The Forex market is a vast liquid market, in which sharp quick movements on a daily basis make this asset class an excellent candidate to trade binary options. The currency markets trade 24 hours a day, 6 days a week and are constantly moving based on fundamental and technical factors that influence this market.
When to Trade Specific Forex Pairs
The currency markets begin to trade during the Australian time zone, but volume really begins to pick up during the Japanese morning. The best currency pairs to trade at this time are the USD/JPY, AUD/USD, and AUD/JPY. The Australian dollar is generally considered a target for “risk on” and “risk off” trades, in which higher AUD/USD or AUD/JPY reflect riskier market sentiment while lower levels for those currency pairs reflect a more cautious market sentiment.
The European markets generally experience the largest volume of trading of any time zone. During the European time zone, the EUR/USD forex pair sees the largest volume of trading, but Euro crosses also see plenty of volume. The currencies that are the best candidates to trade binary option are the EUR/USD, EUR/GBP, and EUR/AUD. The EUR/CHF used to be a robust currency pair, but the Swiss Nation Bank now attempts to fix their currency at a specific Euro rate which has removed most of the volatility from the market.
The UK currency, the Pound is a very active currency and should be part of every binary option trader’s arsenal. The Pounds is very active against the US dollar as well as the Euro. Pound crosses against the Australian dollar and the Japanese Yen are very good candidates for binary options trading.
The US time zone takes over activity from the European time zone, and produces less volume as other US markets close between 1900 and 2000 GMT. The US dollar is the key link to the forex markets, as it is the base currency to all the Major currency pairs. Major pairs include the EUR/USD, USD/JPY, GBP/USD, USD/CHF, AUD/USD and USD/CAD.
What Generates Volatility
A currency rate represent the value investors place on a countries currency. Generally strong currencies have countries with strong economies where their interest rates are higher relative to other countries interest rates. Interest rate differentials usually drive currency action as an investor benefits from holding a higher interest rate delivering a lower interest rate. For example, the Australian dollar has short term rates near 4%, while the Euro has short rates near 50 basis points. Over the course of a year, a trader that is long Australian dollars and short the Euro will gain 3.5% over the course of a year.
Changes in the perception of countries interest rates can come from many sources. The daily release of economic data can have a strong influence on countries interest rates. Releases such as the employment report, the Gross Domestic Product and Inflation can alter the course of interest rates, and spill over into the currency markets.
Monetary policy also will alter interest rates and currency markets. When a central bank increases or decreases interest rates, the home currency will fluctuate if the change was not expected by market participants. In today’s environment the changes to quantitative easing by the Federal Reserve, the Bank of Japan, the European Central Bank and the Band of England, will affect the currency markets.
Changes in price action will also be generated by breaches to support and resistance levels that trigger stop losses by those who are on the wrong side of a trade. Break outs are common in the currency markets which make them excellent candidates to trade using technical analysis and binary options.
Technical analysis is a broad study of capital markets in which participants believe that all the current information that is known is already baked into the price. The study of price action in this case is the best was to determine future price movements. Technical analysis can come in the form of patterns or studies.
The combination of robust liquidity and constant information that can create market movement and activity makes the forex markets one of the best asset classes to trade binary options.