The Forex market is one of the biggest financial markets with average daily turnover surpassing $5.09 trillion in global currency exchanges. A prospective forex trader might not have all the necessary information before starting to invest in Forex options. But it’s essential for any investor to know the pros and cons of Forex options trading in order to get started with it or reconsider other trading methods. You should understand that you can’t become a millionaire overnight by investing in forex options. It requires a lot of patience, discipline and good trading skills to enjoy a successful forex options trading career.
- Forex options will provide fixed returns with limited risk
Unlike spot forex trading in which you have variable risk to reward ratio based on the amount of leverage you choose, forex options will provide fixed returns, and your risk is also capped. In spot forex trading, you can leverage up to 100:1, which means you place your trades of up to $100, 000 by just having an investment capital of $1000 in your trading account. This means you can get more profits if your trade is successful but if your trade is unsuccessful, you will become bankrupt and lose all your money. Whereas in forex options, you will only lose the amount invested in that particular trade, if your option expires out-of-the-money. But if your option expires in-the-money, you can gain up to 80% returns on investment. So, the benefit of forex options is that you have predetermined risk and your returns are also fixed based on the payout percentage offered by your broker. The other advantage is that you can make money even when the market is declining and having a negative trend. Also, you are free to choose any trading currency
- Choosing a reliable broker is crucial for success in Forex options trading
There are countless Forex options brokers available in the market and many of them are unregulated and unlicensed brokers. If you are a novice investor who wants to make money with forex options, you should be very careful in choosing the right broker. You should do thorough research about your broker and ensure they are registered with a trading commission like SEC (US Securities and Exchange Commission) or CySEC (Cyprus Securities and Exchange Commission) etc. You can also check for reviews from existing investors and read the various terms and conditions like payout percentage, minimum deposit, commissions or any other hidden fees etc. There are several blacklisted brokers who try to steal your money through manipulated software which can generate losing trades. You should stay away from such fraudulent brokers and always opt for a trusted and licensed broker before you start trading forex options.
- Understand risk tolerance and hedging techniques
With forex options, you have the possibility to invest in multiple currency pairs at the same time to minimise your losses. For instance, you can bet against EUR/USD currency pair and choose a “Call” option expecting the price to go up and at the same time invest in GBP/USD currency pair and choose a “Put” option speculating the price to go down. By investing in different currency pairs at the same time, traders can minimise their risks in forex options. Also, you should know how much to invest in each trade and define your risk tolerance as part of your trading plan. In forex options, you can become profitable only if you have a win-loss ratio of more than 50%. In forex options, since the payouts are high as 80% you can hedge both ends of a trade without losing money even if one of the trades is unsuccessful. In forex options, a trader can invest in different trading currency at the same time, but this is not possible in spot forex trading.
- Understand the use of technical indicators to predict the movement of currency pairs accurately
With forex options, you don’t actually buy the currencies like spot forex trading but you just bet against the price movement of different currency pairs. You should speculate whether the price of particular currency pair will rise up or fall below the strike price before expiry time, based on which you would choose a “Call” or “Puts” option. In order to predict market movements accurately, it’s mandatory for traders to understand the use of various technical indicators like Bollinger bands, Fibonacci Series, MACD indicators, candlestick charts, RSI etc. Experienced traders also make use of support and resistance levels to speculate future market movements precisely.
- Understand various trading strategies and create a proper trading plan
Before you start with forex options trading, you should educate yourself with various trading strategies and hone your trading skills. You should carry out fundamental analysis about the currency pairs which you plan to invest and you can also get advice from experienced forex brokers. You can also read various online tutorials, e-books and other training materials to get familiar with various trading strategies used by experienced investors. You can also attend webinars or watch training videos to boost your market knowledge. There are various trading strategies in forex options like risk-reversal strategy, hedging strategy, Single payment options trading, trend trading strategy, straddle strategy, support and resistance strategy etc. You should choose a trading strategy which will suit your trading style and also come up with an effective trading plan which will describe your risk tolerance, trading strategies, entry and exit criteria etc.
As a novice investor, you should first understand the fundamentals of forex currency market and binary options before you starting your Forex options trading career. Since you are required to predict the future price movement of underlying assets, you should understand the market trends and use of technical indicators. Along with effective trading strategies and a suitable trading plan, you can definitely become a successful investor in forex options.
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