Difference Between Floating and Fixed Binaries
Binary bets can be largely broken down into two categories, and the distinction is a thoroughly important one for any binaries trader to understand. Knowing whether or not you’re trading a floating or fixed binary is an essential ingredient to successful trading, because of the different impact that each one will have on your trading position and ultimately your bottom line. While the more common of the two is the floating binary, it is nevertheless essential that you understand the difference to make sure you don’t get caught out when it comes to brass tacks.
The distinction between floating and fixed binaries lies in the component of the transaction that is flexible. In a floating binary, prices (i.e. spreads) are consistently re-quoted throughout the day, while the end goal (in handicap binaries) remains a constant component. For example, a floating binary on the FTSE closing 10 points up might start the day at 53-58, then it might drop to 51-56, before rising to 70-75 – while the spreads are ‘floating’, the 10 points criteria remains a fixed component to the trade.
This means that traders are in the fortunate position of being able to close out their positions early, by opening reversed trades to the same extent as open positions, thus they are able to lock in small profits as they arise without necessarily having to wait until the end of the trading day.
By contrast, in the example of fixed binaries, the floating component is actually the target rate – i.e. the 10 points in the above example. In this sense, the spreads will stay the same, but the end goal will vary over time to represent a more realistic goal in relation to the odds on offer. Thus it is the odds that are fixed in the example of fixed binaries. This has the effect of locking traders in to their binary bets until they are settled, either up or down, and thus there is no way in which a trader can close out his position early.
Floating binaries are by far the more common of the two, and almost in fact the default option. However, it’s important nevertheless to be aware of the existence of fixed binaries, and to understand exactly how they differ to ensure you’re prepared for any eventuality.