What are FX Options and why do you need to give them a try? In today’s article we take a closer look at the most recent addition to the palette of our trading instruments. FX Options combine features of regular options and Forex. Already interested? Read the full article to learn more about this unique trading instrument.
Why is it special?
Unlike binary options (where the profitability of each deal is predetermined), FX options can boast unlimited upside. While you can only lose as much as you invest in a deal, the upside you can get is unlimited. This feature can be turned into a reasonable strategy. When you cut your losses and at the same time let your profit grow it is not necessary to win in 50 percent of the deals. By making sure that the average win is greater than the average loss it is possible to be in the black in the long run.
Choose one of the 5 most popular currency pairs (with more to come in the future). This trading instrument is built around strike prices, that let you find a balance between profitability and risk.
How to trade FX Options?
There are several things you should know before engaging in FX options trading. The first, obviously, is how to set up the deal.
When setting up the deal, you have to specify the amount of money you want to invest and choose the strike price. The latter works as a threshold that the price should reach in order for you to win. When the strike price is not met, the invested amount is lost. While the expiration time and money allocation are quite obvious, the concept of strike prices may seem a little bit tricky. But more on that later.
Set up the deal
Setting up the deal is arguably the most important part of the whole process. Here you can choose the strike price and the amount of money you want to invest. Remember about the risk management. The invested amount should be calculated as a percentage of your total funds and should not exceed 5% of the account.
Analyze the trend
There are three major ways to analyze the price action: you can do it visually, technically and fundamentally. Visual analysis is performed automatically as soon as you take a look at the price graph. But what about technical and fundamental ones? What should you apply in FX options trading? Technical analysis is based on the premise that all information you need for a successful trade is already on the price chart. This analysis type disregards the bigger picture. Fundamental one, on the contrary, takes into account important political/economic events and announcements. Since you are trading on one-hour intervals, both can be used effectively.
Open the deal
When the deal is all set up and the most possible direction of the trend is determined, you are ready to open the deal. Hit “Higher” if, according to you, the price is about to go up and “Lower” if the opposite is true. Don’t forget to adjust the strike price, as it often will determine whether the deal was a success or a failure.
The deal will close automatically as soon as the expiration time is met. Should the price at the expiration be above the strike price, you will win if you have clicked the “Higher” button and lose if it was “Lower”. And vice versa, in order to win by choosing “Lower” the price at the expiration should be below the strike price you have specified, otherwise the invested amount will be lost. Do not forget that options have a price of their own that will also be taken into account when the profitability of the deal is calculated.
All in all, FX options are traded according to the same laws and principles as regular options. Follow the trend, cut losses, manage your risks. And, most importantly, educate yourself. Make sure that you constantly improve your trading skills and learn something new. Now, when you know what this new instrument is all about you can give it a try.