Binary options are designed as a simple betting market that can work well in the short and long term. They work differently from standard financial markets such as stocks and bonds. You don’t buy part of a business like stocks but predict whether the company’s stock value or other related assets will rise or fall. This is the reason why binary trading is called binary options.
Binary options only have two possible outcomes. Either you end up with the profit, or you lose your money.
Further price changes are the objective of the contract. Traders indicate that the price of an asset will go up or down. When the conditions of the agreement are fully met, the broker accepts the obligation to pay a fixed amount.
Forex is a combination of foreign currencies traded in pairs. The forex market is an avenue for trading that provides traders with a platform to invest and trade foreign currencies worldwide. The forex market began in 1875 and has grown into the world’s largest and most liquid market.
Because of its successful operations worldwide, forex is becoming more popular and trustworthy among the Pakistani people. In addition to real money such as the US Dollar and British Pound, people can also trade cryptocurrencies such as Bitcoin through any forex broker.
Profit and Loss Calculations in Binary Options
Here’s how profit and losses are calculated in forex and binary options trading.
Binary Option Profits
Unlike ordinary options, the profit of binary options is fixed, and you know what the expected return is when you invest. Of course, depending on the underlying asset, the type of Binary Trading you choose, and the broker you decide to work with, there may be changes, but your payout percentage is predetermined, and you know it.
For example, the Google stock price is now at $1150 at 5:00 PM GMT. The return is 70%; you invest $100, with the expectation that the price will rise soon and stays above $1150 until 5:30 PM GMT.
So far, so good. At 5:30 p.m. the stock price is $ 1,151 which means you earn and get 70% of the profits plus your initial investment (100+ (100 × 70%) = 100 + 70 = $ 170). The important note here is to realize that the expenses are fixed, which means it doesn’t matter if the price goes up to $1 or $10, your profit will be 70%, and you’ll know that before you invest.
This is one of the most important characteristics of binary options, and it is also a significant difference between them and traditional options. The direction is not the only important factor; the scale is also practical.
For example, if the scale is not large enough to cover your investment, you may lose money using traditional options even if you are in the right direction. This is not possible for binary options. If your forecast is correct, you can profit at the fixed return you agreed to when investing.
Binary Option Losses
Unfortunately, things aren’t always what we want or even expect. As you know, if you invest in binary options, your profit is a fixed percentage. It is predetermined, and you know it before you make the above investment.
But what about the loss? Are they also measured in percentages? Unfortunately no. The loss you bear is the investment you have made. If you make a mistake in the example above, you will lose $100 (because that is the amount you risked).
You will lose your investment, no more, no less. Just like profits, losses are fixed, and you know what will happen before you invest (because you will be able to decide how much you want to support). Whether you lose $10 or $10,000 depends entirely on how much you invest (if you bet $10, you will lose, if you invest $10,000, you will lose the same.)
If you lose the entire amount in your account, you may need to top up your account to continue. This is, of course, if you have the money that you can use to fund it.
This creates a very critical question: “How much should I deposit?” If you are new, we suggest that you make a small investment (some brokers even ask you to have a “demo,” you won’t win or lose anything, but beware of liars and scammers!).
We will discuss more investing and managing funds in the following chapters. It would be best if you recognized that this is very important, and this is where the winners and losers stand out.
Profit and Loss Calculations in Forex Trading
After creating a trading account, you have to remember that high leverage makes a lot of money easy, and it is easier to lose everything for the same reason. Therefore, a stop-loss order must be defined.
The actual profit or loss will be the position size multiplied by the price change (measured in pips).
Let’s look at an example:
Suppose you currently have a position of 100,000 GBP / USD, and the trade price is 1.3147. If the price goes from 1.3147 to 1.3162, this is an increase by 15 pips. For a position of 100,000 GBP / USD, a change of 15 pips is equivalent to 150 USD (100,000 x 0.0015).
To determine if it is a profit or a loss, we need to know if we are long or short:
Long position:
In a long position, if the price goes up, it’s a profit, and if the price goes down, it’s a loss. In our previous example, if the position is long GBP / USD, then the profit will be 150 USD. Or, if the price goes from 1.3147 to 1.3127, you will lose 200 USD (100,000 x -0.0020).
Short Position:
In the case of a short position, an increase in price will result in a loss, and a fall in price will result in a profit. In the same example, if we hold a short position in GBP / USD and the price increases by 15 pips, we will lose 150 USD. On the other hand, by 20 pips, a profit of $ 200 will be made.
Another aspect of the income is the account currency. In our example, the profits and losses are denominated in US Dollars. All the same, this may not always be the case.
In our example, GBP / USD is quoted based on the number of US Dollars per Pound. The British pound is the primary currency, and the US Dollar is the quoted currency. Calculated at the GBP / USD exchange rate of 1.3147, the purchase cost of 1 GBP is 1.3147 USD.
Therefore, if the price fluctuates, there will be a change in the value of the Dollar. For a standard lot, each point is worth $10, and the profits and losses are in US Dollars.
Typically, gains and losses will be denominated in the quoted currency, so if they are not US Dollars, you need to convert them to US Dollars to calculate the margin.
Sharia Perspective
The Sharia law explains how Muslims should conduct numerous parts of their lives, including their personal life, societal responsibilities, religious beliefs, and finances.
Interest is an important component of everyday finance. However, it is prohibited under Sharia law, which implies it is forbidden to pay interest between borrowers and lenders.
Halal/allowed online trading depends partly on your behaviour and partly on the broker you choose.
Whether your Islamic investment is stocks, forex, currencies, or options, brokers claim that they provide accounts based on Islamic principles and must meet the following criteria:
- Executing transactions immediately with reduced lead times helps comply with the rules of instant transactions between two parties.
- There should be no interest to abide by the Shariah rules.