The rising popularity of online trading has mostly been centered in the Forex and binary options markets. So, many new traders find themselves interested in both but not sure which is better suited to their trading style and investment goals. This information can also be helpful for traders looking to make the transition from one market to the other, as there is a certain amount of readjustment that must be undertaken in order to successfully make the transition.
Binary Options and Forex
Since changing from one market to another can lead to potentially costly mistakes, it makes sense to look at a comparison of both in order to determine which market is mostly likely to lead to consistent returns for your individual financial approach. Here, we will look at some of the pros and cons of the binary and Forex markets as they relate to Risk Management, Trading Accessibility, and Potential Profitability.
One of the most critical factors when comparing the Forex and binary options markets can be seen with the differences in risk management. Most experts will agree that Forex is far riskier than trades with binaries because a contract will always have a guaranteed loss level (which cannot be expanded).
In addition to this, the Forex market is typically marked by high leverage, which enhances the possibility of larger gains and losses. For new traders, it is much more common for the risk side to win out when using leverage, so the smaller number of enhanced gains still tends to result in depleted trading accounts. Binary options are an “all or nothing” proposition, but some binary options brokers will refund up to 20% of the capital invested when trades expire out of the money.
Another benefit of binary trading is the “rollover” function, which also aids traders in risk management. Rollover allows traders to extend the expiration time of a position that has not yet turned profitable. This, along with the early closure function (enabling traders to close profitable trades before expiration), offers greater flexibility for options positions.
Another advantage of the binary market is that it is not as complicated to place trades. The process is generally taken in four steps, with each piece of information entered into a dialog box. This includes: selecting your asset and strike price, selecting your position size (in Dollar terms), selecting the contract expiration, and confirming the trade.
In Forex trading, the process is not always this easy. Here, traders must calculate stop and limit orders, position lot sizes, in addition to the asset type and price entry level. ECN Forex platforms are even more complex,and this complicated trading requirement might be intimidating for new traders. It can be very easy to make a mistake and when this is done with a live account, the results can be costly. With binary options, you will choose between two orders. When trading Forex, you can have as many as 7 or 8 orders to deal with when constructing a single trade.
Forex Binary Options
Binary options have a unique payout structure, and this allows traders to achieve a risk to reward ratio that is much more favorable and put in place automatically when positions are opened. Trades differ from Forex because you know exactly what you stand to earn or lose from before your position is live. This poses a stark contrast with Forex trades, where wins and losses are variable and the outcome is much more difficult to predict.
In Forex, the trader is responsible for all of the potential profit and loss calculations, and this makes it easier to make mistakes which could negatively affect your trading account. Additionally, binaries allow you to easily open multiple trades in the same day. This is difficult in Forex because there is no way to know exactly how long a Forex trade will be open. But, with options, your trading timeframes are clear from the beginning. So, if you enter into an hourly trade, you could easily open and close many trades within a single day.
As the trading environment changes, it is becoming clear that brokers are adapting to cater to the needs of retail traders online. Account sizes are flexible and option contract periods vary from 60 Seconds to 1 month in duration. For traders looking to minimize their risks (and to be completely clear about the potential losses that can be undertaken in any position), options markets offer some guarantees that are simply not seen in the Forex arena. For these reasons, options offer some attractive features that many new traders will view as preferable when compared to Forex.
Binary Options vs Forex
There are a lot of people that like to trade currencies within the Forex marketplace because of its 24 hour availability, the leverage that most brokers provide, and the lack of commissions. But there are still many barriers to success here that a good portion of these folk experience after a brief time. Binary options, when used correctly, can help solve some of the problems created by the Forex market.
When you are trading currencies, you are trading within the world’s biggest marketplace. More dollars are traded in Forex than in any single stock market. Billions of dollars change hands every day here, and because currencies are traded all around the world, there is always a market open. The major trading centers are in Japan, Europe, and the United States, and this allows the Forex market to stay open in some capacity all day, every day. This allows for a lot more trading freedom.
When you trade binary options, you do have the ability to trade currencies, and many brokers—even domestically based ones—will keep their currency options running in a limited capacity 24 hours per day.
But binary options have several advantages over straight Forex trading. One of the biggest of these is the concept of the spread. If you are trading the EUR/USD pair in the traditional sense, you have a gap that you need to overcome in order to turn a profit. So you might use U.S. dollars to buy Euros at $1.2990 each, but if you try to sell them immediately, you might be quoted at only $1.2983. This doesn’t seem like a big gap, but if you’re looking for short term profits, you will be out of luck in most cases. It can take quite a while to overcome that 7 pip spread, and even when you do, the price might not increase more than enough to give you a profit of a few pennies.
This is a problem that binary options have corrected. If you want to trade EUR/USD, you only need to be correct by a single pip in order to gain a profit, sometimes as much as an 85 percent return. The broker still needs to make money though, and this is why when you are wrong with a trade you lose 100 percent, but only gain 85 percent when you’re right. Still, to make a profit of 85 percent in the traditional Forex market, you would have to either be really lucky, or grind out small gains for several months. Binaries offer a profit level that is unmatched within all other marketplaces.
Leverage is another issue that needs to be addressed. For the savvy Forex trader, this can present a huge advantage. But for most people, it can be a really big problem despite its helpful appearance. Some Forex brokers will allow you 400 times the purchasing power that you are risking. So if you are buying $100 worth of Euros with your dollars, you will actually be able to trade $40,000 worth of Euros. This is great when you’re right since it will help you to increase your profits, but this is a double edged sword. When you’re wrong, you will lose a lot more—and the broker can stop your trade at any time in order to recoup what they’ve lost because of your trade. With binaries, you always know exactly what you’re risking, and exactly what you will earn. There is no leverage with this type of trading, and this offers both new traders and pros an extra level of protection not found within the traditional Forex market.