Thursday July 9, 2015 - 15:49:11 GMT
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Why Trade Forex with Binary Options?
Are binary options for me? How are they different from forex trading? These are questions I have been asked during this period of increased forex market volatility. Whether to trade forex with binary options vs. margin forex is a personal preference and it pays to aware of the differences before deciding which suits you. In this article I will describe binary options as an alternative to trading margin forex.
What are Binary Options?
Binary options got its name from the fact that there is a black or white result. What is meant by that is there are only two outcomes – either your trade ends in the money (winner) or out of the money (loser). In other words, it is an all or nothing trade result. In binary options there is a specified risk and a specified reward that is known when you put on a trade. It is an all or nothing result. Think in terms of how the word binary is used in computer code. It is either 0 or 1, which means there are only two choices.
Why Trade Forex with Binary Options?
One advantage of forex trading with binary options is that you can limit your loss to your initial investment. This differs from margin forex trading, which involves leverage where you can make more than your initial investment but can also lose more as well. This can work either way but preservation of capital in a market of increased volatility should be a priority. The lure of profits in margin forex can often lead to a loss of discipline and over leverage can result in excessive losses. In binary options, you are only risking what you invest.
In binary options, you are basing your trade on two variables, time and price. One advantage is you can pick the time frame you want to trade (e.g. 30 seconds, one minute, one hour, one day, etc) and coordinate it with a similar time frame chart. This means if your call the time frame right, you will be rewarded if the trade goes your way. On the other hand, you can have the right idea but if your timing is off, you could lose if the trade does not unfold before it expires. This is why coordinating your trade with what you see on a similar time frame chart is a strategy you can use when picking direction.
In forex trading, you can also trade based on a time frame chart but there is no time limit on when to close it out. This can work both ways. If your stop (we strongly suggest using stops for all trades) is not triggered, it will give more staying power and time for the trade idea to play out. On the other hand, and it has happened to all of us, you can have the right idea but get stopped out and then see the trade go your way. This may also give your trade idea less time to play out if the stop gets triggered.
In addition, as we have all seen (and hopefully not experienced), a stop does not offer guaranteed protection as was seen when the Swiss National Bank pulled the floor out of EURUSD and the market locked up and gapped sharply lower. Slippage from gaps are not a risk in binary options where losses are limited to what is invested in a trade.
So why trade forex with binary options? There are differences in trading binary options vs. margin forex and it comes down to personal preference. However, for those looking to limit risk, binary options is an alternative that should be considered.
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