Currencies are one of the most popular types of underlying assets for binary options. Before you get started with trading currencies with binary options, here are three facts you should now:
You cannot trade a currency by itself. The price of one currency cannot be measured in the same currency. One US Dollar will always be worth one US Dollar. Therefore, you need to measure the price of one currency in another currency. You could, for example, measure the price of one Euro in US Dollar. Currently, the price for one Euro ranges somewhere between $1.20 and $1.35. That is a relationship you can use to make investment predictions.
Therefore, all currencies are traded in pairs. The currency pair for the Euro against the US Dollar is named EURUSD. All other currencies are traded in similar pairs with similar abbreviations. To invest in a rising Euro or a falling US Dollar, you would invest long in the EURUSD currency pair. To invest in a falling Euro or a rising US Dollar, you would invest short in the EURUSD currency pair.
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A stock’s price is entirely determined by the relationship of supply and demand on the stock exchange. With currencies, however, there are some very fundamental influences, too: Is the central bank of the country printing money to cause inflation or not? Is more money flowing into the country or out of it? How strong is the country’s exporting economy?
These fundamental influences could lead a trader to assume that he should use fundamental analysis when investing in currencies. Nothing could be further from the truth.
Often, these fundamental factors lead to a delicate relationship between the two currencies in one currency pair. If both currencies of one pair are getting stronger or weaker, you have to determine which of the currencies will get stronger or weaker the fastest. In that case, you do not only have to predict the market direction, but which currency will win the race.
Unfortunately, this is not a rare scenario. Since the world’s economy is intertwined, many countries go through similar developments at the same time: A weak economy in the United States will likely be accompanied by a weak economy in Europe, too. Therefore, the American and European central banks will likely employ a similar financial policy, which will lead to similar developments for their currencies.
Investing in currencies is easy, as long as one currency of the pair is strengthening while the other currency is weakening. Most of the time, however, both currencies in a currency pair will move in the same direction.
Therefore, determining which currency will fall or rise faster over the next hours, days, or months cannot be determined with fundamental analysis. Technical analysis is your only choice to determine which currency will win the race to the bottom / top for the next time.
One of the biggest advantages of currencies and the reason why many traders choose to focus on currencies is that currencies can be traded all week.
Every stock has its home market. American stocks, for example, are traded on American stock markets. When American stock markets are closed, American stocks will not be traded. This is especially problematic to traders from all around the world that live in a different time zone. Trading American stocks could mean getting up in the middle of the night.
Currencies, however, are traded all over the world. This means, as long as one market is open, you can invest in currencies. Fortunately, due to time delays, there is always an open market you can trade currencies on from Monday to Friday.
Therefore, where you live does not matter when you want to invest in currencies. You could even travel half way around the world and would still be able to invest in currencies. That great deal of flexibility is a great plus of currencies and binary options.