Forex Binary Options

The modern foreign exchange market is relatively new and since 1970s when it started form grew incredibly reaching nowadays daily turnovers of about $4 trillions. The forex market is unique due to a huge volume, high liquidity, geographical distribution and nonstop operation during weekdays.

The forex market is considered to be the closest to a perfect competition. The market is accessible to practically everyone and the price is determined only by the two market forces, supply and demand. The price is influenced by a wide range of factors including economic factors, political situations and not the least, traders’ psychology.

According to the transaction volumes, on the forex market we can identify important traders such as large banks and security dealers, medium traders that include all sorts of financial institutions and small traders like foreign exchange trader.

The main categories of actors on the forex market are:

- Central banks: these are national banks that put into practice the currency related policies adopted by the government. The central banks could influence the exchange rate of their own currency due to their financial power;

- Commercial banks: large commercial banks like Deutsche Bank, UBS AG and Barclays Capital reach a total of more than 40% of the market share, being among the most important actors on forex;

- Commercial companies;

- Hedge funds;

- Retail forex traders: these are online forex brokers that intermediate the relation between their clients and the forex market;

- Foreign exchange companies;

- Money transfer companies.

Currency pairs

On the forex market the currencies are traded one against the other in pair. This means that the trader buys a certain amount of one currency by paying the corresponding amount of another currency. The direct relation between the two currencies is represented by the exchange rate.

An exchange rate that looks like EUR/USD = 1.41 signifies that 1 euro values 1.41 dollars so to buy 100 euro you will need to pay 141 dollars.

The top five most traded currencies are:

- US dollar: code – USD, symbol - $

- Euro: code – EUR, symbol - €

- Japanese yen: code – JPY, symbol - ¥

- Pound sterling: code – GBP, symbol - £

- Australian dollar: code – AUD, symbol - A$

Binary options trading

The binary options trading revolutionized the forex trading. The first forex trading platforms offered the possibility to trade currencies in the old fashion way. This old fashion forex trading requires skills, a lot of experience and deep knowledge doubled by a good bankroll and a lot of patience.

Binary options trading removed all these obstacles offering everyone the chance to trade on forex market.

In binary options the same exchange rate is used, but the trader doesn’t actually buy the currencies, it only predicts the exchange rate evolution in a certain period of time. If you predict that the price will increase it’s a CALL option, and if you think that the price will decrease it’s a PUT option.

Binary options elements

The binary options are composed from the following items:

- The asset: this is the currency pair that you choose to trade;

- The exchange rate: the current price in real time is displayed and there is a live chart showing the price evolution in the past half hour;

- The expiration time: usually the expiration time can be set for few minutes, few hours, few days, a week or a month;

- The option type: CALL is when the price will go higher the current value or PUT if the price is estimated to get lower than the current price;

- The amount: you need to enter the amount you wish to invest in the binary option;

- The return: once you entered the amount the return is automatically calculated. There are two possibilities for the option, to expire in the money (wining option) or to expire out of money (losing option), so you will see the payout for both situations;

- The confirmation: usually consists in a button with “OK”, “Buy” or “Trade” written on it. You only need to click it and the option is bought.

Forex binary options conclusions

The binary options are the easier form of forex trading. Thanks to binary options the complexity of the traditional forex trading is reduced to only two possible outcomes to choose from, so you can’t get anything simpler than this.

The shorter expiration times, simpler steps and much higher profitability represent the strong points of binary options trading against the classic forex trading. The forex binary options market is in its early days but it has a great potential so it will definitely grow fast attracting many forex traders.

Author: Mihaela Florea