Forex Binary Options

For those who want to benefit from the high liquidity forex market but without the corresponding complexity, forex binary options could prove a worthwhile instrument. The foreign exchange market is a global, decentralised or over-the-counter (OTC) marketplace for the trading of currencies. By combining forex and binary options, the success of each trade relies on what a currency pair is worth relative to a strike price at a given time.

This guide will discuss how to trade forex binary options successfully, covering building a strategy, as well as the pros and cons. We also list the best forex binary options brokers in 2024.

Forex Binary Options Trading Explained

Forex binary options are a type of fixed odds derivative contract in which you predict the value of a forex pair at an expiration time. The trader agrees to a contract provided by the broker with a predetermined reward if the contract ends in-the-money. Typically, the profit percentage is between 60-80% of the initial investment, however this will vary depending on the broker, the underlying asset, the strike price and the expiration time.

These are the several different types of forex binary options contracts:

• High/Low – You predict whether the value of the pair will be higher than or lower than a strike price at expiration
• Touch/No Touch – You predict if the value of the pair will reach or fall to a certain value before expiration
• In/Out – Also known as boundary or range, you predict if the value of the pair value will be between or outside of a given range at expiry
• Ladder – A series of equidistant price levels that each correlate to different payouts. For example, 50% at £2, 60% at £2.50 and 70% at £3. Akin to a series of combined high or low binary options.

Example

Now, let’s look at an example of a high/low forex binary option trade:

• A broker is offering a 75% return on a binary options contract for a EUR/GBP forex pair with an expiration of four hours.
• At 9 am, the pair is trading at 0.8459.
• With a stake of £100, you open a call (high) binary option with a strike price of 0.8455.
• At 1 pm, the pair is trading at approximately 0.84595, meaning the contract ends in-the-money. This is because, at expiration, the pair is valued greater than the strike price. Therefore, you receive a total return of £175 (£100 initial investment and £75 profit).
• If instead, you had opened a put (low) with the same strike price, your position would end out-of-the-money and therefore you lose the entire investment.

EUR/GBP

Getting Started

Choosing A Broker

It can be a challenge to identify the best forex brokers who offer binary options. Before rushing in and making an investment, try to research several brokerages. To help make your selection, consider the following factors:

Customer Reviews

Since the Financial Conduct Authority (FCA) banned the sale of binary options for retail traders in 2019, no regulated brokers in the UK can offer them. Therefore, you cannot rely on licensing to ensure how trustworthy a broker is. Instead, you need to use customer reviews and ratings to determine if certain forex brokers offering binary options are genuine. Alternatively, you can look to see if they are licensed by an offshore regulator.

You can also find user reviews on websites like TrustPilot or at trading communities on social media forums such as Reddit, Facebook
and Discord. Be aware though that there may be some negative reviews from disgruntled traders who are disenchanted with their bad luck rather than having genuine complaints. Additionally, dubious brokers have been known to post fake positive reviews, so try to read plenty before committing to one.

Trading Platform

The investing platform will have a considerable bearing on your experience of trading forex binary options. It is important that you use a platform that has several indicators and trading tools which you can use for technical analysis. Look for high-quality, third-party platforms such as MetaTrader 4 or MetaTrader 5.

Certain forex binary options brokers also provide proprietary platforms. These should be well designed and make it easy to select different expiration times for forex pairs and customise price history charts with indicators, drawings and graph types. The platform should also show additional trade information for each forex binary option contract. Here, you should be able to see the maximum loss, the maximum possible profit, and the estimated probability for the contract to end in-the-money.

Demo Account

The best brokers for forex binary options will provide customers with a free demo account. This is a recommended aid when you first start trading binaries or you want to trial a new strategy. Paper trading accounts are a risk-free way to test the viability of your strategy with simulated funds. Once you are satisfied with the approach you are using, you can then move on to trading on a live account.

Mobile App

Forex binary options brokers with mobile apps allow you to trade on the go. These apps are ideal if you are away from your computer for extended periods of time. The best mobile applications will have the same or similar functionality as browser platforms or computer apps.

Alerts, Signals & Trading Robots

To further develop your forex binary options trading, you can implement alerts, live signals and trading robots. Alerts and signals tell you when there are currency pairs satisfying certain criteria, according to your strategy. These help to reduce the time that you dedicate to searching for trades worth making. You are automatically notified when there is a currency pair you might trade on. You can find high-quality, forex binary options signals both from free providers and from paid-for providers, for example, Ultimate Forex Tools.

Trading robots are algorithmic bots which you can program to carry out trading on your behalf. You input instructions for the bots to identify forex pairs which fulfil your requirements and execute the trade accordingly.

Choosing A Strategy

It is key that you have a well-structured forex strategy for binary options to boost your chances of achieving sustained profits. As most forex binary options contracts have profits which are less than 100% of the stake, having only 50% of contracts ending in-the-money will put you in the red. Therefore, more than half of your binary options contracts must expire in-the-money. For example, if you only open contracts with 80% payouts, you need at least 56% of your trades to end in-the-money in order to be profitable, not accounting for any brokerage fees.

The following are potential strategies that you could adopt:

Hedging

Hedging forex with binary options is a strategy to help reduce the magnitude of your losses. This strategy involves placing two trades on the same asset which both expire at the same time. One is a call, going high and the other is a put, going low (a call option gives the holder the right to buy a security and a put option gives the holder the right to sell a security).

These are set up such that the strike price for the call is lower than that of the put contract, meaning at least one of the two contracts will always end in-the-money. By doing this, you are in essence creating an in/out binary options contract.

Here’s an example of how it works:

• A broker is offering 60% returns on a high/low binary options contract on GBP/JPY which expires in an hour. It is currently trading at 164.319.
• With an initial investment of £30, you open a call contract with a strike price of 164.200. At expiry, the pair is valued at 164.168, meaning you lose the entire stake.
• If you had also placed an additional put contract with a strike price of 164.400, then you would have lost a total of £12. This is because the put contract would return a profit of £18 and offset against the £30 lost in the call contract.

Scalping

Scalping is a strategy that aims to capitalise on short-term, bullish trends. Using indicators such as the moving average convergence/divergence (MACD), traders can open forex binary options with expirations as low as 60 seconds. The MACD indicator, as seen below, is made up of two lines: a signal line and a MACD line.

The blue signal line is used to demonstrate changes in momentum while the black MACD line is the difference between two moving averages. The bar chart underneath simply shows the difference between the two lines. When the bars are greater, there is divergence, which implies trends are likely to continue. When the bars are smaller, there is convergence, which implies that you are likely to see trend reversal or fluctuations.

MACD

Fundamental

A fundamental forex binary options strategy does not rely on technical indicators like scalping. Rather, this strategy relies on news, announcements and reports about an industry or economy. These tend to look towards longer-term trades rather than binaries with expirations of a few minutes or hours.

Let’s look at an example of how current events can influence a fundamental strategy:

• The Russian invasion of Ukraine in 2022 severely impacted the Russian Ruble.
• At the beginning of February 2022, the USD/RUB pair was trading at 75.2 RUB, however on the 7th of March, soon after the invasion, the pair reached 138.2 RUB.

Benefits of Trading Forex Binary Options

• Beginner-friendly
• Returns are predetermined
• A simple trading instrument
• Available on major pairs and those with the GBP
• Limited losses as there is no way to lose more than your stake

Risks of Trading Forex Binary Options

• Retail traders must use unregulated or offshore brokers in the UK, due to a ban by the Financial Conduct Authority (FCA)
• High risk due to their ‘all or nothing’ nature
• Limited profits

Final Thoughts On Forex Binary Options

Trading the forex binary options market is a viable alternative for retail traders interested in speculating on worldwide currency pairs but with greater simplicity. Forex binary options have the potential for profitability but being a successful trader is not easy. You should take the time to research and test strategies with demo accounts to best prepare for live trading. Choosing the best forex binary options brokers is also worth taking seriously, so evaluate your options carefully before settling on a provider. See our list of recommended brands here.

FAQ