Forex Binary Options Risk Control No Transactional Cost Volatility Risk Simplicity, Transparency, Flexibility and Scalability Conclusion

1. Chapter 11:
Forex Binary Options
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2. FOREX BINARY OPTIONS
With so many markets to choose from, a retail financial trader can sometimes feel overwhelmed in deciding
which markets to trade in. most traders will usually pick the market which will provide them with the most
opportunities for profit, in which case they will look for the market with the most liquidity. For most traders, that
would be spot currency market. While well known for its liquidity, the spot currency market is also extremely
volatile and risky for the uninitiated. However for traders who want to avoid these risks, it is more advantageous
for them to trade the currency market with forex binary options instead.
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3. RISK CONTROL
With forex binaries, you always know beforehand exactly what you stand to earn or lose. Because of the way
binaries are structured, you as the trader have complete control over the premium that you put at risk when you
enter a binary trade. Unlike spot forex, the premium that you pay is the maximum amount that you can lose if you
trade ends up out of the money. Furthermore with the “Buy Me Out” feature available on the anyoption platform,
you can even exit your trade before its expiry time hence minimizing your losses even further.
Although spot forex traders have more advanced trading tools such as a “stop loss order’ at their disposal, there is
no 100% guarantee that it can be executed at the level by the broker at the level specified by the trader. There is
always the danger of an illiquid market or slippage which can prevent the stop loss order from being executed by
the broker at the desired level.
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4. NO TRANSACTIONAL COST
With spot forex, traders incur a transaction cost in terms of a wide spread on their Bid/Offer price when they
enter or exit their trade. Not only do spot forex traders have to pay this on both ends of their transaction, in some
cases due to the volatility of the market, the spread can widen considerably from what was initially quoted eg. If
the spreads are not fixed. With forex binaries, what binary traders pay upfront in terms of their premium is all
they will pay, regardless of the market situation.
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5. VOLATILITY RISK
With forex binaries, you need not worry about unexpected volatility. Normally regardless of the reaction of the
market towards unexpected news, your binary trade can weather the shock. Even if the reaction is more than
what anyone had expected, your risk/reward ratio is still set. Spot forex positions on the other hand can be
adversely by sharp swings in the market hence making proper risk management of spot forex trades even more
crucial for the trader.
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6. SIMPLICITY
One of the key attractions of binaries among traders has always been its simplicity. While trading forex binaries do
require some knowledge of the market and tools used, the depth of knowledge required is not as in-depth as
those required when a trader is trading in the spot forex market.
In addition as we mentioned earlier because of the nature of a spot forex trade, to avoid loss due to an
unexpected swing in prices, a spot forex trader needs to be even more careful with his risk management process.
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7. TRANSPARENCY
Related to the issue of market volatility, the prices which spot forex traders are quoted does not necessarily mean
that they will get to trade at that price. Due to slippage, the price quoted and transacted could vary considerably.
With forex binaries, there is no such problem as the premium quoted is the price which a forex binary trader will
transact at. In other words, pricings for forex binaries are more transparent than spot forex quotes.
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8. FLEXIBILITY & SCALABILITY
Because of the low trade entry cost, a forex binary trader has more flexibility and an ability to scale his trade
according to his investment capital. With spot forex, traders are limited to 3 main trade sizes, micro lot, mini lot
and full lot. Because of the size of the trade, this could put the spot forex trader into an untenable situation due
to the size of the market exposure.
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9. CONCLUSION
As we have noted above, the advantages of trading the currency market with forex binaries
are considerable. Because of the way this instrument is structured, it is especially suited for
those who are just starting out with online trading.
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