When you undertake a binary options trade on a forex currency pair, you are expressing a view that one currency will strengthen or weaken relative to another currency. You may think, for example, that the US Dollar will go higher against the Euro or will fall against Sterling. In these cases, you will purchase a binary options contract that will be in the direction of your forecast.
There are plenty of currencies where the rate is governed by the market and so this gives almost limitless combinations of currency pairs. In practice, you will generally trade the major currencies, such as the Euro against the US Dollar (EUR:USD) or the Great Britain Pound against the US Dollar (GBP:USD). This still gives plenty of opportunity to trade forex binary options and, since these major currencies are more familiar, will give greater chances of success than forecasting the movement of some of the more obscure currencies.
Analyze your currency pairs
Before you make any forex trades, however, you need to have a proper basis for your investment. You don’t simply want to make a guess at the way you think a currency is going to move or assume it’s going to continue in the direction it’s been moving previously. To trade binary forex options successfully, you need to analyze the asset you’re planning to trade.
The difference between analyzing forex and anything else is that you’ve more than one element to consider. With company stocks, market indices and commodities, you’re focusing on a single asset. For forex, however, you’re dealing with two currencies that make up a currency pair and so you have to take into consideration the factors that affect both currencies.
In terms of technical analysis, there’s no real difference because there’s only one price, the exchange rate between the two currencies, and so there’s a single price chart that tracks how the price moves. You’re therefore looking to identify patterns of previous price movements as a means of forecasting how the price will move in future.
It’s on the fundamental analysis side of things where it gets a little more complicated because you have two currencies to think about. The exchange rate between the two currencies is a measure of the relative values of each one. Consequently, if the economy of one country becomes stronger, the value of its currency will increase and its exchange rate will rise in relation to other currencies. If those country’s economies grow at the same rate, however, the value of their currencies will also increase and the exchange rate between the two currencies will remain basically the same.
The exchange rate for any two currencies, therefore, can be seen as a differential between them and reflects the relative strengths of their economies. A country’s currency will rise in value either because its own economy has become stronger or because the other economy has become weaker. For this reason, you need to study and analyze both countries to trade forex binary options based on their currencies.
Study economic news
As preparation for making any trades, it’s important that you study all news, announcements and publications relating to each country that makes up the currency pair. Look at a country’s employment figures, its gross domestic product (GDP) and balance of payments values. Signs of a healthy economy will point to a currency that is likely to rise in comparison to the less well off economies. High imports from one country will require large amounts of that country’s currency to pay for them, which will tend to increase the cost of that currency.
Changes to a government’s monetary or fiscal policies will affect its country’s exchange rates while a political crisis can drive down the value of the currency. Interest rates are often used by governments to control inflation and to affect the trade balance king4d. Increasing interest rates makes a currency more attractive, causing its value to rise and reducing the level of imports by making them more expensive while at the same time making it easier to export because the country’s products become cheaper. As a binary options trader, you should look for signs that interest rates are due to change since this will point the way that the exchange rate is likely to move.
Once you’ve completed your fundamental analysis of the economies behind the currency pairs, you’ll be in a better position to trade them successfully. However, this analysis has to be a continuous process because you always need to have the very latest information. Indeed, part of the secret behind being a successful forex binary options trader is being able to recognize significant events and then reacting to them quickly. If you’re too slow, the opportunity will be gone and you’ll miss out.
Making the trade
When you are ready to trade, do it straightaway without any hesitation:
- Access your trading account
- Choose to trade currencies
- Select the currency pair you have been analyzing
- Purchase a call option if your analysis suggests the exchange rate will increase or a put option if it is due to go down
- Enter the amount of your investment
- Confirm the trade
- Wait for the expiry time to see if your forecast is correct.
Continue to analyze all the currency pairs you have selected so you always have the latest information. In this way, you will gain in knowledge and experience and will always be ready to trade when the opportunity arises.