Buying Calls and Puts in Forex
Two of the fastest growing markets in the financial environment can be found in forex and in binary options. This is a stark contrast with what has been seen over history, were the large majority of the global investor base looked to enter into ‘buy and hold’ positions in stocks and indices. Of course, there is nothing wrong with these types of approaches. But the implementation of both binary options and forex have been a welcome addition to the investment space as they give investors many more choices to use when looking to establish an active position in the market. Here, we will look at the ways some of these positions are constructed when we combine both forex and binary options in active trading.
Trends in Calls and Puts
Binary options require traders to make a clear decision on the ultimate price direction in the trend of a given asset. Bullish trends are needed in order for traders to enter into call options, and bearish trends are needed in order for traders to enter into put options. Each asset market has its own set of rules for what is most likely to generate a bullish or bearish trend. So, in essence, the “rules” will be somewhat different depending on whether you are trading in stocks, commodities, or currencies. Many are aware of corporate earnings and some of the other factors that are involved in pricing the appropriate valuation for stock markets. But many that are less familiar with forex lack a proper understanding of which factors are involved when determining the most likely trend in currencies.
Factors in Forex
There are many factors that influence currency valuations,” said Steven Thompson, forex analyst at Teach Me Trading. “But many experienced forex traders will argue that the primary force involved in directional forex trend comes from the interest rate policy that is outlined by central banks.” This is important because rising interest rates tend to increase the value of a currency. This creates a climate that is more suitable for long positions that are expressed through call options. Conversely, situations where central banks are lowering interest rates create bearish trends for currencies. These types of situations would be best for initiating short positions using put options.
Of course, there are other factors at work and not everything can be isolated to interest rates. But the reality of the forex market is that most economic data releases are wided within this wider context. For example, a consumer inflation report that comes out of the UK will be viewed in terms of the way it is likely to impact the bias seen at the Bank of England in terms of whether or not they might to raise or lower interest rates in the future. With this in mind, there are many factors that will influence the trend direction of forex prices. But when binary options traders are looking to establish an active position, it will always be important to assess the likelihood a given central bank will raise or lower interest rates going forward.