Forex Binary Options
Forex binary options are a financial product used to speculate on foreign exchange markets. In this guide, we explore how to trade forex binary options, from strategy considerations to example currency pairs. We also explain the differences between trading currencies traditionally and binary options products.
Top Binary Options Brokers With Currency Pairs
These are the top-rated brokers from our reviews that offer trading on forex binary options:
Top Binary Options Trading Websites
How Forex Binary Options Work
Binary options are a type of financial contract typically with two possible outcomes: the trader receives a fixed payout or loses their initial investment.
Traders predict whether an underlying asset is worth more or less than a set price (known as the strike price) at a set expiry time. In the case of forex binary options, the underlying asset is a currency pair such as EUR/USD or GBP/USD.
As an example, imagine that you stake $100 on a prediction that the GBP/USD pair will be above 1.20 by lunchtime. Your broker offers you a payout of 70%. If your prediction is correct, you receive $170 ($70 plus your initial investment). If you are incorrect, you lose $100.
To be profitable on average, your win rate needs to exceed the breakeven rate implied by the payout/odds and costs. This makes it vital to have a robust trading strategy, as this can help you to avoid making rash or emotional decisions.
We have placed dozens of trades on major, minor and exotic currency pairs using binary options on over 20 platforms.The most popular type of binary contract is the up/down, also known as higher/lower. Clients bet on whether a currency pair’s value will be over or under the strike price at expiry.
Pros Of Trading Forex With Binaries
- Currency pairs are the most widely supported market from our tests of binary options platforms, giving traders a wide choice of providers.
- Traders can often choose from major currency pairs containing the US dollar (USD) and those from emerging and developing countries, offering opportunities in different regions.
- Some brokers provide technical summaries and analyst insights, especially on major currency pairs, as well as economic calendars and breaking news feeds to help inform trades.
Cons Of Trading Forex With Binaries
- Unlike trading stocks with binaries, whereby you might be focused on one stock, you need to understand two different currencies, and how their relative strength drives the exchange rate.
- Currency prices are notoriously volatile and can be influenced by a wide range of macroeconomic factors, making them challenging to predict for inexperienced traders.
- Payouts on prominent currency pairs like EUR/USD and USD/JPY can be high, topping 90% on some platforms, but minor and exotic currency pairs can have much lower potential payouts, sometimes around 50% depending on the broker, pair and market conditions.
- The ‘all or nothing’ nature means you could lose any money you invest if the trade finishes ‘out of the money’.
Forex Binary Options Strategies
In this section, we introduce simple strategies to help you understand the basic principles of forex binary trading. In day trading, most binary options trades are short, sometimes only lasting a few seconds or several hours.
In addition to an underlying trading strategy, forex binaries require money management. A notable technique is the percentage method, whereby only a set percentage of your total capital is invested per trade, such as 0.5-1%. This means several fast losses won’t wipe out all your capital.
Trading The News
Forex markets are traditionally very sensitive to the global news cycle. By keeping an eye on current affairs, traders try to profit from the short-term price movements that occur when a big announcement, such as a Fed interest rate cut, is broadcast.
Important information to look out for includes:
- Consumer/business confidence surveys
- Interest rate decisions
- Unemployment
- Retail sales
- Inflation
American economic releases tend to have the biggest impact on the forex market, as the US dollar is incorporated into many currency pairs. When significant news events hit the market, there can be a quick, strong reaction. You can try to trade this reaction with a high/low options offered by most platforms.
Momentum Strategy
The aim of the strategy is to capitalize on short- to medium-term movements in the value of a currency pair.
Momentum traders can use a variety of tools to determine the strength of a trend and when it might reverse. These include indicators popular with binary traders like the ADX (Average Directional Index), Relative Strength Index (RSI), and Stochastic Oscillator. You can observe how the Stochastic Oscillator reflects the price momentum of GBP/USD in the chart below.
On a candlestick chart, a strong trend is displayed when each peak is higher than the previous peak, and each trough is higher than the previous trough.
Once a trend is identified, traders can open an up or down position. Typically, trends with greater momentum will last longer, and so it may be worth opening an up/long trade.
Binary Options Vs Forex Trading – Key Differences
So far we’ve focused on trading forex via binary options. Next, we compare binary options with traditional forex trading (e.g., spot/CFDs) so you can decide which approach suits you. A summary of the key differences can be found below.
| Characteristic | Forex Trading | Binary Options |
|---|---|---|
| Strategy | Traders speculate on price movements of a currency pair and take a short or long position | Traders earn a fixed payout based on a win or lose outcome only |
| Access | 24/5 | Can be 24/7 with OTC brokers depending on asset/broker |
| Costs | Broker spreads and/or trading commission | No direct costs normally other than what is factored into the final payout |
| Risks | Losses can be high and unpredictable & high margin for trader error | Losses are capped at the initial investment |
| Time period | Not scheduled – traders can close at any time (can be long-term) | Scheduled – expiry date and time set by the trader (usually short-term) |
| Leverage | Yes | No |
| Volatility | High | High |
| Popular brokers | IG / Forex.com / CMC Markets | Pocket Option / Deriv / IQ Option |
Below is a more detailed look at trading forex vs binary options across key areas.
Access
- Forex trading – The currency market is not a centralized marketplace but instead spans across several major financial centres in different time zones. Banks, institutions, and individuals can therefore trade forex flexibly 24 hours a day, 5 days a week.
- Binary options – You trade the underlying asset with binary options, with some over-the-counter (OTC) brokers providing access to markets 24/7, though payouts can vary depending on conditions.
Volatility & Risk
- Forex trading – The forex market moves and fluctuates depending on a variety of factors that affect supply and demand, such as global geopolitical events. This makes the currency market highly volatile and forex trading unpredictable.
- Binary options – With binary options, the trader establishes the profit and loss upfront. Volatility can still affect prices and payouts. Losses are capped at the original investment.
Profitability
- Forex trading – Due to market volatility, profits can be high, though so can losses. Forex trading can also be leveraged. This means you can borrow capital beyond your initial investment to increase your position size (sometimes up to 1000+ times), leading to larger returns but also greater losses.
- Binary options – Binary options can be profitable, but it depends on the skill of the trader and the broker and their payouts. Leveraged investing is not possible with binary options.
Fees
- Forex trading – When forex trading, fees usually come in the form of spreads and commissions set by the online brokerage company. These vary from competitive and transparent to complex and significant.
- Binary options – Costs are typically factored into the final payout when binary options trading. Of course, some brokers offer lower payouts than others, but traders usually have a clearer picture as to what those costs and payouts will be before entering the trade.
Control
- Forex trading – Flexibility to enter, amend or exit an order can be attractive to currency traders. However, this also means there may be a high margin for error if trades are not monitored properly. Also, other factors, such as liquidity, slippage or downtime on the trading broker’s platform can be harder to keep a handle on.
- Binary options – There is some level of control with binary options trading. Profits and losses are pre-determined and the trader chooses the expiry.
Which Is Right For You?
When looking at forex trading vs binary options, it’s important to consider your requirements. If you’re looking for a well-regulated environment, real-time flexibility, and have the time to carefully research and monitor positions, forex trading may best suit your needs.
If you’re looking for a straightforward financial trading product requiring less time and more defined risk, binary options trading may be worth considering. And you can, as explained further above, trade currencies using binary options contracts.
FAQs
Forex And Binary Options: Which Is More Profitable?
The potential payouts for an individual forex trade are often higher than an equivalent binary trade. However, the losses may also be higher. Retail investors can lose money with both, so it ultimately depends on the trader’s style and preference.
Is Forex And Binary Options The Same?
Traditional forex trading often requires direct investment into foreign currencies. Binary options, on the other hand, are fixed-odds financial derivatives that can be based on many different underlying markets, including a range of currency pairs.
How Can I Start Trading Forex Binary Options?
The best way to start is to develop a forex binary options strategy, test in a demo account, and then choose a reliable broker and start with small stakes.