Are binary options and forex trading strategie same

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Binary options and forex trading strategies: Can you migrate from one to the other?

As you may know and, as many times mentioned, binary options and forex are two different things. Yet, despite some clear differences you can find a few elements the two have in common. These allow us to migrate from the trading of binary options to forex. How to achieve it? And what are the risks? Read on to find out!

From binary options to forex

In theory, migrating from binary options to forex is easier than vice versa. As a trader of binary options you must analyse markets and have an idea of which direction the market will move in. Trading orders used in forex are very simple because you can either buy or sell (there are no more options except you speculate whether to place your order instantly or once some specific conditions are met e.g. limit order).

Well-known buttons in binary options trading: CALL and PUT

In most cases, it is easy to swap strategies used for binary options trading into a forex strategy. For instance, you can use trend lines and formations normally used in binary options.

The CALL option in binary options would in forex translate into buying a given asset. (.. to be later sold once you feel that the profit is worth it) However, if you don’t reach the profit level you must close the position soon.

In the PUT option, the procedure is the exact opposite; you must sell.

From forex to binary options

While a forex trader only knows BUY or SELL, binary options offer more types of trading. Some of the basic types of binary options include: high-low (price going up or down), one touch (speculating on touch), no touch (market not reaching the price level) and ladder (price remaining within a range or beyond).

As a forex trader, you must get rid of your black-and-white thinking and exploit all trading opportunities. Understanding trading all types of binary options is nothing difficult. What may be difficult, however, is to choose the right one.

A typical forex trader is used to closing trades whenever he or she feels comfortable, or with a fixed take-profit. After you have migrated to binary options, you will lose this advantage.

Easy forex strategy described in article: Developing your first forex strategy

Binary options and forex: trading differences

We have focused on this issue many times before. The trading systems are quite different. Binary options trading is somewhat safer, because you set a maximum loss before opening a trade. Seeing from the opposite side, your gains are limited.

When trading on forex markets you will not see such limitations, which requires more discipline from the trader. The types of trading orders are different but the market is the same. It’s always the same market regardless of what currency pair and what instrument you trade – you trade the same things and see the same things. Having this in mind, the majority of trading strategies can be easily turned from forex into binary options and vice versa.

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You may oppose that on forex, by using stop-loss and take-profit you can make your forex trading a kind of binary options trading i.e. with a risk (100% X) and a potential gain (90% X) without any time limits. Yes, you’re right. But I know many traders who move their stop-loss hoping that one day the trend must revert or, on the contrary, close their trades before reaching the take-profit level. I know what I am talking about. I was no different…

Author

More about the author J. Pro

Unlike Stephen (the other author) I have been thinking mainly about online business lately. I wasn’t very successfull with dropshipping on Amazon and other ways of making money online, and I’d only earn a few hundreds of dollars in years. But then binary options caught my attention with it’s simplicity. Now I’m glad it did because it really is worth it. More posts by this author

2 Responses to “Binary options and forex trading strategies: Can you migrate from one to the other?”

Before you dive within trading you must get a Foreign exchange education. Similar to several alternative investments, you should never just diving into stock trading on this currency exchange market without find out what your in for. With the appropriate foreign stock trading education, you’re on the appropriate track to how to make a considerable sum of gain trading on foreign currency exchange market.

Trading Forex with Binary Options

Binary options are an alternative way to play the foreign currency (forex) market for traders. Although they are a relatively expensive way to trade forex compared with the leveraged spot forex trading offered by a growing number of brokers, the fact that the maximum potential loss is capped and known in advance is a major advantage of binary options.

Defining Binary Options

Binary options have two outcomes: They settle either at a pre-determined value (generally $100) or at $0. This settlement value depends on whether the price of the asset underlying the binary option is trading above or below the strike price by expiration.

Binary options can be used to speculate on the outcomes of various situations: Will the S&P 500 rise above a certain level by tomorrow or next week? Will this week’s jobless claims be higher than the market expects? Or will the euro or yen decline against the U.S. dollar today?

For example, say gold is trading at $1,195 per troy ounce currently and you are confident that it will be trading above $1,200 later that day. Assume you can buy a binary option on gold trading at or above $1,200 by that day’s close, and this option is trading at $57 (bid)/$60 (offer). You buy the option at $60. If gold closes at or above $1,200, as you had expected, your payout will be $100, which means that your gross gain (before commissions) is $40 or 66.7%. On the other hand, if gold closes below $1,200, you would lose your $60 investment, for a 100% loss.

Binary Option Buyers and Sellers

For the buyer of a binary option, the cost is the price at which the option is trading. For the seller of a binary option, the cost is the difference between 100 and the option price and 100.

From the buyer’s perspective, the price of a binary option can be regarded as the probability that the trade will be successful. Therefore, the higher the binary option price, the greater the perceived probability of the asset price rising above the strike. From the seller’s perspective, the probability is 100 minus the option price.

All binary option contracts are fully collateralized, which means that both sides of a specific contract – the buyer and seller – have to put up capital for their side of the trade. So if a contract is trading at 35, the buyer pays $35, and the seller pays $65 ($100 – $35). This is the maximum risk of the buyer and seller and equals $100 in all cases.

Thus the risk-reward profile for the buyer and seller in this instance can be stated as follows:

Buyer

  • Maximum risk = $35
  • Maximum reward = $65 ($100 – $35)

Seller

  • Maximum risk = $65
  • Maximum reward = $35 ($100 – $65)

Forex Markets

Binary options in forex are available from exchanges such as Nadex, which offers them on the most popular pairs such as USD-CAD, EUR-USD, and USD-JPY, as well as on a number of other widely-traded currency pairs. These options are offered with expirations ranging from intraday to daily and weekly. The tick size on spot forex binaries from Nadex is 1, and the tick value is $1.

The intraday forex binary options offered by Nadex expire hourly, while the daily ones expire at certain set times throughout the day. The weekly binary options expire at 3 P.M. on Friday.

For forex contracts, Nadex calculates the expiration value by taking the midpoint prices of the last 25 trades in the forex market, eliminates the highest five and lowest five prices, and then takes the arithmetic average of the remaining 15 prices.

Examples of Binary Options in Forex

Let’s use the EUR-USD currency pair to demonstrate how binary options can be used to trade forex. We use a weekly option that will expire at 3 P.M. on Friday, or four days from now (or Monday). Assume the current exchange rate is EUR 1 = USD 1.2440.

Consider the following scenarios:

1. You believe the euro is unlikely to weaken by Friday and should stay above 1.2425. The binary option EUR/USD>1.2425 is quoted at 49.00/55.00. You buy 10 contracts for a total of $550 (excluding commissions). At 3 P.M. on Friday, the euro is trading at USD 1.2450. Your binary option settles at 100, giving you a payout of $1,000. Your gross gain (before taking commissions into account) is $450, or approximately 82%. However, if the euro had closed below 1.2425, you would lose your entire $550 investment, for a 100% loss.

2. You are bearish on the euro and believe it could decline by Friday, say to USD 1.2375. The binary option EUR/USD>1.2375 is quoted at 60.00/66.00. Since you are bearish on the euro, you would sell this option. Your initial cost to sell each binary option contract is, therefore, $40 ($100 – $60). Assume you sell 10 contracts, and receive a total of $400. At 3 P.M. on Friday, let’s say the euro is trading at 1.2400.

Since the euro closed above the strike price of $1.2375 by expiration, you would lose the full $400 or 100% of your investment. What if the euro had closed below 1.2375, as you had expected? In that case, the contract would settle at $100, and you would receive a total of $1,000 for your 10 contracts, for a gain of $600 or 150%.

Additional Basic Strategies

You do not have to wait until contract expiration to realize a gain on your binary option contract. For instance, let’s say by Thursday the euro is trading in the spot market at 1.2455, but you are concerned about the possibility of a decline in the currency if U.S. economic data to be released on Friday are very positive. In this case, your binary option contract (EUR/USD>1.2425), which was quoted at 49.00/55.00 at the time of your purchase, is now at 75/80. Therefore, you could sell the 10 option contracts you had purchased at $55 each, for $75, and book a total profit of $200 (or 36%).

You can also put on a combination trade for lower risk/lower reward. Let’s consider the USD/JPY binary option to illustrate. Assume your view is that volatility in the yen – trading at 118.50 to the dollar – could increase significantly, and it could trade above 119.75 or decline below 117.25 by Friday. You, therefore, buy 10 binary option contracts (USD/JPY>119.75, trading at 29.50/35.50) and also sell 10 binary option contracts (USD/JPY>117.25, trading at 66.50/72.00). Therefore, you pay $35.50 to buy the USD/JPY>119.75 contracts, and $33.50 (i.e., $100 – $66.50) to sell the USD/JPY>117.25 contracts. Your total cost would be $690 ($355 + $335).

Three possible scenarios arise by option expiration at 3 P.M. on Friday:

  1. The yen is trading above 119.75. In this case, the USD/JPY>119.75 contract has a payout of $100, while the USD/JPY>117.25 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  2. The yen is trading below 117.25.In this case, the USD/JPY>117.25 contract has a payout of $100, while the USD/JPY>119.75 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  3. The yen is trading between 117.25 and 119.75: In this case, both contracts expire worthlessly and you lose the full $690 investment.

The Bottom Line

Binary options are a useful tool as part of a comprehensive forex trading strategy but have a couple of drawbacks in that the upside is limited even if the asset price spikes up, and a binary option is a derivative product with a finite lifespan (time to expiration).

However, binary options have a number of advantages that make them especially useful in the volatile world of forex. For starters, the risk is limited (even if the asset prices spikes up), the collateral required is quite low, and they can be used even in flat markets that are not volatile. These advantages make forex binary options worthy of consideration for the experienced currency trader.

Binary Options Trading Strategies

Trading with Binary Options

Binary Options, known also as Digital Options or All-or-Nothing Options are not new financial instruments, but thanks to the new technologies, these are now available to the public and present an easier and faster way to make money.

The Digital option term derives from the digital nature of electronic devices which have only two states of being, “on” or “off” as with digital options trading.

When you hold a digital option, you are either in an ―On‖ state indication which means you are in the money or in an ―Off‖ state implying you are out of the money.

The value of the payout (Some brokers offer up To 85% return) is determined at the onset of the contract and does not depend on the magnitude by which the price of the underlying asset moves, so whether you are in the money by $0.01 or $0.05, the payout that you receive will be the same.

Binary Options are sometimes called all-or-nothing trades, meaning that either you are In-The-Money (ITM) and you get the specified payout, or you are Out-of-the-Money (OTM) and you lose your traded amount.

Binary options trading are a fast and exciting way to trade the financial markets. The payout rate trading digital options is high in comparison to any other traditional financial trading.

From the buyer’s perspective, the main advantage of binary options trading is that the Risk taken is limited to the premium that the trader pays up front to take on a binary option position. So in above example, the Risk taken by the trader is limited to $100 in that particular position.

This benefit means that the binary options trader can feel secure in knowing that their downside is limited to their initial trade size. While they can still profit if their market view turns out to be correct, they avoid having to worry about stop loss order slippage or losing their trading discipline.

Furthermore, binary options are a simpler trading vehicle having a limited risk profile since they either pay off a fixed amount or they do not, depending on where the underlying instrument is trading at the binary option’s expiration.

Another advantage is that binaries can often be traded for shorter time frames (1 hour, ½ hour or even 15 min) via binary options trading platforms then are typically available for normal options offered by exchanges.

Several types of Binary Options can now be traded online using a variety of binary options trading strategies.

High/Low: The most commonly available binary options are “High/Low” also known as “Above” and “Below” or “Call/Put” binary options. Basically, a trader will receive a payout on a long binary option if the market is higher than the strike price of an above binary at expiration, or under the strike of a below binary.

Fr om the buyer’s perspective, the main advantage of binary options trading is that the Risk taken is limited to the premium that the trader pays up front to take on a binary option position. So in above example, the Risk taken by the trader is limited to $100 in that particular position.

This benefit means that the binary options trader can feel secure in knowing that their downside is limited to their initial trade size. While they can still profit if their market view turns out to be correct, they avoid having to worry about stop loss order slippage or losing their trading discipline.

Furthermore, binary options are a simpler trading vehicle having a limited risk profile since they either pay off a fixed amount or they do not, depending on where the underlying instrument is trading at the binary option’s expiration.

Another advantage is that binaries can often be traded for shorter time frames (1 hour, ½ hour or even 15 min) via binary options tradingplatforms then are typically available for normal options offered by exchanges.

Several types of Binary Optionscan now be traded online using a variety of binary options trading strategies.

High/Low:The most commonly available binary options are“High/Low”also known as“Above” and “Below”or“Call/Put”binary options. Basically, a trader will receive a payout on a long binary option if the market is higher than the strike price of an above binary at expiration, or under the strike of a below binary.

One Touch:Some online binary options trading platforms also offer“One Touch”above or below binary options that generate a payoff as soon as their trigger level trades in the underlying market… even before the expiration time.

Boundary:Another popular type of binary option is the“Range or Boundary”binary that is characterized by a range that is compared to the underlying market at the option’s expiration. Typically, an ―in‖ range binary pays off if the market ends up inside the range, while an ―out‖ range binary pays off if the market ends up outside the range.

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