In recent years, in the community of financial markets many traders of all types (large and small) have chosen to trade with currency pairs in the Forex market for various reasons. Part of the appeal of trade in the Forex market, either through Forex spot market (spot market) or traditional options on currency pairs, is that the prices of currency pairs are in constant motion. We currently live in an interconnected world where a change in the US economy, for example, not only have an impact on the US dollar but also in other currencies such as the euro, Australian dollar and Japanese yen.
If a trader makes the decision to trade binary options on currency pairs, it is important to develop a trading strategy which necessarily requires an adequate understanding of the interrelationships between currencies. For example, if we are trading with options based on the USD/JPY, it is important to have a clear idea about the yen sensitivity to changes in the dollar. Learning the basis of the behavior of the currency pairs in the Forex market is essential to maximize opportunities when trading binary options based on these instruments.
For those traders who have experience trading in Forex in an atmosphere of traditional negotiation, certainly trading with currency pairs through a binary options platform will be quite different. On a platform like this, the trader not only has the ability to perform transactions based on the exchange rate of a variety of currency pairs, but also has the added opportunity to speculate on other asset classes such as stocks, indices and commodities.
In the case of traditional transactions with currency pairs, the trader needs to understand when to buy and/or sell the currency pair to maximize the return on the trades. In the case of binary options on currencies, the trader only has to predict if the value of the currency pair will rise or fall within a predetermined period (expiration period of the option). Once the trader acquires the binary option and open the position, the only thing he or she have to do is wait until the option reach its expiry time to discover if the trade was successful (the option expired In The Money) or not (the option expired Out The Money).
An important point with respect to traditional operations in the Forex market is that the amount of benefits that can be produced in a transaction (and also the amount of losses) depends entirely on the amount of pips that the market has risen or fallen and the moment in which the trader closed position. Certainly this puts a lot of responsibility and work on the trader who must constantly monitor the behavior of the currency pair over time. Binary options allow to obtain higher benefits based on a fixed payment. Moreover risk management with binary options is simpler because as profits and potential losses are indicated in advance before the execution of the trade.
To operate successfully with binary options on currency pairs, it is important to follow a series of principles such as:
- Develop a strategy to trade binary options on currency pairs: For this purpose, it is necessary that the trader understands the various interrelationships between currencies. Among other things, the trader must learn about the characteristics of the economy of the country issuing the currency, internal and external factors that affect the relationship of the currency against other currencies, financial news which may have positive or negative effects, behavior of the currency over time and others. In other words, the trader should consider all factors that may affect the exchange rate of the currency pair in which has interest to make accurate predictions about its future behavior.
- Learn to identify reliable trading signals to open positions in currency pairs: After studying and learning more about the selected currency pair, the trader can analyze historical trends of the instruments through the price charts of the trading platform. This can show the times when there have been significant changes in the value of a currency pair and what were the signs that indicated that it was to ocurr a change in the exchange rate. This information can help the trader to make predictions regarding the possible direction in which the pair will move in the future.
- Study both the successful trades and the operations that produced losses: Regardless of the result, we can learn much from our previous trades as they can help to correct mistakes and improve the trading strategies that we are using. For example, suppose you open a position with a call option on the EUR/USD which expired Out The Money, which means we had a losing trade. Instead of continuing and make another trade as if nothing had happened, it is best to analyze why the EUR/USD moved in the opposite direction to that predicted. Thus, in the future we can identify more precise signals that can help us be more successful in the long term.
Transactions with binary options on forex currency pairs are an excellent way for a trader to leverage the knowledge of this financial market and execute trades through a derivative which is quite simple and provides a potentially high level of earnings.
By understanding the benefits offered by binary options on currency pairs, and following some tips and basic principles as explained above, a trader can improve their chances of long-term benefits in these derivatives.