The Retail Forex Market has come a long way in the past decade. Back in the 1990s, the world of foreign exchange trading was purely the domain of large global banks, central banks and large financial institutions. The smallest lot size was $1 million, and the average transaction was roughly $5 million. However, a few creative brokers developed aggregation schemes that allowed for smaller lot sizes and in combination with online software trading platforms, retail forex trading was born and made available for the average consumer on the street, or better still, on the Internet.
Popularity in retail forex has grown dramatically over the past five years, ostensibly due to the flexibility of trading, easy online access by traders, the ability to quickly grasp and practice the techniques necessary for success, and the ability to quickly make money online. The market has also grown in diversity. Investment vehicles are no longer restricted to spot and forward purchases. Today, futures options are actively traded, and leveraging programs can enable financial access at levels that everyone can afford. The genre still requires specialized training to understand the nuances of the craft, and success is highly dependent on the amount of effort expensed on free demo trading platforms. This practice time is necessary to develop a disciplined approach to the market, acquire an ability to execute under highly stressful conditions, and perform at a level of consistency that is required by the fast-paced nature of the forex market.
The latest advancement on the scene of forex trading is the binary, or digital, forex option. Forex options have been traded for some time on the futures markets, and are typically referred to as the “poor man’s” way of trading foreign exchange. Options require a smaller commitment of capital since the actual asset, or underlying currency, is not actually being bought and sold. An option, or derivative instrument, is a contract between two counterparties. The purchaser has the right but not the obligation to purchase a currency pair at a specific price, the strike price, and at a specific time, the expiration date. The seller has the obligation to sell the currency pair to the buyer if the buyer chooses to exercise the option contract. An American-style option can be exercised up to the expiration date, whereas a European-style option can only be exercised on the expiration date. The seller receives a premium from the buyer for his option exercise right.
Binary options create a new opportunity by being an attractive alternative to trading in traditional options. In this case, binary forex options are trades related to directional movements of the currency market where the payout is fixed. The binary nature of the actual payout gives the option its name. The investor can expect only two events over a short timeframe, either a large payout if correct in the direction of the market or an 85% to 90% loss of principal when the trade is unsuccessful. Binary forex options are generally set to expire over short time periods, and a buyer is not required to exercise their option. The payoff is defined up front and is triggered when a price level occurs.
Binary forex options are commonly referred to as all or nothing options and fall under three various types:
Above (Call) or Below (Put) Options: With this binary option, the investor has the opportunity to speculate that his selected currency will strengthen or weaken in the market. The trade is actually for a specific amount (a minimum is generally $100). The option-trading screen will specify the current strike price, percent return and the expiration time/date. For an “Above” example, if the currency is higher than the strike price and a 70% payout is listed, the investor gets $170; if not, he gets $15 with an 85% loss rate. A Below (Put) operates in the opposite manner.
Range Option: For a range option, an investor can speculate if a currency pair will either hit or miss a specific range during the time period of the option. The bet here is both range and time dependent. The payout will also be tied to the distance from the range box.
One Touch Option: This option sets a specific strike price that is above or below the current market price. Payoffs tend to be higher since the market must move more in a specific direction to “touch” the strike price.
Binary options are simple and straightforward to use. Margin calls are nonexistent. Payoffs and downside risks are fixed. They are not nearly as complex as vanilla options, and returns do not require an enormous amount of capital to be realized. The trading format offers more ease of execution, too, but be sure to shop around, since not all forex brokers offer options trading on their respective platforms. If you are interested in this type of trading, one such platform I recommend is Eztrader, it's free, they give you bonus money on deposit, and they mitigate your losses.