Is a simplified version of Forex Investing, it generally suits a more “Gambling” mentality approach to the Financial Markets. Similar to red/black on a casino roulette table mentality.
How does it work?
It is a currency trade/Investment that offers an all-or-nothing payoff based on a given Forex rate, when the position reaches its expiration date/time. Binary Investing has a single payoff amount rather than the variable profit amounts found in the more traditional spot/Day trading investments.
Binary investments can be used for either hedging purposes (such as downside protection for assets held in a specific currency) or as a speculative bet on the direction a specific Forex rate will move. The going premium on a currency binary represents the consensus “odds” that the strike exchange rate will be reached prior to the expiration of the contract. Binary investors can also sell (short) a currency binary position, reversing the payoff options and effectively betting that the exchange rate will fall.
Binaries are the new kid on the block as far as trading investments go, and many are limited in the currency pairs that can be offered, so shop around.
Depending on the Broker chosen this could be as near as the end of the next hour, or the end of the day, or week, with the binary platform offering monthly expiries too. As with a Forex Investment, decide on the direction in which the asset is predicted to move – UP or DOWN, otherwise known as CALL or PUT. Once the option is initiated, the price that the asset is bought at is known as the strike price.
CALL – a call option is bought when it is predicted that by the expiry time the price of the asset will be higher than its strike price. (Forex Long)
PUT – a put option is bought when it is predicted that by the expiry time the price of the asset will be lower than its strike price. (Forex Short)
An example, assume that the exchange rate for the EUR/USD is currently 1.3500; an investor who buys (long) a currency binary at a strike rate of 1.4000 is speculating that the exchange rate will be 1.4000 or greater on the expiration date/time. If this does occur, the investor will receive a “set payoff” amount, no matter how far above 1.4000 the exchange rate settles. If the exchange rate at expiration is less than 1.4000, the long investor will lose his initial margin completely however, will not lose or be asked for more money than was initially speculated in the margin.