Trading binary options allows traders to invest on a range of assets including currencies. Unlike Forex trading, traders do not have to buy or sell any currency while trading on them, but require just to determine the future market value of a specific currency pair. Yes, currencies in binary options have to be traded in pairs. For optimum success while trading currencies, it is important to know how to choose the right currency pair. Here’s how.
Before, reaching to that point, it is important that one has sound knowledge about what currency pairs really are and what are their traits. In fact, the value of a currency is determined by its comparison to another currency. Therefore, obviously, a currency pair consists of two currencies having a correlation with each other. That is, the trend of one currency determines the trend of the other.
The first currency in a pair is known as the Base Currency while the second currency is known as the Quote Currency or Counter Currency. The relationship between these two is such that a rise in the base currency implies weakening of the counter currency and a rise in the counter currency implies a fall in the base currency. Similarly, a fall in the base currency alludes to a rising quote currency and vice versa. It is very important to understand these details well as they are decisive in the right choice of a currency pair for trading.
Types of currency pairs
Currency pairs are categorised according to the specific pairs’ daily trading volume. Accordingly, we have categories as Major currency pairs, Minors and Exotics.
Major currency pairs
These are the currencies which trade the most volume against the U.S dollar. The EUR/USD, GBP/USD, the USD/JPY amongst others form part of Major currency pairs. Normally, these pairs have very liquid markets and trade 24 hour every business day.
These are currency pairs not associated with the U.S dollar. They are also termed as ‘Crosses’ or ‘Cross Pairs’. Minor pairs are sufficiently liquid, but not as liquid as major currency pairs. Examples of minors are, amongst others, GBP/JPY and EUR/GBP.
Exotic currency pairs include currencies of emerging markets. They are not much liquid and examples are USD/SGD
Commodity pairs basically come from countries possessing significant amounts of natural resources as crude oil and precious metals. These pairs are highly correlated with the changing prices of commodities. Examples of commodity pairs are USD/CAD, USD/AUD and USD/NZD.
Which one to invest in?
Choosing which currency pair to trade on, is subject to decisive determining factors. All of them have to be taken into good consideration to assure optimum success while trading
currency pairs. Also, for novice traders, it is advisable to trade on a given sent of pairs while advanced traders can go for a wider range of pairs. Well, let us throw some more light
on these determinants.
Trends and events
First of all, it is important that one keeps good track on the currency market and remains updated with the trends in binary options such as the individual currencies. That is because fluctuations in one currency impact other currencies and knowing the direction a specific currency implies knowing the direction of other currencies, thus giving a technical indication of the direction of specific currency pairs. Similarly, it is important to be well conversant with whatever is happening on the financial market in general, specially what is happening to other assets. It is so as the trends of other assets also determine the direction of specific currencies and currency pairs obviously. As mentioned earlier commodity currencies are directly impacted by the trends of commodities such as crude oil. Indeed, generally when crude prices climb higher, the dollar experiences slight weaknesses. Another example is that a significant portion of the Canadian economy is tied to the fluctuation in oil prices. As such changes in oil prices become a major determinant in the trend of the Canadian dollar. Therefore, whenever, specific commodities fluctuate up or down, traders know which currency pair to tap on.
Global financial events are also important determinants while choosing currency pairs to trade on. The reason, as you may have guessed, is simple. These events impact significantly on currency pair. A good example is the recent Brexit referendum which took the British Pound to record lows. Also, the USD/JPY is much impacted by Japanese economic and political news. As such currency pairs as the GBP/USD and the GBP/JPY were much recommended to be traded on with put options. Other events as important elections or calamities are equally important and deserve the attention of successful investors.
Volatility and volume
The volatility of currencies help traders select the currency pair which best suits them in terms of risk aversion. For instance, a beginner should not trade on the GBP/USD pair
unconscientiously as it is the most volatile pair out there. As for a pair like the EUR/USD, it relishes the highest trading volume, thus making of it the most forecastable currency pair. That is why it is many trader’s favorite.
For news traders it is not much advisable to be exposed to currency pair which have wide spreads as pairs having wide spreads have a tendency to be more volatile. Trading EUR/USd pair is the one deemed to have the lowest spread on the market and therefore, is the least volatile, a treat for newbies. Besides, the popularity of the euro and the dollar which caters for abundant news about them makes it much easier to track the trends of the pair. Another pair with low spread, is the USD/JPY.
All one needs to do is just take into serious consideration these factors while trading currency pairs and bear in mind that markets are volatile and can take any turn. As such every trade should be very well backed by fundamental and technical analysis.