It’s the world’s largest market, by far, with $3-5 trillion traded every day. Traded 23 hours a day in financial centers around the globe, the currency exchange markets truly never sleep. It’s no wonder individual traders have flocked to the opportunity of near round-the-clock liquidity and variety.
Currency trading was long the exclusive province of institutions. When “retail” forex became available to individual traders, at first it was offered through dubious, unregulated providers. Binary options went through a similar phase, before the establishment of CFTC-regulated binary options exchanges like Cantor and Nadex.
Forex is attractive to both fundamental traders—those who make decisions based on the news, data, and the consensus of experts—and technical traders, who focus on price action and chart patterns.
Fundamental traders can use the foreign exchange market as a reflection of global trade and economic activity. Fluctuations in the exchange rates between currencies can reveal the comparative strengths of the two economies. Those who follow economics and global affairs often have opinions on where the euro, yen, or Swiss franc might be headed.
For technical traders, a chart is a chart. Such traders are mainly looking for strong trends and liquidity that allows for quick and accurate order filling. The foreign exchange markets certainly offer those things.
Like the futures markets, forex offers leverage, meaning that you can get a potentially substantial return on a relatively small move in the market. But leverage is a double-edged sword. If the market moves against your position, you could also lose a large amount in a short time.
How much could you lose? With traditional forex trading, you can never say with 100% certainty. You can use a stop-loss order, but if that order doesn’t get filled at the price you wanted, you might lose more than you bargained for and could even end up owing money to your broker and getting a dreaded margin call.
That may be the most obvious advantage of trading the forex markets using binary options: you know your maximum possible loss on every trade with 100% certainty. You decide up front how much you’re willing to risk. You can never lose more. And you never get margin calls.
Since 2012, forex traders have had a new alternative: binary options on a CFTC-regulated exchange. (Note: this article refers only to US-based, exchange-traded binary options, approved by the Commodity Futures Trading Commission.)
Binary options offer many of the same advantages as conventional forex:
At the same time, binary options avoid many of the disadvantages of traditional forex trading:
Your risk is always limited to an amount you set up front, before you enter the trade. You can never lose more
You never get stopped out, because you get built-in risk protection without a stop-loss order
You never get a margin call, because you can never risk more than you have in your account
You can typically start with a smaller account balance
You don’t need a broker. You trade directly on the exchange and don’t pay commissions, just a low, fixed trading fee
Short-selling is as simple as buying
The all-or-nothing outcome at expiration means your exit strategy is built in. At the same time, you can exit early with a limit or market order, to determine your own exit
You can also trade commodities, stock indices, and even economic numbers from the same account
When you don’t have to use a stop-loss order for risk protection, you are free to focus on the trade itself, knowing that your maximum possible loss is already set. What’s more, if a market goes sharply against your position, your binary option’s value might go to zero, but you aren’t stopped out of the trade. If the market comes back, you still have a chance to break even or profit.
Finally, the yes-or-no design of a binary option focuses all your analysis on a clear trading decision: “Will this market be above this price at this time?”
The question is simple, but not simplistic. Getting to the right answer provides all the challenge and excitement of forex trading, but with limited risk and a level playing field.
Binary options on a CFTC-regulated exchange offer a secure, transparent, and sensible way for almost anyone to trade the forex markets.
Plus, at your next party, you get to tell your friends about how you shorted corn futures that morning. And if one of them warns you about a truck pulling up and dumping 5,000 bushels of corn onto your front yard, you’ll know it’s just an old, corny joke.
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