FOREX (FOReign EXchange) of FX options are financial contracts, where your return on investment depends on the difference in the number of pips (percentage in point, a certain unit to express the difference in a currency pair’s exchange rate) against the strike rate. The main differences between FOREX and “regular” binary options are: FOREX options have no expiry date and FOREX options can be closed whenever you want. As a result, you always have total control over the option and run significantly less risk on your investment. For example, you can close an active FOREX option whenever you want and set Stop Loss (SL) and Take Profit (TP) levels. The SL is based on your invested amount (you can never lose more than your investment!) And the TP is based on how much money you want to earn. Below is the full description of how to trade FOREX options on abcOptions and how this can be an interesting way of investing for you.
How do you execute a FOREX trade?
The steps below explain how you place a FOREX trade on abcOptions:
- Login on your abcOptions trading account.
- Go to the Traderoom and select the FOREX tab.
- Select the currency pair (for example EUR/USD) that you want to trade. As soon as you selected a currency pair, the name of it is displayed in the Assets field and the rates are loaded/shown in the chart.
- Then you decide whether you want to BUY or SELL the currency pair:
- When you think that the price of the pair will go up, then you choose for BUY the asset (BID).
- When you expect a decrease of the value of the pair, then you choose for SELL the asset (ASK).
- After having selected SELL or BUY, the Order Ticket window will pop-up, which let you execute a Market Order or a Pending Order.
5.1. With the Market Order you execute and place a FOREX order in the system, and it lets you do the following:
- Choose between BUY (you expect a price increase) or SELL (you expect a price decrease);
- Enter the Investment amount;
- Enter the Take Profit amount;
- Review the Stop Loss and Take Profit values, and the PIP value;
- Execute the trade by clicking TRADE.
5.2. The Pending Order allows you to capture the parameters of a FOREX option so that you can start it automatically as soon as a certain price is reached. The Pending Order consists of the following components:
- Choosing a Sell or Buy FOREX option;
- At “At Price” you determine the price at which the Pending Order is automatically activated into a Market Order;
- Entering Investment Amount;
- Entering Take Profit Amount (Revenue Amount);
- Review the Stop Loss and Take Profit Values, and the PIP Value;
- Add your Pending Order to ORDERS by pressing the SUBMIT button.
How to stop/close a FOREX option?
A FOREX option can be closed in 2 ways. The first way in which a FOREX option expires is when the Stop Loss or Take Profit level is reached. The second way to close a FOREX option is by pressing Close in the Tools column of the Open Trades. The amount visible in the column Profit will then be added to your balance sheet.
Which currency pairs are available for FOREX options?
You can purchase FOREX options of the currency pairs below:
- ASSET – Trading hours (GMT)
- AUD/JPY – Mo-Fr 00:00 – 18:00
- EUR/USD – Mo-Fr 00:00 – 20:00
- GBP/USD – Mo-Fr 00:00 – 20:00
- USD/CHF – Mo-Fr 00:00 – 20:00
- USD/CAD – Mo-Fr 00:00 – 20:00
- AUD/USD – Mo-Fr 00:00 – 20:00
- USD/JPY – Mo-Fr 00:00 – 20:00
- EUR/JPY – Mo-Fr 00:00 – 20:00
- GBP/JPY – Mo-Fr 00:00 – 20:00
- NZD/USD – Mo-Fr 00:00 – 20:00
- EUR/GBP – Mo-Fr 04:00 – 20:00
- CHF/JPY – Mo-Fr 07:00 – 20:00
For the current asset list plus the trading hours for FOREX, take a look at our Asset List page.
How does FOREX work?
The following topics explain the underlying operation and basic terms of FOREX options. Pricing explains how the BID and ASK prices work. The common FOREX terms Spread, Pips, Leverage, Contract Size, and SWAP are also explained.
All forex assets are quoted in terms of one currency versus another. Each currency pair has a base currency and a counter currency. For example, in EUR/USD, EUR is the base currency and USD the counter currency. Forex pricing is a two-way quotation mechanism that indicates the best price at which asset can be sold and bought at a given point in time.
The BID price represents the maximum price that a buyer is willing to pay for the asset. The ASK price represents the minimum price that a seller is willing to receive for the asset. A trade or transaction occurs when the buyer and seller agree on a price for the asset.
Note that the trader can SELL the currency pair without buying it first. This is due to the fact that by selling a currency pair the trader actually sells the base currency but it’s buying the counter currency.
The BID price is the price on which the users SELL the currency pair, while the ASK price is the price on which the users BUY it.
|Currency pair Bid Ask||BID||ASK|
This means that the end user can sell 1 euro for 1.0853 dollars or buy 1 euro for 1.0856 dollars.
The difference in the BID and ASK of the currency pair is referred to as the spread.
An example would be EUR/USD dealing at 1.33800/1.33808 (in this case the spread is 0.8 pips or 0.00008). Every quote contains Bid and Ask so every quote has spread. The spread is not fixed and it can fluctuate during different market conditions.
Pips (Percentage in Points)
Pip stands for Percentage in Points. Most of the currency pairs are quoted to 5 decimal places with the change from the 4th decimal place (0.0001) in price commonly referred to as a pip. For example, if the price of the EUR/USD forex pair moved from 1.33800 to 1.33925, it is said to have climbed by 12.5 pips (92.5-80=12.5).
Foreign exchange is a leveraged (or margined) product, which means that you are only required to deposit a small percentage of the full value of your position to place a forex trade. This means that the potential for profit, or loss, from an initial capital outlay is significantly higher than in traditional trading, like Stock trading.
Currently, abcOptions works at a Leverage ratio of 1:25. The main reason for this relatively low ratio is to avoid exposing you to a too big risk. You can always check the Leveragein the overview of the Market Order or Pending Order. The Leverage is also always stated in the Open Trades.
This is the value which is defined by the leverage value. It stands as quantity entities for the traded asset. For example, if you trade with a leverage of 1/25 and you invest 50$, the contract size will be 25×50 =1250$.
Swap is a daily commission you pay over an active FOREX option. At the end of each day that the opened FOREX positions are not closed, the Swap percentage is applied over the total invested amount of these open FOREX trades.
The reason for applying this commission is due to the fact that you have to pay for the allocation or interest of currencies. As written before, the Contract Size or what you actually own in a Forex trade has a lot bigger currency value than your invested amount. To cover the cost for the allocation/interest paid over the currencies we apply the Swap rate.
You can find the up-to-date Swap rates at our Trading instruments page (in the footer under Trading Resources).
Do you have questions about FOREX options?
Contact your account manager, and he/she can give you more information about FOREX options.