Trading Crosses with Binary Options Triangulation

Trading Crosses with Binary Options Triangulation

Submitted by adil on Mon, 02/23/2015 - 09:21

Arbitrage in binary trading is very popular where traders make money through the exchange rates of currencies. The currencies are traded in pairs and their relative movement is used in trades. Arbitrage however cannot be performed by small retail traders. “Crosses” is another trading method that works in somewhat similar manner. This method is used by traders to trade two different currency pairs off of each other, which is called a cross. This trading technique is used in binary options trading to minimize exposure and reduce losses. It also produces more profitable trade.

As an example, consider you have to trade in currency pair GBP/JPY, for this you will have to make a cross of GBP/USD and USD/JPY.  This trading method requires you to keep a closer look on several markets at the same time. However, it requires experience and is not suggested to beginners.

Understanding currency crosses in binary options

Binary options trading have only two possible outcomes; you could either win a trade or lose it. You know the amount of risks and profits involved depending on your investment. Also, we know that every currency pair is dependent on two variables. The wins and losses of one currency will be affected by the economic situation of the other currency in the pair. Hence for example, if the interest rates are increased by US Central Bank, the price of Dollar will increase making it more valuable. This change in price will affect all the currency pairs USD is a part of. For example, crosses like EUR/USD and USD/JPY will be affected. Other pairs such as EUR/JPY will not be affected by any movement in Dollar rates. Because of arbitrage, however, these increased or decreased levels in currencies are balanced out. This means if two currency pairs share same type of currency, their trading behavior will be in line with each other.  

How currency cross work in binary options

 In a normal trading environment, if one currency pair is getting stronger, say the value of Euro is going up, you will definitely buy the calls in Euro currency pairs and you are constructive that future might be in your favor. But when we talk about arbitrage, things get a little complicated as the relative currency rates between all three currencies in a cross is stable. Say, we take our example from above, the Dollar, the Euro and the third currency Yen would have a relatively stable rate. Hence if Euro does not go up against the Yen as predicted, this implies that the Yen and the Euro both got stronger.

The cost in binary options trading is less than the profits; hence you cannot enclose your call against the same pair. What you can do is secure your trades which are more risky by using the crosses. Carrying on with the same example, you are betting on EUR/JPY with the prediction that its value is going up. Here you can triangulate using a third currency which is US Dollar in this case. This means you can buy a call based on Euro and a call based on JPY. This works in the sense that if the value of any base currency goes up, you will still have two options out of three to win the trade. Here you have to keep in mind that the three calls have same expiry time and are bought very close to the same time.

This system, however not entirely perfect, is very beneficial and less risky. It provides very significant opportunities to forex traders and allows you to expand your trading horizon.