exchange’s interface.
Limit orders sometimes take time to fill, and they appear in the ‘orders’ window until they are. When the order is filled, it will appear in the positions window. You can then monitor the position from the positions window until expiry.
If you see that the market moves against your position, you can close out early and limit your losses. However, it is also possible that the market moves in favor of your position, in which case you can close out early and lock a smaller profit in.
Waiting till expiration is also an option, but you risk your contract settling at zero.
Frequently Asked Questions
How risky is trading binary options on forex markets?
Every trade involves some risk, so experienced traders only trade with the capital they can afford to risk. If you’re new to trading binary options, we recommend using a demo account to practice trading strategies before spending any real capital.
You must trade with a CFTC-regulated exchange to avoid fraud. Always trade your own account and never engage with any individual who claims to be a broker that can trade for you.
Is binary options currency trading legal?
Trading binary options are legal as long as you trade with a regulated provider. Besides being legal in the U.S., binary options trading is regulated and has relatively low capital requirements.
Ensuring that the exchange you’ve signed up with is based in the U.S. and regulated by the CFTC should ensure you remain protected against unethical market practices.
Are options and binary options the same thing?
Options or vanilla options pay out according to the difference in the option’s strike price and the underlying asset. However, using options to make money can be challenging since they are difficult to price and have the potential for causing significant losses.
Binary options, on the other hand, are short-term contracts that offer limited risk. These options have only two outcomes: you either make a predefined profit or lose the investment. The payout and the losses are fixed in binary options.
What is the minimum deposit for binary options?
Different exchanges have different minimum deposit requirements. You can expect the minimum deposit to range from $100 to $250. Most exchanges require you to fund your trading account when you create it.
It is also important to note that different exchanges offer binary trades at different prices. Besides the trade value, you will need to pay the exchange fees to place an order.
Trading binary options is one of the easiest ways to engage in forex markets and earn a piece of the profits.
With this guide, you have learned all you need to know to trade binary options on forex.
All that’s left to do is create an account on a regulated exchange, and you can get started with making money.
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:
- 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.
- 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.
- 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?
- Will the currency pair breach a price target or fail to reach the target?
- 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.