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Traders' views - Forex

How safe are forex safe havens using binary options?

By , 09 Aug 2011

After an extremely volatile month, investors desperately look for a safe place to invest. Fore example, there has been a torrent of money flowing into gold as well as the of the Swiss and Japanese markets, which are seen as 'safe havens' even when their central banks are making interventions in the market.

One way of playing volatile forex markets is with binary options.


What are binary options?

A binary option, sometimes called a digital option or maybe a fixed option, is a financial instrument that provides a fixed return determined at the point when the contract is bought.

Binary options are essentially predictions about how certain currencies, stocks, indices or commodities will perform over a specified period of time, from as short as a minute to several months. They are called 'binary' because there are only two possible outcomes when the time period expires: either nothing or a fixed sum of money.

Fans of binary options see less risk than some other trading methods, as you're not buying the asset, just predicting whether the price will rise or fall - hence the binary or digital name. For example, compared to spread betting, the risk is low as with binary options the most a trader can lose is the cost of the option, and as with all options, if the price moves against you, then you just let the option expire worthless. 

But if you are wrong, like with a bet with a bookmaker, you end up with nothing. Also, if they are something you want to try, make sure your binary options provider is regulated.

How to trade binary options?

Well, say, you think Barclays shares are going to go up in the next month. You invest £500 in one binary option for this trade. If you're right in a month's time you've just made £445. If you got it wrong, you can still recover £75 from your initial investment.

Binary options always offer a fixed return. Many binaries options brokers typically return 85 per cent when an option expires "in the money", or a winning bet. On an invested sum of £200 therefore an expiry "in the money" will return £370 to you.

Binary options trading in forex

As binary option traders we look at the foreign exchange market developments over the past week, and must ask the question: are these currency havens safe for binary options traders?

While the obvious answer for the short term binary option trader may appear to be “yes”, the answer in fact is not that straightforward.

Logically, if investors are pouring money into the certain markets, then those markets will increase in value and the fixed option trader would benefit. But that’s not always the case.

Potential pitfalls

Take for example, Japan’s intervention into the surging yen: the Japanese government stepped in and stopped the yen’s dramatic increase against the dollar in order to prevent the weakening of Japan’s manufacturing sector.

But if you were a binary options trader and saw this market skyrocketing, you probably didn’t think about the government intervening and putting a stop to the rise. Yet in these current market conditions, government intervention may happen unexpectedly and stop any rise, or fall, that may be occurring in the market.

Another pitfall that the binary option trader has to be wary of is the short-term investment.

So while it may be true that a market is in a decline for a longer period of time, like a day or week, most binary option trades have a much shorter time period and the market can be much more volatile in the short term.

For example: the USD/CHF on 8 August:

Notice the overall downtrend since the end of July of the USD/CHF. While this market is charting down, there are days where it does spike.

Notice in the next chart how the market wavers in one day:

The market decreased overall, but if you were a binary option trader anywhere during that day, you could have been in for quite a ride.
While the current trend amongst investors may be to move to the Swiss and Japanese 'safe havens' it is important to remember that these markets are subject to the same volatility as any other global market.

To learn more about financial fixed-odds betting, you can click through to the
BullBearings guide to financial fixed-odds financial betting or play our financial fixed-odds fantasy trading game here. To keep up with the markets and the site you can also click here to follow BullBearings on twitter.

Warning: Remember, particularly if you are new to trading in the stock market and in forex, that the prices of shares and other investments can fall fast and you may not get back the money you originally invested. The material here is for general information only and is not intended to be relied upon for individual investment decisions. Take independent advice before making such decisions. Also, the BullBearings free stock exchange simulation portfolios are a good way to practice trading techniques.

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