EURUSD Binary Options Trading

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Trading EUR/USD

Why Trade this System?
One of the main reasons we chose the EURUSD as the underlying asset of choice to trade this system is because it is the currency pair that is traded the most in the forex market. This ensures that as a binary options instrument, it is available for trading all day long and will have good liquidity, enabling you to get good pricing. You will not have to buy costly bets that will have a greater risk than reward.

If you are starting out in binary options trading, this is a great way to start your trading career. This system can be used to trade the Rise/Fall variety of binary options. If your broker does not offer this trade type, you can opt for the High/Low variety or the Touch/No Touch binary option.

Setting Up the System:

Most binary options brokers do not provide charts for use in trading analysis, so you have to get the charts yourself. Since the underlying instrument is a forex instrument, you can easily get a chart by downloading an MT4 platform from any of the popular forex brokers like forex.com.

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The strategy in question is to be implemented on a 30-minute chart, and the strategy will make use of the following indicators:

1) MACD (12, 26, 9): This is a momentum indicator that shows the strength of the signal.

2) Parabolic SAR (default settings of 0.02, 0.2): This is a trend signal.

Here are the trade rules for this strategy.

BULLISH SENTIMENT: In order for the EURUSD to go bullish, we wait for the Parabolic SAR indicator to indicate a buy signal, which occurs when the stars of the Parabolic SAR indicator appear below the price action on the chart. We also wait for the MACD lines to cross from negative to positive.

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BEARISH SENTIMENT: In order for the EURUSD to go bearish, we wait for the Parabolic SAR indicator to indicate a sell signal, which occurs when the stars of the Parabolic SAR indicator appear above the price action on the chart. We also wait for the MACD lines to cross from positive to negative.

Once you have got a confirmation of the signals, the next step is to choose the binary option trade of your choice. For this example, I will recommend choosing the Touch/No Touch option. This is easier to predict than a Rise/Fall or a range option, as all you need is a touch, (or no touch) to make money on this trade.

If you are bullish on the EURUSD, you can decide to purchase a Touch option contract, selecting a strike price to the upside. Make sure you identify the resistance points and keep your strike price below the resistance so you can be sure the price action will actually touch the price barrier you have set. You can then purchase a “No Touch” option contract, selecting a price barrier to the downside. In this instance, you can set your price barrier well below the nearest resistance so the price action has no chance whatsoever of touching your price barrier.

Repeat the same trade sequence in reverse fashion if your signal indicates a bearish outcome. Whichever trade you decide to take, you should at least have 4 different trade options to benefit from:

  • Touch – Price barrier between market price and nearest resistance.
  • No Touch – Price barrier below the nearest support.
  • Touch – Price barrier between market price and nearest support.
  • No Touch – Price barrier above nearest resistance.

Trading Forex with Binary Options

Binary options are an alternative way to play the foreign currency (forex) market for traders. Although they are a relatively expensive way to trade forex compared with the leveraged spot forex trading offered by a growing number of brokers, the fact that the maximum potential loss is capped and known in advance is a major advantage of binary options.

Defining Binary Options

Binary options have two outcomes: They settle either at a pre-determined value (generally $100) or at $0. This settlement value depends on whether the price of the asset underlying the binary option is trading above or below the strike price by expiration.

Binary options can be used to speculate on the outcomes of various situations: Will the S&P 500 rise above a certain level by tomorrow or next week? Will this week’s jobless claims be higher than the market expects? Or will the euro or yen decline against the U.S. dollar today?

For example, say gold is trading at $1,195 per troy ounce currently and you are confident that it will be trading above $1,200 later that day. Assume you can buy a binary option on gold trading at or above $1,200 by that day’s close, and this option is trading at $57 (bid)/$60 (offer). You buy the option at $60. If gold closes at or above $1,200, as you had expected, your payout will be $100, which means that your gross gain (before commissions) is $40 or 66.7%. On the other hand, if gold closes below $1,200, you would lose your $60 investment, for a 100% loss.

Binary Option Buyers and Sellers

For the buyer of a binary option, the cost is the price at which the option is trading. For the seller of a binary option, the cost is the difference between 100 and the option price and 100.

From the buyer’s perspective, the price of a binary option can be regarded as the probability that the trade will be successful. Therefore, the higher the binary option price, the greater the perceived probability of the asset price rising above the strike. From the seller’s perspective, the probability is 100 minus the option price.

All binary option contracts are fully collateralized, which means that both sides of a specific contract – the buyer and seller – have to put up capital for their side of the trade. So if a contract is trading at 35, the buyer pays $35, and the seller pays $65 ($100 – $35). This is the maximum risk of the buyer and seller and equals $100 in all cases.

Thus the risk-reward profile for the buyer and seller in this instance can be stated as follows:

Buyer

  • Maximum risk = $35
  • Maximum reward = $65 ($100 – $35)

Seller

  • Maximum risk = $65
  • Maximum reward = $35 ($100 – $65)

Forex Markets

Binary options in forex are available from exchanges such as Nadex, which offers them on the most popular pairs such as USD-CAD, EUR-USD, and USD-JPY, as well as on a number of other widely-traded currency pairs. These options are offered with expirations ranging from intraday to daily and weekly. The tick size on spot forex binaries from Nadex is 1, and the tick value is $1.

The intraday forex binary options offered by Nadex expire hourly, while the daily ones expire at certain set times throughout the day. The weekly binary options expire at 3 P.M. on Friday.

For forex contracts, Nadex calculates the expiration value by taking the midpoint prices of the last 25 trades in the forex market, eliminates the highest five and lowest five prices, and then takes the arithmetic average of the remaining 15 prices.

Examples of Binary Options in Forex

Let’s use the EUR-USD currency pair to demonstrate how binary options can be used to trade forex. We use a weekly option that will expire at 3 P.M. on Friday, or four days from now (or Monday). Assume the current exchange rate is EUR 1 = USD 1.2440.

Consider the following scenarios:

1. You believe the euro is unlikely to weaken by Friday and should stay above 1.2425. The binary option EUR/USD>1.2425 is quoted at 49.00/55.00. You buy 10 contracts for a total of $550 (excluding commissions). At 3 P.M. on Friday, the euro is trading at USD 1.2450. Your binary option settles at 100, giving you a payout of $1,000. Your gross gain (before taking commissions into account) is $450, or approximately 82%. However, if the euro had closed below 1.2425, you would lose your entire $550 investment, for a 100% loss.

2. You are bearish on the euro and believe it could decline by Friday, say to USD 1.2375. The binary option EUR/USD>1.2375 is quoted at 60.00/66.00. Since you are bearish on the euro, you would sell this option. Your initial cost to sell each binary option contract is, therefore, $40 ($100 – $60). Assume you sell 10 contracts, and receive a total of $400. At 3 P.M. on Friday, let’s say the euro is trading at 1.2400.

Since the euro closed above the strike price of $1.2375 by expiration, you would lose the full $400 or 100% of your investment. What if the euro had closed below 1.2375, as you had expected? In that case, the contract would settle at $100, and you would receive a total of $1,000 for your 10 contracts, for a gain of $600 or 150%.

Additional Basic Strategies

You do not have to wait until contract expiration to realize a gain on your binary option contract. For instance, let’s say by Thursday the euro is trading in the spot market at 1.2455, but you are concerned about the possibility of a decline in the currency if U.S. economic data to be released on Friday are very positive. In this case, your binary option contract (EUR/USD>1.2425), which was quoted at 49.00/55.00 at the time of your purchase, is now at 75/80. Therefore, you could sell the 10 option contracts you had purchased at $55 each, for $75, and book a total profit of $200 (or 36%).

You can also put on a combination trade for lower risk/lower reward. Let’s consider the USD/JPY binary option to illustrate. Assume your view is that volatility in the yen – trading at 118.50 to the dollar – could increase significantly, and it could trade above 119.75 or decline below 117.25 by Friday. You, therefore, buy 10 binary option contracts (USD/JPY>119.75, trading at 29.50/35.50) and also sell 10 binary option contracts (USD/JPY>117.25, trading at 66.50/72.00). Therefore, you pay $35.50 to buy the USD/JPY>119.75 contracts, and $33.50 (i.e., $100 – $66.50) to sell the USD/JPY>117.25 contracts. Your total cost would be $690 ($355 + $335).

Three possible scenarios arise by option expiration at 3 P.M. on Friday:

  1. The yen is trading above 119.75. In this case, the USD/JPY>119.75 contract has a payout of $100, while the USD/JPY>117.25 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  2. The yen is trading below 117.25.In this case, the USD/JPY>117.25 contract has a payout of $100, while the USD/JPY>119.75 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  3. The yen is trading between 117.25 and 119.75: In this case, both contracts expire worthlessly and you lose the full $690 investment.

The Bottom Line

Binary options are a useful tool as part of a comprehensive forex trading strategy but have a couple of drawbacks in that the upside is limited even if the asset price spikes up, and a binary option is a derivative product with a finite lifespan (time to expiration).

However, binary options have a number of advantages that make them especially useful in the volatile world of forex. For starters, the risk is limited (even if the asset prices spikes up), the collateral required is quite low, and they can be used even in flat markets that are not volatile. These advantages make forex binary options worthy of consideration for the experienced currency trader.

7 Binary Options

The currency pair is classified as major a+since it is the most traded currency pair in the world and they are very close in value. The difference in value, i.e. the strength of the currencies depend on the economic status of the states they represent, coming down to the Eurozone and the US economy.

The EURUSD is the most traded and most liquid pair since this currency pair is being sold and bought numerous times on a daily basis. It goes over the trading table as the best know currency pair. The special feature which draws so many traders to the EURUSD is the small spread. Namely, these currencies are close in value and they do not account for major losses when it comes to individual trades. Since binary options are close to Forex trading, this pair is one of the highlights in the options market as well.

Before you enter a binary options trade on this currency pair you might want to know the following:

  • The greatest market activity of this pair takes place during North American and European sessions and you should trade only during USA and European sessions to avoid a standstill of the currencies;
  • The Asian market activity time is also not to be neglected for trading ranges with a special target on One Touch options given the consolidation of EURUSD in Asia;
  • EURUSD trading is highly popular since it involves the two biggest global economies the USA and Eurozone which reflect on minor economies as well.

Follow The News of the European Market

To stay in the loop, it is very important to follow the economic news related to this currency pair since it contains a lot of useful information regarding price movements of the two currencies. As a committed trader, you should take a look at the European Consumer Price Index (CPI) since it reveals the inflation status which is one of the key factors for the European Central Bank when drafting its monetary policy.

The European Purchasing Manager Index (PMI) represents also an important source of economic information given that it examines individual sectors and if they are growing or declining which is yet another hint as the European Central Bank uses the data and classifies them as dovish or hawkish/bullish or bearish.

Traders also look at the EU GDP (Gross Domestic Product) and the course of the unemployment rate in the EU when they trade the EURUSD currency pair. Follow the press conferences of the sessions of the ECB (European Central Bank) whereby the ECB President answers interesting questions on the market, an event which causes fluctuations in the market since the EURUSD trade frequency is particularly volatile during these events.

All of the economic news and releases give useful information to traders and can help them acquire more knowledge related to the economic movement, but they do not represent an instant success ticket, but rather give hints to traders of what is going happen at the next meeting and what decisions will be taken. A trader’s job is to interpret the information and link them to the EURUSD price movements, e.g. if inflation is greater than predicted by the ECB, you can prepare yourself for rates being cut.

Follow The News on the US Market

Since the USA is the biggest economy, closely followed by the Eurozone, economic news is being released regularly on a monthly basis and the news which one should take to heart as a trader are discussed below.

The Federal Reserve or the US Central Bank has a dual role and its decisions can be guessed from employment data and inflation or CPI. As a trader, make sure to take into account releases relating to these two factors, but some other sources will also be to your benefit. For example, the Institute for Supply Management (ISM), Retail Sales, Manufacturing and Non-Manufacturing, GDP, Private payrolls (ADP)Producer Price Index (PPI), etc.

Studying the different information from all of the listed sources can help you gain a better understanding of the market.

The Goal of Following Economic News

Well, of you follow the big economic releases, you will notice that the markets show the most intense volatility during those periods. Technical factors are the trigger for market movements but the reason for movement is news release which has been already proven in the past.

In order to give you a full picture let’s imagine that news on the unemployment rate in the Eurozone is being announced during the London market session and the rate is higher than initially predicted. Such an information will automatically lower the value of the EURUSD pair since everyone will be looking to get rid of the depreciating Euro since they know that the ECB will be looking to modify the monetary policy in order to make up for the bigger unemployment rate. But, if during US news release it turns out that the US GDP is not indicating growth but rather a recession, it will completely out-balance or undo the Eurozone unemployment crisis and the EURUSD will automatically start to climb in value in the market.

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