Diversification for Binary Options

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What You Need To Know About Binary Options Outside the U.S

What Do You Need To Know About Binary Options Outside the U.S?

Binary options let traders profit from price fluctuations in multiple global markets, but it’s important to understand the risks and rewards of these controversial and often-misunderstood financial instruments. Binary options bear little resemblance to traditional options, featuring different payouts, fees, and risks, as well as a unique liquidity structure and investment process.

Binary options traded outside the U.S. are also structured differently than those available on U.S. exchanges. They offer a viable alternative when speculating or hedging but only if the trader fully understands the two potential and opposing outcomes.

The Financial Industry Regulatory Authority (FINRA) summed up regulator skepticism about these exotic instruments, advising investors “to be particularly wary of non-U.S. companies that offer binary options trading platforms. These include trading applications with names that often imply an easy path to riches.” 

Key Takeaways

  • Binary options have a clear expiration date, time, and strike price.
  • Traders profit from price fluctuations in multiple global markets using binary options, though those traded outside the U.S. are structured differently than those available on U.S. exchanges.
  • Non-U.S. binary options typically have a fixed payout and risk, and are offered by individual brokers rather than directly on an exchange.
  • While typical high-low binary options are the most common type of binary option, international brokers typically offer several other types of binaries as well.

Binary options outside the U.S. are an alternative for speculating or hedging but come with advantages and disadvantages. The positives include a known risk and reward, no commissions, innumerable strike prices, and expiry dates. Negatives include non-ownership of the traded asset, little regulatory oversight, and a winning payout that is usually less than the loss on losing trades.

Understanding Binary Options Outside the U.S

What Are Binary Options?

Binary options are deceptively simple to understand, making them a popular choice for low-skilled traders. The most commonly traded instrument is a high-low or fixed-return option that provides access to stocks, indices, commodities, and foreign exchange.

These options have a clearly stated expiration date, time, and strike price. If a trader wagers correctly on the market’s direction and price at the time of expiration, they are paid a fixed return regardless of how much the instrument has moved since the transaction, while an incorrect wager loses the original investment.

The binary options trader buys a call when bullish on a stock, index, commodity, or currency pair, or a put on those instruments when bearish. For a call to make money, the market must trade above the strike price at the expiration time. For a put to make money, the market must trade below the strike price at the expiration time.

The broker discloses the strike price, expiration date, payout, and risk when the trade is first established. For most high-low binary options traded outside the U.S., the strike price is the current price or rate of the underlying financial product. Therefore, the trader is wagering whether the price on the expiration date will be higher or lower than the current price.

Binary Options Outside the US

Foreign Versus U.S. Binary Options

Non-U.S. binary options typically have a fixed payout and risk and are offered by individual brokers rather than directly on an exchange. These brokers profit from the difference between what they pay out on winning trades and what they collect on losing trades. While there are exceptions, these instruments are supposed to be held until expiration in an “all-or-nothing” payout structure.

Foreign brokers are not legally allowed to solicit U.S. residents unless registered with a U.S. regulatory body such as the Securities and Exchange Commission (SEC) or Commodities Futures Trading Commission (CFTC).

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The Chicago Board Options Exchange (CBOE) began listing binary options for U.S. residents in 2008.   The SEC regulates the CBOE, which offers investors increased protection compared to over-the-counter markets. Chicago-based Nadex also runs a binary options exchange for U.S. residents, subject to oversight by the CFTC.

These options can be traded at any time, with the rate fluctuating between one and 100, based on the current probability of the position finishing in or out of the money. There is full transparency at all times and the trader can take the profit or loss they see on their screen prior to expiration.

They can also enter as the rate fluctuates, taking advantage of varying risk-to-reward scenarios, or hold until expiration and close the position with the maximum gain or loss documented at the time of entry. Each trade requires a willing buyer and seller because U.S. binary options trade through an exchange, which makes money through a fee that matches counter-parties.

High-Low Binary Option Example

Your analysis indicates the Standard & Poor’s 500 index will rally for the rest of the trading day and you to buy an index call option. It’s currently trading at 1,800 so you’re wagering the index’s price at expiration will be above that number. Since binary options are available for many time frames—from minutes to months away—you choose an expiration time or date that supports your analysis.

You choose an option that expires in 30 minutes, paying out 70% plus your original stake if the S&P 500 is above 1,800 at that time or you lose the entire stake if the S&P 500 is below 1,800. Minimum and maximum investments vary from broker to broker.

Say you invest $100 in the call that expires in 30 minutes. The S&P 500 price at expiration determines whether you make or lose money. The price at expiration may be the last quoted price, or the (bid + ask)/2. Each binary options broker outlines their own expiration price rules.

In this case, assume the last quote on the S&P 500 before expiration was 1,802. Therefore, you make a $70 profit (or 70% of $100) and maintain your original $100 investment. If the price finished below 1,800, you would lose your original $100 investment.

If the price expires exactly on the strike price, it is common for the trader to receive her/his money back with no profit or loss, although brokers may have different rules. The profit and/or original investment is automatically added to the trader’s account when the position is closed.

Other Types of Binary Options

The example above is for a typical high-low binary option—the most common type of binary option—outside the U.S. International brokers will typically offer several other types of binaries as well.

These include “one-touch” options, where the traded instrument needs to touch the strike price just once before expiration to make money. There is a target above and below the current price, so traders can pick which target they believe will be hit before the expiration date/time.

Meanwhile, a “range” binary option allows traders to select a price range the asset will trade within until expiration. A payout is received if price stays within the range, while the investment is lost if it exits the range.

As competition in the binary options space heats up, brokers are offering additional products that boast 50% to 500% payouts. While product structures and requirements may change, the risk and reward is always known at the trade’s outset, allowing the trader to potentially make more on a position than they lose. Of course, an option offering a 500% payout will be structured in such a way that the probability of winning the payout is very low.

Unlike their U.S. counterparts, some foreign brokers allow traders to exit positions before expiration, but most do not. Exiting a trade before expiration typically results in a lower payout (specified by broker) or small loss, but the trader won’t lose their entire investment.

The Upside and Downside

Risk and reward are known in advance, offering a major advantage. There are only two outcomes: win a fixed amount or lose a fixed amount, and there are generally no commissions or fees. They’re simple to use and there’s only one decision to make: Is the underlying asset going up or down?

In addition, there are also no liquidity concerns because the trader doesn’t own the underlying asset and brokers can offer innumerable strike prices and expiration times/dates, which is an attractive feature. The trader can also access multiple asset classes anytime a market is open somewhere in the world.

On the downside, the reward is always less than the risk when playing high-low binary options. As a result, the trader must be right a high percentage of the time to cover inevitable losses.

While payout and risk fluctuate from broker to broker and instrument to instrument, one thing remains constant: losing trades cost the trader more than they can make on winning trades. Other types of binary options may provide payouts where the reward is potentially greater than the risk but the percentage of winning trades will be lower.

Currency Correlation for Binary Options Explained

Tools, tools, tools! Hand me some nails please. Hammer too! What good are nails without a hammer? Now hand me that currency correlation… Wait. What? Don’t know what correlation is? Well, good thing you found this article then because it’s one of the most important things a trader must be aware of when trading currencies, one of the four fathers of binary options. Anyway, don’t expect UP and DOWN arrows… no, no, that’s not how correlation works so keep reading only if you are serious about trading.

If I were to hit my head on a wall I would get a headache for sure. There’s a direct correlation between my action and the headache that follows and this idea holds true in the financial market as well. Of course, the euro or the dollar will not go around bashing their heads against walls, but correlation exists and you must be very aware of it because it’s an important part of trading. That being said, let’s begin.

What is Currency Correlation?

Have you ever noticed similarities between the movements of currency pairs? Yes? Then you probably saw currency correlation at work. Take a look at EUR/USD and GBP/USD and you will be amazed to see they follow each others movement. If one goes UP, the other follows. Same for moves to the south. Of course, they are not mirror images of one another but the overall direction is the same. When two pairs move in the same direction, they are positively correlated, just like EUR/USD and GBP/USD or EUR/JPY and USD/JPY. However, there is another type of correlation which… you guessed right, it’s called negative correlation. When two pairs are negatively correlated, they move in almost completely opposite direction: if EUR/USD makes a higher high, almost certainly USD/CHF will make a lower low of similar size. In other words, if EUR/USD goes UP, USD/CHF goes DOWN. To keep it simple: positively correlated pairs move overall the same and negatively correlated pairs move in opposite directions. However, they will not move 100% identical or opposite.

Think about it like this, the chart patterns made by one of them will be inverted by the other. In other words, if the EUR/USD shows a Double Top, USD/CHF will make a Double Bottom. If EUR/USD moves Up, USD/CHF moves Down. There are a couple of reasons for this: first of all, notice the position of the USD in the two pairs under discussion. In EUR/USD the dollar is the second currency in the pair while in USD/CHF it is the first. Whenever the second currency in a pair strengthens, the pair goes Down and if the first currency strengthens, the pair goes Up. With that in mind, if EUR/USD goes Down, it means the USD strengthens but if it strengthens, that means USD/CHF will go Up because as I said earlier, if the first currency in a pair strengthens, the pair will go up. Yea, I had to read it again to make sure I didn’t make a mistake and I am sure it can sound complicated if this is the first time you’ve read something like this.. but the ordeal is not over so take a break if you want because I’m going to explain the second reason.

The two pairs we are talking about are composed of three currencies: EUR, USD and CHF. As you might have guessed, the third currency has something to do with the pair’s movement as well. To understand its role, you will have to take a look at EUR/CHF or to take my word for it: that pair has minimal movement and this means that the EUR/CHF rate is very constant. What I am going to say is not the most correct or accurate from a financial point of view, but it will help you understand: because their movement is so slow, you could say that EUR is CHF and vice versa, they are equal, they are the same. So actually when we are comparing EUR/USD and USD/CHF we could say we are comparing EUR/USD and USD/EUR. If the third currency in our pairs has no relevance (almost), then all there is left is the position of the currencies in the pair. Since the USD is the last currency in one pair and the first in another, it is normal that the two pairs will move in opposite directions almost always.

And because all this turned out to be more complicated than I thought, I am going to tone it down a bit for those of you that are not used with all this technical talk. What we know so far is that some pairs move in opposite direction. Also, some of them move in the same direction, so we need to pay attention to what pairs we are trading. Think about this: if you have a Call on EUR/USD and a Put on USD/CHF and you win the Call, you will most likely win the Put as well. Remember if EUR/USD moves Up, USD/CHF moves Down. If you have two Calls (one each pair), you will most likely lose one of them and win the other. This opens the door for a lot of money management and hedging techniques: if you want to maximize your potential profit, you can open opposite trades on currency pairs with opposite movement (we call these negatively correlated pairs). But you must remember that this also increases risk; it’s great if the pairs move in your direction but otherwise, you can end up losing both of them. Looks like I didn’t kept my promise of making it simpler… well, blame it on correlation. Maybe the summary that follows will help. Keep in mind that pairs which move the same way are positively correlated and pairs that move the opposite way are negatively correlated.

Correlation Coefficient – Don’t Worry, there’s No Math Involved

Now that you have an idea what correlation is, you might be wondering how to know exactly which pairs are correlated, how high the correlation is and if it’s negative or positive. Well, don’t worry, you don’t have to memorize currency pairs and their correlation values; all you have to do is follow this link: http://www.forexticket.com/en/tools/01-01-correlation and check out the tables presented there. Usually correlation above 80 is considered strong and positive (pairs move similar); correlation below -80 (minus 80) is considered strong negative (pairs move in opposite directions). You will also notice that the time frame of the chart affects the correlation coefficient. For example two pairs can be strongly correlated on an hourly chart but not so much on a 5 minute chart. Another thing to note is that correlation changes over the course of time so it would be a good idea to check the link above regularly.

Some Rules For Trading Currency Correlations

  • Same direction trades on positively correlated pairs increase potential profit and increase risk
  • Opposite direction trades on positively correlated pairs decrease both potential profit and risk
  • Same direction trades on negatively correlated pairs decrease both potential profit and risk
  • Opposite direction trades on negatively correlated pairs increase both potential profit and risk

Why does Currency Correlation Suck?

Maybe you wondered what’s the connection between the title “Double or nothing?” and currency correlation, maybe it has something to do with gambling? Well let me explain: if you trade in the same direction on two positively correlated pairs (these pairs move similar) and one of them goes against you, what do you think will happen to the other one? It will go against you as well… so you lose Double. I bet before you knew about correlation you didn’t find an explanation why both your trades went wrong. Now you know ;) However, if you open opposite trades on negatively correlated pairs (i.e. a Put on EUR/USD and a Call on USD/CHF) and one of them goes against you… guess what: you will probably lose them both. Money in the pocket of the broker…

Why Currency Correlation doesn’t Suck?

Let’s say you want to limit your risk. With the use or correlation you can do that by opening opposite trades on positively correlated pairs or trades in the same direction on negatively correlated pairs. Say you open a Call on EUR/USD and a Call on USD/CHF; since these are negatively correlated pairs which usually move in opposite directions, chances are that you will win one of the trades, hence limiting the potential loss.

Wrapping it up – To Use or Not to Use?

No matter if you choose to use it or not, correlation exists. It’s a feature of the market and more than that, it is not a matter of whether correlation sucks or not. It’s all about being aware of it and knowing that it can double your profits as well as your loses. However, being aware is 100% the job of the trader. So if you want to be aggressive, use correlation to double your profits or use it to hedge a position if you want to be more conservative. It’s all up to you.

Correlation can help you get out of a hairy situation, can maximize your profits but it can also be your enemy because it can make you lose more than you originally intended. In other words, it can be both Friend and Foe, depending on your understanding of the market and risk appetite. If you want to risk more, increasing your profit potential at the same time (or the other way around), correlation can help you do that. For this article I only used a few pairs as an example, but most pairs are correlated to some extent with other pairs they share currency with.

Currency Correlation, Account Diversification and Binary Options Copy Trading

Currency correlation is an important factor for anyone trading forex or forex based options. Even binary options, even when you are copy trading. If you are not aware of currency correlation let me enlighten you. Some currencies and currency pairs are tied together, when one moves so does the other one. It is most common between pairs including one of the same currencies like EUR/USD and EUR/JPY but can also exist between seemingly unrelated pairs such as the EUR/USD and CHF/HKD which have been shown to move in tandem over multiple time frames. What makes currency correlation really confusing is that some moves move together, but in opposite direction.

Unwanted Correlations Add Risk For Binary Copy Traders

The reason why it is important to understand these correlations in terms of account diversification and copy trading is that you don’t want to double up on trades that are essentially identical, and you don’t want to make trades that are likely to cancel each other out. It is all to easy to jump from chart to chart, looking for signals, and forget that sometimes these charts have a big impact on each other. You may find identical signals occurring on multiple pairs and there is a reason for it; they are basically the same trade, moving on the same fundamentals and the same catalysts. You may at first think it a good idea to trade on 2,3 or 4 signals because you are spreading your risk around but if those trades are all looking for the dollar to strengthen you are really increasing your risk. If the dollar strengthens you win 4 times, but if it weakens you lose 4 times.

Adding risk is reason enough to be wary of correlations but there’s another reason to fear it; cancellation. Cancellation is when you trade on two pairs that move in opposite directions of each of other like the EUR/USD and USD/CHF. These two pairs, and many like them, will move in opposite direction of each other. Placing a call or a put on both at the same time has a higher chance of resulting in one win and one loss than it does in two wins or two losses. Trading like this ultimately will result in losses for binary traders because of the risk/reward ratios of trading. You never win as much as you lose on a trade by trade basis, it takes a win rate greater than 50% to be profitable.

Copy Trading Binary Options

Copy trading is supposed to help make trading easier but when you consider correlations and how they can affect your account you may not agree with that sentiment. Blindly following someone, or a couple someones, can result in major losses and currency correlation is only one method. You can try to avoid them through diversification but there is nothing to stop your traders from trading the same pairs, or pairs that cancel each other out, so you really have no control over your risk. This is why it is important to fully understand who and what you are copying, and to use copy trading as a tool for your trading education, not as your overall strategy.

The first step to avoid these risks in your account is learn as much as you can. Education is always the key. The more you learn the better able you will be to choose the right copy trading platforms and services, the more you learn the better able you be to choose the right traders to follow. As your education grows you will eventually learn to make good trading decisions and even make your own trades which should be your goal. If it isn’t you aren’t serious about making money trading binary options.

Social Trading Is The Answer

Once again the answer to the question, the solution to the problem so to speak, is social trading. Where copy trading is nothing more than following signals or auto-trading software, social trading takes signal trading to the next level through education and interaction that allows you to make proper decisions about your account and currency correlations. A few of the benefits include knowing who you are following versus following some avatar on a website, knowing the strategies employed, picking only the trades you want to follow/not all the trades a trader makes and the support of other traders like yourself. Yes, you can just copy the trades of other traders but you at least have the opportunity of picking and choosing which trades to follow. The bottom line though is that correlations can kill your copy trading account faster than a broker will call you back after signing up on their website. Open your first Social Trading Account with CommuniTraders Today!

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Интересная стратегия, основанная на нескольких уникальных индикаторах. Стратегия позволяет находить точки входа в трендовое движение.

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