Forex vs. Binary Options Trading

Difference between Forex and binary options

Know the difference between trading Forex and binary options

The Forex market and binary options market offer two different ways to trade the financial markets.

Binary options are options contracts where you must pay a premium every time you take a trade. The premium and the reward are fixed. If the trade is successful, the premium you paid is returned to you plus the additional fixed reward (often around 80% of the premium). Should the trade be unsuccessful, the premium is not returned and is a loss.

Trading spot Forex (FX) is an agreement between two parties to buy one currency against selling another at an agreed price. Quantity and time are variables.

Both methods have similarities and differences.

The Similarities

Online and price movement

Both FX and BO allow you to trade online, and both markets depend on the price movement of currencies.

Small capital

As long as you shop around for the best brokers, you can access the market with a small initial capital. This means you can increase your capital once confidence increases.

Profit in both directions

Profit is made by speculating on direction of the price. Should you be correct, both offer excellent returns. You can profit from the market moving in both directions, up and down. If you think a market is overvalued you can sell the market and benefit from a market declining.

Difference between Forex and binary options

Both Forex and binary options allow you to go either long or short

 

 

 

 

 

 

 

 

 

 

The Differences

Despite often trading the same underlying products, there are considerable differences when trading binary options compared to FX.

Direction vs. Direction and Distance

The binary system has two inputs, 1 or 0. Binary options are similar in the fact that there are two options, up or down. If you correctly guess the direction you will profit.

In comparison, FX, not only must you guess the direction correctly but you must know how far the market will go in that direction.

Timeframe

Binary options have expiry times. Every time you take a trade, you will choose when the trade will end. This can last 60 seconds or 3 months.

When you trade FX, you can hold the trade for as long or short as you want. You can immediately close a trade once its opened or hold it for 10+ years if you choose an outlook that long.

Risk Vs Reward

When trading binary options, you have a pre-determined risk and reward. Once you take the trade, you have already paid the premium (risk). Other than the premium, you have nothing at risk. Likewise, you already know how much you will gain should the trade be successful. The reward will depend on the broker but often is around 80% of the premium. If you lose, you lose the premium. If you win, you win 80% of your premium plus your premium is returned.

When you trade FX, you do not know your risk or reward. You can essentially have your entire account at risk when trading FX. That said, there are tools to help you manage your risk and reward. To reduce your risk, you can apply stop-loss orders which exit you from the market at a predetermined price and, as such, give you a predetermined level of risk.

This however, is not guaranteed. If a market moves too quickly, you can encounter slippage or gapping. Slippage means the broker cannot fill you at the predetermined price and so will fill you at the next available price (this can be negative if the market is going against you, but also a positive if the market is going with you). Gapping means that the market does not trade at a certain price. Should this happen, your order will not be executed because the market did not trade at that price. Both instances are rare in the FX market but can happen.

Charges

Trading binary options, the only cost is the premium you pay. Whereas when trading FX, you can be charged a commission and a spread. The spread can vary on broker, market and volatility. Consequently, the costs when trading FX are often unknown until you execute the trade.

Margin

Trading FX is usually done so on margin. This allows you to only put down a fraction of the actual trade size, thus (effectively) increasing your investment capital. This can boost both profits and losses. Binary options cannot use margin as a tool.

 

Forex can be bought on margin but not on binary options

Margin can be used on Forex but not binary options

Volatility

Volatility is also a risk when trading FX, especially when using a stop-loss. A market can whipsaw, take you out of a trade for a loss and still get to the point you were targeting. Despite being correct, you have still lost capital. When trading binary options, you are protected from volatility by paying the premium. The market can whipsaw as much as it likes, if it finishes in the direction you predicted in the timeframe, you will profit.

 

Binary options and FX trading are considerably different and it is important to understand the differences when deciding which method you choose to trade with.

 

 

 

 

 

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