What is Binary Options Pairs Trading?
Several new types of trading have been rising to prominence lately, one of which is called “pairs trading.” You may have started noticing this type of trade being listed more and more often on binary options broker platforms. As far as we are aware, the concept of making pairs trading available to binary options customers started with a broker called StockPair. You can read our review of StockPair here.
StockPair came up with an idea that at the time was quite unique, which was to allow binary options traders to bet base on the relative performance of two assets (stocks in this case). On their platform, they asked a simple question. “Which will perform better?” Two stocks would be listed, contending for best performance, along with an expiry time. So for example you might be asked, “Which will perform better in the next 15 minutes? Shell or BP?”
You choose the stock you believe will outperform the other, put in the amount of money you want to invest, and wait for the trade to expire. If the stock you chose is outperforming the one you didn’t at the time the trade expires, you win. If the other stock is outperforming yours, you lose. So in the example above, if you bet on Shell and Shell was outperforming BP when 15 minutes expired, you would win the payout. If however BP was in the lead at the end of the expiry time, you would lose your investment.
Bet On More Than Just Stock Pairs Now
Back when StockPair came up with this concept, they were the only broker around that offered it, and it was specifically for stock trading, as the name of the company implies. Once StockPair started getting some press for their ingenuity, other brokers started to pick up this type of trade and offer it on their own websites. Now there are dozens of binary options brokers listing pairs trading, and many offer not only stock-based trading, but pairs trading for other types of assets as well, like futures, indices, and currencies.
So now, if you have knowledge of a different type of asset, you can trade with that knowledge. Maybe you know more about futures than you do about stocks. You might find a trade which allows you to say whether gold will outperform silver within a given time period. Or perhaps your expertise are in currency pairs. You may find trades allowing you to say whether GBP/JPY will outperform EUR/USD, or whether AUD/USD will outperform GBP/CHF, and so on.
Opportunities are exploding now for pairs trades, and this is a very exciting new way to trade. StockPair made it popular, and they are one of our recommended brokers, but if you are interested in pairs trading for other types of assets, there are now a ton of possibilities open to you. Other brokers we recommend that are now offering pairs trading include Nadex and Marketsworld.
Why Is Pairs Trading Exciting?
Pairs trading is exciting not only because it gives you another approach, but also because you can profit even if both the assets you are looking at are falling in price! This is particularly unique for stock traders, who are used to a situation where they can only profit when stocks are going up in price. Of course, High/Low trading has changed that as well, since you can now profit from a falling stock simply by guessing it is going to fall.
With pairs trading, however, you don’t have to have a guess at all about whether the stocks, currencies, commodities, or indices you are looking at are going up or down. You don’t need to know anything about the direction price is moving. You also don’t really need to know how little price will move or how much. All you have to know is which asset is stronger than the other. You might determine this through any number of different means of analysis.
This method was probably introduced first for stocks because it is easy to see how this could be uniquely beneficial for stock pair trading. Say for example we have a hypothetical situation where conditions are economically uncertain for tech companies. If you are a fundamental analysis trader, you may still be having a hard time deciding whether tech stocks on the whole are going to go up or down. But one thing you may know is that a particular company is definitely going to do better than one of their competitors—even if both companies do poorly, or both companies do well. Wouldn’t you take the chance to profit on that knowledge? Stock pair trading gives you the means to do it—without worrying about the general market performance.
Likewise, you might have a situation where nobody can easily predict whether a particular currency is going to be performing strongly or not. Maybe the future of the US dollar is uncertain. But one thing you might know is whether a particular currency pair is going to do better than another. You might know for example that the Yen is in jeopardy. As such, you’d expect USD/JPY to rise relative to another USD currency pair, simply because of the information you have on the Yen. This would allow you to profit from a pairs trade when you could not necessarily profit in a simple High/Low or One Touch trade.
A Great New Way to Trade
Pairs trading is one of the most exhilarating developments in the binary options world. High/Low trades have many pros and cons, but pairs trading, like range trading, offers you opportunities to profit in market situations where you could not otherwise expect to make any money or find any trade setups. That means more chances to make money than you would have without binary options. You may even end up building your entire trading strategy around pairs trading. We will update you as more binary options brokers on our recommended brokers list add this type of trade to their platforms.