Foreign exchange pairs are commonly used by binary options traders – and there are a range of currency pairs available from countries around the world. However, in order to successfully trade binary options on currency pairs, binary options traders should have an understanding of how one currency trades in relation to the other currency that it has been paired with for the trade.
How to Successfully Trade Currency Pairs in the Binary Options Market
When trading currency pairs in the binary options market, the value of one country’s currency is essentially determined by its comparison to another country’s currency. Therefore, when an investor is trading currency pairs, the first currency of the pair is referred to as the base currency, while the second is referred to as the quote currency.
These currency pairs show how much of the quote currency will be needed in order to purchase one unit of the base currency. When trading currency pairs, the currency pair in and of itself may be thought of as one single unit, even though the trader is actually simultaneously buying one of the currencies and selling another.
When traders purchase a currency pair, they are actually buying the base currency and subsequently selling the quote currency. Therefore, the trader’s bid (the price to buy) will represent how much of the quote currency will be necessary for them to obtain one unit of the base currency.
If, conversely, the trader is selling the currency pair, then they are essentially selling the base currency and receiving the quote currency. In this case, the trader’s ask price (selling price) for the currency pair will then represent how much they will receive in the quote currency when they sell one unit of the base currency.
Trading with EUR/USD
One of the most popular trading pairs for binary options traders is the Euro and the U.S. Dollar. This is in fact the most traded currency pair in traditional markets as well. For those who trade currency pairs as part of their binary options trades, it is important for traders to understand the strength of these particular currencies as well as their related economies.
In this case, the Euro is a driving force in the overall global economy. As much change has occurred across Europe of late, the U.S. Dollar has continued to maintain its position as one of the main currencies for trade in the world.
As an example, if a trader is involved in trading a USD/EUR currency pair, and the pair is quoted as USD/EUR = 1.3, the trader can purchase the pair meaning that for every 1.3 Euros that the trader sells, he or she can buy $1 U.S. Dollar. Conversely, if the trader sells this same currency pair, he or she would receive 1.3 Euros for every $1 U.S. Dollar that they sell.
The reverse of this currency quote could be EUR/USD. In this case, the corresponding price of the currency pair would then be EUR/USD = 0.667. This means that for every $0.667 U.S. Dollars, the trader could purchase one Euro.
Prior to transacting currency pair trades, a binary options trader should have a good understanding each of the currencies being traded, how each compares to the other, and which direction each is expected to move.
Looking for trades with currencies such as the EUR/USD
Many traders either consider themselves as technical or fundamental analysts in looking for their binary options trading setups. Even those who follow a strict strategy will be undertaking some form of analysis before purchasing their options and this is an important aspect of achieving success as a binary options trader. From a technical perspective, traders will look for specific chart patterns and perhaps also a technical indicator in order to spot potential opportunities. As binary options charting software has not yet evolved to the level of detail offered by many forex brokers or software programmes, traders will typically undertake this analysis outside of the binary options platform. Looking for technical setups on the EUR/USD is best done during the European and North American trading hours. This is when the currency pair is likely to be the most volatile and opportunities will be more abundant for all traders. Having said this, due to the global popularity and the interrelationships between other currencies, the EUR/USD currency pair will also move significantly enough for trading outside of these hours.
Fundamental binary options traders will look at major news releases to purhase options in this currency pair. This may be things such as interest rate decisions, political events or economic data which influence the values of these two important currencies. For binary options traders with an idea in advance of how these things may affect the value of the pair, these can present very simple and profitable trading opportunities.