Understanding Forex Binary Options

When setting up the parameters for your Forex trades, you can choose between the standards of stops and expirations or, you can now set a binary option. Forex binary options are not available with all trading systems but are fast becoming a standard. There are advantages to these parameters that can work well for you, but only if you have a firm grasp of the limitations of your resources. If you are bundled into a group trading package via a brokerage, setting the parameters may not be something you have much input in deciding. However, understanding what they are will help you in understanding the choices and actions of your brokers.

Stops and Expirations

The standard trading parameters on the Forex market, and common to the stock market, are to set a stop amount that tells brokers when to sell your shares. This is a predetermined value of the unit for how low it can go before you trade, or high it can rise before you do the same. This is done to minimize risk. While the inclination may be to stay with a rising value, the rise only lasts for so long before investors cash in to access the profit and drive the value down. Conversely, a dip in value may not be something a currency or commodity can recover from and it is time to begin trading to minimize loss and move on. Expirations are time limits to how long you want to park your money on a certain risk. This allows you to see what it might do, but not abandon your funds to it indefinitely. Stops and expirations are fixed amounts or time limits that have little flexibility. They trigger selling when their marker is hit.

Flexibility

Forex binary options introduce a greater element of flexibility in setting parameters with investments. Rather than setting a strict time limit, these settings allow for fluctuation before triggering a trade marker. It works by the investor setting a greater than or less than payout option. This hedges the risk against a loss better than a direct stop. If a direct stop tells the system to sell if the value goes below 1, then the trade is made and the investor is out. If twenty minutes later the value jumps to 1.2, the investor has lost out. With binary options, the investor or brokers can set a profit payout percent should the value become less than 1. Then, only a percent of the funds are traded out, returning funding to the account but leaving a mitigated risk for loss or, allowing a risk for gain should the value rise. Binary options remove total financial risk for the investor. There is risk of loss still involved, but it is potentially less than a straight trade out. This type of option is more flexible with market fluctuation than an expiration because the parameter is not randomly selected from a time frame, but a percentage of value context.

Low Risk, but high return?

Binary options are considered the “money market” approach to Forex trading. They are low risk because the percentage parameter you set pre-determines how much you are willing to lose and prevents you from going beyond that. This option focuses on developing your return on investment (ROI) potential for standard trades. The trade-off is that the potential for high return is very low. The percent triggers will not pay out more if you exceed the parameter. One of the best uses for them are short term trades. They can generate profit in hours whereas standard approaches may take several days before the stops are reached and profit percentage points can be assessed. As low-risk as this all may be, it is not a good beginners trading strategy. You must be willing to lose to learn how the Forex market behaves. Taking your experience, you can now begin to use the different options available to maximize the return on your investment. This approach is also well suited for a seasoned trader who wishes to explore, but not risk, with new units of value.

Using Options Effectively

Forex binary options are not a way to make a large return on your trades. They are best used to help you navigate the market to know when to jump in. You can set time limits for them that go by hour, day or week. Then, you can gauge from the ATR (Average True Range) reported from the time frames what the potential for an exchange is shaping into. Binary settings are a means to test the waters, not something to build an entire foundation on. By mixing this technique with the traditional stops and expirations, you can manage trading your funds better and lessen your overall financial risk.