Strategy for binary options with Forex economic indicators

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Contents

Strategy for binary options with Forex economic indicators

Investing in binary options without adopting a valid trading strategy is a real suicide. In such case it would be better to play online casino, which surely offers higher payouts. Everything changes if you do binary trading with a good strategy. One of the more valid strategies, in my opinion, is based on the publishing of Forex economic data. With this strategy, taken from one of the best Italian web sites concerning binary options, that I will describe later, you needn’t to make predictions, it’s sufficient to profit by Forex macroeconomic data as soon as they are published on the economic calendar. The sense of timing in this strategy is essential, so let’s use 24option as broker for binary options, which allows to open a position in a short time, in order to fully profit by the trend that you decided to follow.

How can we invest with the strategy of Forex economic data?

First of all we need a Forex economic calendar. Every day we must select in the calendar the three bulls news to follow. Then we note down date, hour and currency that will suffer more due to the economic news.

Hint: the three bulls economic news that are isolated in a particular hour are the ones that function better with this strategy.

What should we do once the Forex indicator is published?

As soon as possible (a few seconds) we invest downward or upward, depending on the result published, with 5 minutes expiration.

In order to better understand when we should invest downward or upward, let’s see the following example:

In the photo we selected for 10.30 p.m. of the 7 th of February 2020 the NonFarm Payrolls indicator for USA market, that is a very important three bulls indicator.

The previous value was 75k and the expected one was 185k. The result was 113k, lower than expectations and so penalizing for the USD currency.

In this case as soon as the datum 113k was published, we invested upward on one of the following Forex couples: EUR/USD or GBP/USD, in which USD appears as denominator. Otherwise we could invest downward on the Forex couple USD/JPY in which USD appears as numerator.

This image shows the result “in the money” of our investment with this strategy. I placed the light blue arrow upward to show our upward entrance, which happened a few seconds after the publishing of Nonfarm Payrolls economic indicator. The candlestick graph is set with a 5 minutes time-frame.

Which scenarios can we have after the publishing of a Forex economic indicator?

▪ If the economic indicator published is exactly the same to the one that the experts expected we don’t invest (NO trading).

▪ If the Forex economic indicator published is better than expected for the relevant currency:

▪ if we invest on a couple in which the interested currency is the numerator, we open an upward position with 5 minutes expiration;

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▪ if we invest on a couple in which the interested currency is the denominator, we open a downward position with 5 minutes expiration;

▪ If the Forex economic indicator published is worse than expected for the relevant currency:

▪ if we invest on a couple in which the interested currency is the numerator, we open a downward position with 5 minutes expiration;

▪ if we invest on a couple in which the interested currency is the denominator, we open an upward position with 5 minutes expiration;

In our example, the published result was worse than expected so, as we already told, we opened an upward position with 5 minutes expiration for the Forex couple EUR/USD.

Why do we choose a 5 minutes expiration?

We choose a 300 seconds expiration because we saw that in the first 600 or even 120 seconds there can be rebounds that could make our strategy vain. 10 minutes are too many, so the best compromise we found is the one proposed by 24option: 300 seconds, that is 5 minutes.

Further considerations about the strategy

We don’t recommend to invest during the speeches of banks presidents because in such period the prices suffer great rebounds depending on the sentences of the president. So, DON’T trade during speeches.

In this page I explained you the strategy I adopt to profit by Forex economic data and that is giving me great satisfactions, but it’s only a strategy, so if you decide to follow it, it’s at your peril.

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.

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