Using Binary Options to Trade Forex Markets

When we refer to Forex trading, many people automatically assume that the spot FX market is the only one in which an investor can make money. Indeed, buying and selling currency is an excellent way to take advantage of currency movements – but it is certainly not the only way.

Another interesting way of profiting from Forex is using something called "binary options". These are special contracts which predict the future movements of a currency, and then pay out if that movement does indeed eventuate.

Let's take a closer look at binary Forex options to see how they can be of benefit to a trading strategy – and how you can actually use them to make a profit.

How Binary Options Work

Basically, a binary option is a contract that you enter in to with a set outcome. It is almost like playing Blackjack at a casino table – except the odds can be significantly swayed in your favour.

For example, let's take a binary option with the following criteria:

• EUR/USD currency pair.
• EUR/USD is currently at 1.3400.
• You think that EUR/USD will appreciate in the near future.
• You buy a binary option which pays out if EUR/USD reaches 1.3500 in 30 days.

The price you pay for the binary option will reflect the NUMERICAL probability that the currency pair will reach the target price in 30 days. This is calculated through volatility, average daily range, and other factors. However – you immediately have an advantage. You are not a computer, and therefore you might have a better idea of where the currency pair is going in the future.

If this is the case, you can exploit the numerical probability, and use a binary option to profit from your opinion.

The Binary Option Example

Continuing with the example above, someone might buy the contact for $60 – with a return of $100 if the criteria are met. Hence, this represents a $40 profit. However, if EUR/USD fails to reach 1.3500 as predicted – the price of the contract is lost – i.e. $60 loss.

Some people, however, are more accustomed to use binary options than others. Specifically, the trading style which most reflects the use of binary Forex options would probably be the medium to high risk investor. This is simply because of the profit to loss potential ratio which is involved.

Conservative account holders might want to stick to the easier, and more understandable spot Forex market when trading.