How is Binary Options Trading Different to Regular Forex Trading?

What is a Binary Option?

To understand the binary option, you must first understand the difference between it and traditional trading methodology.

In traditional trading, what you purchase is essentially a piece of a desired asset, at a certain price. When you sell that asset, the objective is to sell it at a higher price than your purchase price. In this way, you make money from the difference between the sell and purchase prices.

In a binary option, rather, you are not purchasing any asset whatsoever. Instead, you are purchasing the right to a return given that a specific asset performs based on your specifications within a certain period of time. Regardless of amount of performance gain or loss, your earnings and losses remain a flat constant rate based on the original agreement.

Binary in Forex

Assuming you are comfortable with the binary option, you may now apply the same principle to Forex trades. Instead of betting on the performance of an asset, the binary option is purchased with respect to the performance of two international currency pairs.

This means that when a binary option is purchased, two international currencies are selected. For example, the American Dollar (USD) and the Australian Dollar (AUD). There are a few different types of binary option which we will discuss in a moment, however the basis remains the same.

Types of Forex Binary Option

There are three types of Forex binary option commonly used in the market; above or below (the most common), range, and one-touch.

Above or below

The above or below option is the most commonly used Forex binary option and averages a 70% return on investment and 85% loss. This means with a $100 investment, a winning return yields $170 where as a loss returns $15.

In an above or below option, given a certain currency pair, (USD & AUD) for example, you choose whether the resulting pair will be above (call) or below (put) the current amount after a period of time.

Range

In a range option can also be known as a ‘hit or miss’ option. In this scenario, you are betting that the currency pair will land within a certain range or, hit (win) or miss (lose) a given range.

The return on investment varies with a range option based on how long the range option is good for, how far the range is from the starting position and how wide the range is. Consult your broker for specifics.

One Touch

A one touch option yields the most return at an average of 75% return. In this option the currency pair is specified to ‘touch’ a specified amount at least once. If that amount is reached, the option pays out. If not, the option is a loss.

Related posts:

1. Understanding Binary Forex Option
2. What Exactly is Forex Binary Option Trading?
3. How to Succeed with Futures and Options Trading
4. Currency Option Trading