Trading currency pairs on Forex is a very popular form of investment speculation these days. One of the main reasons for this is that many novices are attracted to Forex because of its enormous daily turnover which is reputed to be in the region of $3 trillion. They believe that with such a large pot of money available that they should readily be able to grab a slice of it.
However, reality presents a different picture by revealing that only a small proportion of traders are successful. This is because many influences exist that can significantly affect the creation of the price formations of currency pairs making them difficult to predict and hard to trade successfully.
It’s also a difficult task to find the right broker to trade Forex with binary options. Your best choice for Forex trading is IQoption, maybe the largest broker out there. Click here to start trading Forex at IQoption!
Consequently, beginners are confronted with a steep learning curve that they need to overcome in order to acquire consistent profits. One of the biggest difficulties that they encounter is that they always have to determine not only the direction in which the price of a currency pair will advance but also its size or magnitude. This can be quite a daunting task for the inexperienced.
As an alternative, many traders have started to use binary options as a method to trade Forex because of the many simplifying benefits that they offer. For example, by undertaking such an action you will then be able to just focus on predicting the price direction of a currency pair without the necessity to evaluate its size. This means that, for a ‘call’ binary option, if price finishes by just one pip higher than its opening price before its expiry time elapses then you will be in-the-money. In contrast, you need price to finish at least 1 pip lower than its opening or strike price for a ‘put’ binary option in order to register a profit.
Another vital procedure that you must perform in order to directly trade Forex successfully is to devise a powerful risk and money management strategy so that you can restrict your risk exposure per trade. However, if you trade Forex using binary options you will not be required to undertake this complicated task so stringently. This is because you will always understand precisely what your pre-determined profits and losses will be even before your contracts are activated.
By studying a simple sample, you can verify the increased simplicity that you will experience by trading currency pairs using binary options as opposed to opening positions directly on Forex. For example, imagine that your Forex trading system notified you that you should open a new short AUDUSD position.
As you will also know that your maximum potential loss would be about 85% of your investment, you could determine easily the size of your deposit in order that it complied with your 2% maximum risk per trade money management strategy. Let us assume that this figure is $1,000. In addition, as the recommendation from your trading system was based on using the daily time-frame, you could safely select an expiry time of 1 hour.
So now, all you would have to do is activate a ‘put’ binary option using the AUDUSD currency pair as the underlying asset with an expiry time of one hour. Assume that the opening or striking value of your option is 1.3281. After the expiry time of one hour elapsed, if the value of the AUDUSD had been just one pip below its opening price at 1.3280 then you would be in-the-money and would receive a payout of $800. Not bad for one hour’s work. If you had traded the Forex directly, you would have needed to capture about 228 pips in order to generate the same return using a $1,000 deposit.
The above sample illustrates that you would have had to undertake some complex trading decisions if you had activated the trade directly on Forex. For example, you would have had to place accurate stop-losses and profit-targets. You would also have had to determine your deposit size accurately in accordance with your money management strategy. You may have subsequently suffered significant stress while waiting for price to hit your target. In contrast, if you utilized binary options then you would have found this process much simpler.