Binary options vs. Forex (1)

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Binary Options vs Forex

Binary Options have become widely popular during the last two years. The main reasons for this, is that they offer high profit returns and they are easy to trade.
In this article I will try to outline the main differences between Binary Options and Forex, so that you can evaluate which is the better trading method for you. A good way to start is to provide definitions of both and look at an example of a trade.

Forex definition: When trading Forex you are speculating that the value of one currency will increase or decrease compared to another, in an attempt to make a profit. For example: The current price of EUR/USD is 1.30850 and you think the price will increase in the future. You buy 1 lot of EUR/USD and wait for the price to increase to the point where you want to close the trade and realize the profit you want.
Binary Options definition: When trading Binary Options you only have to predict if the price of an asset (for example currency pair or stock) will increase or decrease from its current price over a certain period of time. For example: The current price of EUR/USD is 1.30850 and you think the price will be higher in the next hour. So you place a “Call” option on EUR/USD and wait to see its price 1 hour from now. If your prediction is right you can make a profit of 80% of your investment.

Binary Options or Forex Trading, which is the best?

Binary Options or Forex Trading, which is the best?

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Last Updated: Sep 5, 2020 @ 7:18 am

Hi guys! It seems majority of us are confused with the differences between binary options and forex trading.

As this is our first article in our binary options series, we’ll be looking to give a brief overview of what it is all about and then compare it with the forex trading.

This will be beneficial to you especially if you are new to it and looking to start trading .

What are Binary Options?

In simple terms, Binary options are types of trade options where the payoff (reward) received is either all or nothing at all. This type of option has really gained popularity in recent years with more binary options brokers appearing day by day.

In this type of trading, there’s no need to worry about liquidity and volatility of assets any longer when executing digital option trades. It fixed payout and there are only two possibilities in this type options. First, either the price of the current rate of asset will rise or fall within a specified time frame. Your ability to predict correctly, the result of your binary option trades will determine the reward you’ll get after the trade has expired.

Terms like “In the money” and “out of the money” are binary options jargons often used to denote when a correct prediction has been made within a specific time frame or incorrect prediction made within the same time respectively.

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It is very simple to understand and use because the most important thing you need to know is to predict correctly, the asset’s trend direction within a specific time frame.

Assets traded in options could be stocks, commodities, indices and forex. Since it have expiry times and dates, your fixed return price is also known as the strike price.

What i consider best aspect is that regardless of how much the instrument or asset has moved, you are paid a fixed return on expiry provided the correct prediction was made. On the other hand, a trader who predicts wrongly on the asset’s direction will end up losing a fixed part of his or her investment or can even lose it all at expiration.

If a trader believes the market trend of an asset will go higher at a specific time, the trader would purchase a “call” while traders that believe the market trend of the same asset will go down for that specific time frame would purchase a “put”.

In both directions, you can make money by earning a fixed return on your investment provided the correct prediction was made.

For a call to make you money, the current price of the asset must be above the strike price at expiration. In the same vain, for a put to make money, the current price of the asset must be below the strike price at expiration.

One major advantage of trading options is that both the risks involved and reward are known. This simply means that it doesn’t matter how much he trade moves in favour or against the trader. One the factor is always certain, win a fixed proportion of your investment or lose a fixed proportion of the same investment.

Because of the high rate of return on investment often witnessed ( e.g 70%, 80% and up to 90% returns), one would think it’s a quick way to become very rich overnight. Don’t think that way because the major demerit is that the reward is always less than the risk staked on a trade.

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However, many binary option traders who apply the right strategies may quickly become rich �� .

Differences between Binary options and forex trading

Traders, especially newbie traders find it difficult differentiating between foreign exchange trading and digital options.

Though quite similar, both are not the same because they deal with different assets.

  • Forex trading deals with trading live currency exchange rates while binary options can be used to trade stocks, commodities, indices and forex.
  • In binary options, there’s no liquidity or volatility issues while in traditional option (forex trading included), such liquidity issues always arise and can lead to huge losses if not properly managed.
  • A beginner who decided to start trading options immediately can start off instantly with no technical knowledge required. In foreign exchange market, you need to learn most of the terminologies, skills, risk management rules, fundamental and technical analysis e.t.c before you can start trading.
  • In options, no matter the rate at which the price of an asset has moved in favor or against you, you will still receive the same fixed payout provided you predicted the market trend direction correctly. In foreign exchange market, the extent at which the price of a currency pair moves in favor or against you is always considered and it determines if you will profit or lose in a position.
  • In binary options, there are no spreads (commissions paid to forex brokers in terms of pips) to worry about. In foreign exchange market, spreads are the only way brokerage firms get paid for offering trading instruments to their clients.
  • Digital Options provide a full payout due to a single pip movement. In foreign currency trading, a the amount of pip movement is what determines the either the extent of profit or loss you will get from a position.
  • In binary options, there’s a risk to reward ratio meaning that both the risks and reward involved in a trade are known even before entry. In the foreign exchange market, there’s no defined boundaries of risks and rewards and therefore the profit and losses can be limitless.
  • The payout amount is not proportional to the amount by which the option ends in the money in options. As long as the trade is in the money by even one tick (regardless of how much in the money it is), the winner receives the full payout amount. In the foreign exchange market, the payout amount highly depends on the instrument involved, the extent of movement, and the broker.
  • In digital options, knowing the magnitude and direction of price movement is not required but it’s one of the key concepts you must learn before you can start trading forex.

Similarities between Forex trading and binary options

  • Both involve substantial amounts of risk.
  • Both are traded with the help of brokerage firms.
  • You can apply your forex knowledge in binary options and still make money
  • The brokers are regulated by the same companies like the CFTC , SEC or CySEC

Which do you consider the best between Binary Options and Forex trading?

I don’t know about you but for me, I trade options most of the time and rarely trade foreign currencies. Even if i consider trading forex, i use free signals so that i won’t have to monitor my trades all day long.

To trade binary options, you need to register with a broker that offers quick support to its clients, high return on investment, simple and easy to use trading platform.

Binary Options vs Forex

Binary Options have become widely popular during the last two years. The main reasons for this, is that they offer high profit returns and they are easy to trade.

In this article I will try to outline the main differences between Binary Options and Forex, so that you can evaluate which is the better trading method for you. A good way to start is to provide definitions of both and look at an example of a trade.

Guest post by Peter Traychev of ActionBinary.com

After you read this article, please share your views with us! We encourage you to use the comment box at the bottom of this page.

Forex definition: When trading Forex you are speculating that the value of one currency will increase or decrease compared to another, in an attempt to make a profit. For example: The current price of EUR/USD is 1.30850 and you think the price will increase in the future. You buy 1 lot of EUR/USD and wait for the price to increase to the point where you want to close the trade and realize the profit you want.

Binary Options definition: When trading Binary Options you only have to predict if the price of an asset (for example currency pair or stock) will increase or decrease from its current price over a certain period of time. For example: The current price of EUR/USD is 1.30850 and you think the price will be higher in the next hour. So you place a “Call” option on EUR/USD and wait to see its price 1 hour from now. If your prediction is right you can make a profit of 80% of your investment.

Margin

Forex: You can use margin to trade Forex. The maximum margin is determined by each broker, and sometimes can be up to 1:200 or 1:500. Margin allows you to increase your investment capital so you can make a larger trade and make a larger profit if your trade is a winning one.

Binary Options: Margin is not used when trading Binary Options. You can still make a large return on your investment (up to 80% or sometimes 400%), so Binary Options are still very attractive for traders. The good news is that you can never get a margin call.

Payouts and Losses

Forex: With Forex you never know what is the maximum profit you can make on a trade. You can set a limit or stop order so that you can be guaranteed a certain percentage profit if the limit or stop is executed. The losses in Forex can be managed with limit/stop orders, the same way profits are managed. The maximum loss with Forex may be all of the money in your trading account.

Binary Options: Before you make your trade you will know exactly what is the payout and loss return percentage that you will get for the particular option, when it expires. Some brokers offer payouts up to 80% or sometimes 400% depending on the option traded. This means that if you invest $500 on an option and the payout is 80%, you will make $400 profit if the option is a winning one. Some brokers don’t offer “loss back”, which means that if your option trade is a losing one, you will lose the amount you invested in the trade, but not more.

Closing a position

Forex: You choose when to close the position. You can close your position anytime the market is open and the broker has to accept and execute the order.

Binary Options: Before you make your trade you have to select when you want the option to expire (example: 1 hour or 1 week from now) – at the “expiry time” your trade will close automatically. The broker offers you different types of options with predetermined expiry times. Some brokers allow you to close your trade early, but you will exit your option at a percentage of the expected return. The “early closure” option is not offered by all brokers, and might not be available during the whole time the trade is active. Another important point to mention is that some brokers allow traders to delay the expiry time, to the next expiry time. This is called “Rollover” and the traders will need to increase their investment by a certain percentage, sometimes 30% in order to be able to do this.

Orders Types

Forex: There are a variety of order types in Forex. The most important ones are the market (Buy/Sell) orders. Also there are more advanced orders such as: Limit, Stop, OCO (One Cancels the Other), Trailing Stop, Hedge orders, and others.

Binary Options: There are about five Binary Options types which you can trade. They include: High/Low (also referred to as: Call/Put or Up/Down), 60 Seconds Options, Touch/No Touch Options, Boundary Options, and Option Builder.

Trade size

Forex: Some brokers allow you to trade micro lots, which is 1,000 units of the base currency in a Forex trade. The maximum trading amount is determined by each broker, and can be up as high as 100 standard lots or $10,000,000.

Binary Options: Each Binary Options broker determines what is the minimum and maximum trading size for its clients. Sometimes the minimum trading amount can be as low as $5 per trade, and the maximum can be up to $1,000 or $5,000 or more.

Trading costs

Forex: When trading Forex you have to consider what are the spreads and rollover/swap, and if there are any commissions.

Binary Options: There are no spreads, rollover/swap or commissions when trading Binary Options.

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