Forex binary options vs conventional forex
With markets available 24 hours a day and many brokers offering low commission, tight spreads and high leverage, forex trading has become extremely popular with retail investors. It remains however, high risk, particularly where leverage is involved. Forex pairs are the starting point for forex trading. So a trader is going to buy one currency, using the other.
The trader will buy pounds, using the US dollar. When prices are quoted, they are always the second currency, buying the first. Note however, that the decimal will move, making the price look a little strange to anyone used to exchanging currency for their holiday.
For holiday makers heading to Europe, that equates to The currency of the trading account does not matter, the broker will convert them as required in order to allow traders to buy or sell currencies.
Retail forex trading is simply speculating on the movement of the exchange rates between forex pairs. Binary options brokers are now offering options on between 40 and 50 different currency pairs from all over the globe. Emerging markets have added a whole new element to Forex trading. These markets include regions like South America and Asia. Currencies often represent the market confidence in the entire economy of the area concerned.
Given the huge range of factors that contribute to such economies, it is easy to see why prices fluctuate constantly. Minor and exotic pairs do however, see lower levels of trading volume, which can impact volatility, but also availability at times. So what influences the FX markets? Almost every piece of global news could have a conceivable impact on currency prices. For example, the collapse in the price of oil led to a similar fall in the value of the Russian rouble. An economy so heavily linked with oil will rise or fall with the value of that commodity.
There are additional factors to consider of course, but the example is clear. A more subtle example was the Indian rupee. New governorship at the Reserve Bank of India boosted investor confidence in the recovery plans set out for the Indian currency. That confidence was reflected in the resulting strong performance of the rupee.
Another example is foreign policy. If a nation such as China were to broker a deal with Russia over gas, both currencies may benefit. If markets believed one trade partner has the better side of the deal then one currency may gain while another suffers. Traders may take a view on future foreign policy and invest accordingly. These examples are some of the more obvious and larger market drivers, but illustrate the fact that forex is a very complex market.
Uncertainty in markets usually leads to volatility. The global economy is without doubt uncertain right now, meaning there are plenty of opportunities for Forex traders. Binary options provide an opportunity to profit from the uncertainty. The range of forex currencies available to trade via binary options brokers has never been bigger and the right strategy, for the right currency, could prove very profitable. Our reviews highlight those brokers that focus on exchange rate binary options.
Some beginners skip some forex basics and head straight for strategy. That can be a mistake, and lead to a lot of lessons learnt the hard way losing trades.
The forex market is open hours a day. This is because banks and corporation are open at different times around the world. This demand provides liquidity to forex pairs. Yet each hour of the day has different tendencies based on what part of the globe is open for business. Major markets are open at different times throughout the day. Which market s is open directly affects the liquidity and volatility and forex pairs. Currencies generally see increased liquidity when one or more markets that actively trade, or use, that currency are open for business.
The chart does not show every market in the world. Germany opens one hour before London; therefore, some consider that to be the open, and not the start of the London session. Those major sessions directly impact currency pair volatility. Hourly volatility does follow certain trends. If your strategy is based on volatility or you are using a trending strategy, focus on times of day where the price moves are largest.
If you are using more of a range trading strategy, or prefer low volatility, trade during the sedate times. Check where the charts show decreased hourly volatility. Those seeking reduced volatility, or times more likely to quietly range, trade between When you buy a Binary Option you know at the start, what your maximum loss will be.
It is defined by the cost of the option itself. You may also define your loss trading Forex by adding a Stop Loss order to your position, but two things can then come into play;. Often traders end up trading emotionally which can eventually be disastrous. With Binary Options your maximum loss is always fixed and there are no risks of losing more. While both trading methods share many common features, there are additional elements that set each apart:. Binary Options allow for very short expiry times.
Expiries of just a few minutes are available, in fact even as little as a sixty second expiry. In forex it is very rare that the market will move enough for you to close your position in a few minutes let alone in just sixty seconds. With Forex trading you enter a position with the aim of the price level reaching a certain target which will inevitably be far away from the current price.
Binary Options allow for the target price, the strike, to be a t the money , creating higher chances of the Option being in the money at expiry. This is because you should be entering each trade with a Target profit that is higher than the Stop Loss, for example 35 pips against With each individual trade, more funds are being risked, than will be won in the event of the option finishing in the money.
Also, with binary trading there is no real secondary market. Once you have bought an option, you may want to exit that position before the expiry — you may be trying to minimise your loss or maximise your profit if you think the market is changing.
Therefore you may find yourself looking to sell the option you bought. To do that you only have the choice of selling it at the price the broker, where you bought the option, displays to you. While you could have various accounts with different Binary Option brokers and compare the prices of the option you want to buy before actually buying it, once you are in the trade, if you want to unwind it, that is close the trade before its actual expiry , you have no choice but to do so at the price the broker displays.
Which trading choice is the best i. Binary options or Forex? This depends greatly on your own level of commitment in terms of hours a day in front of a screen and discipline in risk management. With Binary Options you may not need to be in front of a screen for many hours a day to follow the markets on a constant basis as may be necessary when trading Forex. You can take your position and wait for the outcome resting assured that your maximum liability is the cost of the option.
One thing that is common to both markets is the analysis needed to make a trading decision. For both markets you will need to hone your analysis skills and create a profitable trading plan or strategy. Daily volume has increased hugely since those early days. When these forex strategies fail, the system is blamed. Ranging markets do not actually exist.
Any system has the same ultimate goal — to detect the best entries and exit points for any given trade. Everything should be read carefully.
Do not jump to using the high-risk methods without understanding fully how the strategy works. Be prepared to pass up trades if something puts you off. Do not force trades where there are none, opportunities will arrive.
The first point is to offer an explanation of forex markets in general: Exchange of currencies is ruled by the laws of supply and demand. They use HSBC for clearing, so these funds are received there. The transfer order comes in on Tuesday at 4 pm UK time. These may have arrived up to a month ago.
Do not force trades where there are none, opportunities will arrive. The first point is to offer an explanation of forex markets in general: Exchange of currencies is ruled by the laws of supply and demand. They use HSBC for clearing, so these funds are received there. The transfer order comes in on Tuesday at 4 pm UK time.
These may have arrived up to a month ago. The order is fixed at 1. How can banks — or retails investors — make money from this transaction? Extending the hypothetical example, here is how the markets look. Euro outlook is bullish. Asian markets rose during the night. The US fiscal cliff is getting resolved. Millions of retail investors and outlets take BUY orders and place their stops 10 pips under the current price.
Other retail investors now make new buy orders to cover their losses. The price flies to 1. Here, we might exit our BUY positions gradually assuming we followed the bank trades. We exited at 1. Once leverage is considered — and the sheer scale of these trades — huge sums of money have just changed hands.
Banks and retail investors both utilise leverage to make big gains from such moves. The truth is that the volumes are huge 4 trillion USD daily. These levels are defined by the larger players. They also hold really well because retail investors spot them and use too. The smart money cycle happens in 3 price cycles.
These price cycles are not random. This sequence is defined by a set of numbers called Fibonacci numbers. Fibonacci numbers were not developed for trading. Combining Fibonacci with precise price channel calculations and information on how others trade, you have a profitable trading strategy for forex. Well unlike with spot foreign exchange, you need to be right more often.
You need to identify the direction, not the size of the move. During day trading this will not involve big trades shown above. Correlations show which pairs move together. No less importantly, it will show which pairs are unrelated. Correlations are normally displayed with values ranging from to Figures at the extremes of the spectrum are rare — but the closer the number to or , the stronger the correlation. This shows a strong correlation. It shows that the correlation between these two pairs is Correlations tables are created and updated based on hourly, daily and weekly timeframes.
All these timeframes provide valuable information depending on what timeframe you trade on. For short-term trading, the hourly and daily correlations will be the most important important. Figures change, so do not take the above as gospel. For example, a trader might assume trading multiple pairs has offered them diversification.
Only by knowing pair correlations, can this be assured. Risk has effectively been tripled. If leverage has also been used, the risk is large. Another reason why forex correlations matter, is that they can provide you with trades you may not have seen.
High correlations positive to negative provide you with alternative trades; choose the one with the best trade set-up. I also like to use forex correlations to confirm trades. Upon finding forex pairs with high correlations, I will use one pair to confirm trades in the other. When they do not, it warns me that maybe I should look more closely at my trade. Correlations can be a complex statistical topic. Check correlations frequently to be aware of relationships between forex pairs which may be affecting your trading.
Use the correlation data to control risk, find opportunities and filter trades. If you are having trouble seeing how correlations work, try looking at the figures in the correlation tables and then pulling up price charts of the two forex pairs in question.
Notice how the pairs move relative to one another; doing this will help create a general understanding of correlations. A trader is attempting to follow the momentum of an asset price, usually within an established trend channel.
The reason being that it is difficult for institutional traders to put on positions of the sort of size they need without moving the market. This may not necessarily be true for the Forex market as the Major pairs are all very liquid, and there is a vast interbank market. Traditionally swing trading positions itself in terms of time horizon between that of day traders and medium term investors or traders.
A day trader will hold a position for a few seconds or hours at the most while a medium term investor may hold a position for several weeks. However, the forex market is a very different type of ball game. Swing traders in Forex markets may also well be day traders, trying to take advantage of price momentum to the down and upside.
Their mission is to get into the market long as momentum rises to the upside but go short as soon as the market swings round again to the downside. Swing traders, due also to their short holding period, are not so interested in fundamentals and are primarily focused on technical analysis.
It may be something as simple as a 3 day moving average crossover strategy, tweaked to get in and out of positions early. Or a more elaborate mixture of various technical indicators superimposed upon each other.
In any case, the intention is the same, to get in early when the momentum changes and to turn the position around when the market retraces. This strategy, therefore, works particularly well when the market is trending sideways rather than up or down. Forex markets do have many swings even when the market has a clear trend, but attempting to sell in a strong bull market early enough to catch the swing may prove painful.
Defining whether the market is currently suitable, over a given time frame is crucial to the successful outcome of this strategy. You have to consider the time horizon you are trading over, in Forex markets swings happen in comparatively shorter time intervals. It is, therefore, necessary to stick to the time horizon you are trading in to determine if the market is trading sideways. A sideways market is defined when highs and lows do not go past previous highs and lows, giving rise to so-called channels as well as other chart patterns.
The shorter the time frame the smaller the difference between high and low, or the shorter the channel of price action. In comparison, if you are looking at an hour chart the channel might be more like 0. Often sideways markets in time periods that are less than one day can move in very tight ranges as the market consolidates its new level.
As we can see, the pair goes through a relatively tight price range of around 45 pips, between 0. The blue rectangle that goes from May 19 In swing trading, there are no downtime periods; the strategy consists in being long or short continuously. So there are no close and wait periods, which can be useful when the market is retracing allowing you to get back in the market at a better price than the one you exited at.
However, it can be excruciating if the trend is sharp and continued. It is, therefore, necessary to identify a break of the sideways price movement, and the development of increased momentum in one direction. From the chart above it looks like there has in fact been a break-out of the channel pattern. Three of the last four bars have closed above the blue rectangle which should raise red flags to a swing trader. The sideways action may not have evolved into a new uptrend.
However, the fact the price has moved above its channel should create caution. It would be necessary to wait and see if the market has now found new momentum or simply a higher top side to the channel.
As price moves from point 1 to point 2, it may be tempting to open a short position at point 2 with the view that a new bear trend is underway. Only to find that price is now heading back higher again and trading within a range. Correct identification of market regime will allow you to avoid buying when the market is about to turn down, or selling when the market is about to retrace back up.