CHAPTER 11: FOREX BINARY OPTIONS
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Forex binary options provide a structured and simplified approach to trading in the currency market, allowing traders to know their potential profits and losses upfront, thus managing risk more effectively. Unlike spot forex trading, forex binary options have no transaction costs beyond the premium paid, and they offer greater transparency and flexibility in trades. This makes forex binaries particularly appealing for novice traders seeking to enter the market without the volatility and complexity associated with spot forex.
CHAPTER 11: FOREX BINARY OPTIONS
- 1. Chapter 11: Forex Binary Options Forex Binary Options | Page #1
- 2. FOREX BINARY OPTIONS With so many markets to choose from, a retail financial trader can sometimes feel overwhelmed in deciding which markets to trade in. most traders will usually pick the market which will provide them with the most opportunities for profit, in which case they will look for the market with the most liquidity. For most traders, that would be spot currency market. While well known for its liquidity, the spot currency market is also extremely volatile and risky for the uninitiated. However for traders who want to avoid these risks, it is more advantageous for them to trade the currency market with forex binary options instead. Forex Binary Options | Page #2
- 3. RISK CONTROL With forex binaries, you always know beforehand exactly what you stand to earn or lose. Because of the way binaries are structured, you as the trader have complete control over the premium that you put at risk when you enter a binary trade. Unlike spot forex, the premium that you pay is the maximum amount that you can lose if you trade ends up out of the money. Furthermore with the “Buy Me Out” feature available on the anyoption platform, you can even exit your trade before its expiry time hence minimizing your losses even further. Although spot forex traders have more advanced trading tools such as a “stop loss order’ at their disposal, there is no 100% guarantee that it can be executed at the level by the broker at the level specified by the trader. There is always the danger of an illiquid market or slippage which can prevent the stop loss order from being executed by the broker at the desired level. Forex Binary Options | Page #3
- 4. NO TRANSACTIONAL COST With spot forex, traders incur a transaction cost in terms of a wide spread on their Bid/Offer price when they enter or exit their trade. Not only do spot forex traders have to pay this on both ends of their transaction, in some cases due to the volatility of the market, the spread can widen considerably from what was initially quoted eg. If the spreads are not fixed. With forex binaries, what binary traders pay upfront in terms of their premium is all they will pay, regardless of the market situation. Forex Binary Options | Page #4
- 5. VOLATILITY RISK With forex binaries, you need not worry about unexpected volatility. Normally regardless of the reaction of the market towards unexpected news, your binary trade can weather the shock. Even if the reaction is more than what anyone had expected, your risk/reward ratio is still set. Spot forex positions on the other hand can be adversely by sharp swings in the market hence making proper risk management of spot forex trades even more crucial for the trader. Forex Binary Options | Page #5
- 6. SIMPLICITY One of the key attractions of binaries among traders has always been its simplicity. While trading forex binaries do require some knowledge of the market and tools used, the depth of knowledge required is not as in-depth as those required when a trader is trading in the spot forex market. In addition as we mentioned earlier because of the nature of a spot forex trade, to avoid loss due to an unexpected swing in prices, a spot forex trader needs to be even more careful with his risk management process. Forex Binary Options | Page #6
- 7. TRANSPARENCY Related to the issue of market volatility, the prices which spot forex traders are quoted does not necessarily mean that they will get to trade at that price. Due to slippage, the price quoted and transacted could vary considerably. With forex binaries, there is no such problem as the premium quoted is the price which a forex binary trader will transact at. In other words, pricings for forex binaries are more transparent than spot forex quotes. Forex Binary Options | Page #7
- 8. FLEXIBILITY & SCALABILITY Because of the low trade entry cost, a forex binary trader has more flexibility and an ability to scale his trade according to his investment capital. With spot forex, traders are limited to 3 main trade sizes, micro lot, mini lot and full lot. Because of the size of the trade, this could put the spot forex trader into an untenable situation due to the size of the market exposure. Forex Binary Options | Page #8
- 9. CONCLUSION As we have noted above, the advantages of trading the currency market with forex binaries are considerable. Because of the way this instrument is structured, it is especially suited for those who are just starting out with online trading. Forex Binary Options | Page #9
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