Binary options are available on various underlying assets: stocks, indices, commodities and currencies. The latter are one of the most important financial products, both within the world of binary options and beyond. For every serious trader it makes sense to know something about the forex market, and there attractive opportunities for binary option traders.
Currencies (or: forex) constitute the world's largest financial market, with a daily turnover of about 4 trillion(!) pounds. The foreign exchange rates are determined by macro-economic developments (fundamentals), and the reaction of investors (sentiment). There are various techniques for predicting the development of exchange rates. The most important are technical analysis and fundamental analysis.
Currency trading in pairs
Currencies are always traded in pairs. That is, you always speculate on the rise (or fall) of one currency relative to another currency. An example is the currency pair GBP/USD. If you buy a call (higher) option on the GBP/USD, then you would expect the pound (GBP) to go up and the US dollar (USD) to go down relative to each other. For any two currencies there is only one pair available. There is therefore no currency pair USD/GBP. Would you like to bet on the GBP against the USD? Then buy a put (lower) option on the GBP/USD.
It may be that you have positive expectations for the pound, but also for the US dollar. In that case, you can buy two binary options, both relative to a third currency. For example, to speculate on a rise in the GBP and the USD, you buy call options on the GBP/JPY and USD/JPY.
It can never be the case that all currency pairs increase in value. The prices of currencies are always relative. They reflect the performance of an economy vis-à-vis other economies.
Advantages and disadvantages of binary options on forex
Binary options on currencies have a number of advantages over other underlying values:
- The forex market is open 24 hours a day, 5 days a week. This means that you're not dependent on a specific stock exchange, and can always trade.
- Forex quotes are the most dependent on macroeconomic developments, much more than, for example, shares or stock market indices. You can therefore optimally use your general economic knowledge when it comes to trading in binary options on currencies.
- There are often important economic news facts presented, which directly have a strong influence on the short-term value of a currency. This creates many opportunities to buy profitable binary options.
- There is a lot of information to be found on the internet about currency trading. See for example this free forex course for beginners (not in English).
There are also disadvantages to forex as underlying asset:
- The forex market does not benefit from a general positive or negative stock market sentiment. Often, all stocks move in the same direction on a tradingday, as the stock market will have a good or a bad performance on a given day. That makes it easy to predict the price direction. Forex quotes are always relative, so if some rise, others fall.
- Because the foreign exchange market is vast, your specific knowledge is of little use in predicting the exchange rates of certain companies or sectors. For example, even if you notice Google shares are getting worse, you cannot draw any conclusions from that on the future of the USD.
Binary options versus 'regular' forex trading
If you want to take advantage of fluctuations in the foreign exchange market, then binary options are very suitable for you. However, you can also trade in forex directly (or in CFDs on forex). Forex trading has been around much longer than binary options, and many professional day traders earn their living with it.
Is trading directly in forex better than trading binary options on currencies? That depends. In case of forex trading, you will need to make many more decisions: at what point do I take a position in a currency pair? What are my stop-loss and take-profit? After how much time do I step out again? Should I cover my position with other positions, or strengthen to buy in the interim?
You do not encounter these difficulties with binary options. You only have to choose your entry moment and the currency pair that you want to take an option on, the rest is automatic. At the same time, this also means that you do not have at your disposal all the tactical tools you have in forex. So if you have years of experience in the foreign exchange market and know exactly how all instruments work with forex, then you can earn more. But if you are new to currency trading, then binary options on currencies are a much easier stepping stone to becoming a succesful trader.
Try forex trading for yourself without risk
We hope that after reading this article you understand the differences between binary options trading on currencies and traditional forex trading. The best way to find out which mode of trading works best for you, is to try it for yourself.
That is why we have an offer in collaboration with CFD broker Plus500. This broker generally comes out of reviews as one of the best rated broker for forex. If you open your first trading account at Plus500, you will get a 20 pounds welcome bonus (T&Cs apply). This way you don't have to put your own money at risk to give forex trading a try. (If you do decide to invest your own money, your capital is at risk.)