Forex vs Binary Options

Forex vs Binary Options

Difference between Binary options and Forex

The fixed risk and fixed returns is usually an attractive proposition that drives many traders into binary options trading. They are often considered to be simpler than trading any other markets and this is one of the reasons many beginners prefer to trade binary options rather than forex or CFD’s. In this article we’ll explain the differences between binary options and forex so that readers can learn the differences and also the pros and cons and thus be able to decide if trading binary options is ideal for them or not.

Characteristics of Binary Options trading and Forex trading

Binary options trading offers the following features

  • Binary options is fixed risk and fixed returns. Therefore traders know exactly the amount invested which is at risk of the market and they also know before they enter a contract the returns they can expect if the contract expires in-the-money.
  • Because of the derivative nature of binary options, there is no use of leverage. Traders familiar with forex would know that leverage can act both ways. While it can magnify the chances of making big profits, leverage can also be capable of decimating a trader’s equity. Because there is no need for leverage, the trader actually trades with the amount they have and thus be able to manage risk better. Click here to read about Leverage.
  • There are only two ways to trade binary options. A CALL option or a PUT option which is based on the directionality of the security. Therefore a binary option trading is much simpler. You purchase a CALL option if you think the price will rise or you purchase a PUT option if you think the price will fall; by the time the contract expires.
  • With binary options you do not own the actual underlying stock and therefore protected from any premiums (positive of negative) that you might be charged
  • Some Binary Options Brokers also allow for the trader to sell back their contract before expiry (known as buy-back) and allows for the trader to further minimize their risks.

In comparison, Forex trading offers the following features

  • Trading forex requires you to have a significant amount of capital. Although there are many Forex Brokers who allow for forex deposits for as low as $10 (but typically $100) the capital is not enough to make any substantial profits from the markets.
  • Use of leverage allows a forex trader to increase the profitability (but also increases their risk as well). Improper use of leverage can result in risking the capital and in some cases more than the invested amount.
  • Depending on the trading strategy if a trader buys or sells and holds the position overnight, they are subject to overnight rollovers or swaps which can be either positive or negative and can therefore affect the floating P/L of the position. Read more about swaps and rollovers.
  • A forex trader has the freedom to close their trade anytime they wish to, regardless if it is in profit or not.
  • There is no fixed risk (although this can be determined by the stop loss a trader has for a position) and fixed return (which can again be determined by the target limit order). Therefore unlike binary options, in forex both risks and rewards can increase or decrease.

Binary Options vs Forex – Which is better?

While both the above markets have their own distinct features, one cannot simply dismiss one market for the other. Of course, a complete beginner might find binary options easier to trader compared to forex, while a seasoned trader would know that binary options trading can complement their forex trading and vice versa.

To better understand the difference between binary options and forex, let’s take the following example.

Forex vs Binary Options

Let’s assume that a Forex trader entered a BUY trade on EURUSD at 1.383 on 24/04. The trader sets their stop loss and target limits to 1.3792 and 1.38858 respectively. After entering the position, the trader waits for price to reach its target, which it eventually does on 01/05. Although the trade was profitable, during the course of the trade, EURUSD was volatile where it dropped back to below the entry price (which could have been risky for the trade). The forex trade lasted for 6 days. Depending on the number of lots bought (assuming it was 0.1); the trader’s profit would have been $55.

Now if a BinaryOptions trader would have purchased a CALL option on EURUSD at 1.383 with an expiry of 24 hours, the trader would have made a quick profit. If the trader invested just $50 the profit they would have made would be $44 within 24 hours.

In terms of risk, with binary options the trader would have risked $50, while with forex, the risk was $38.

The same example will show different results if the option expiry was set to more than 24 hours or even a weekly option expiry date.

From the above example, we can therefore learn that we cannot simply state that binary options is better than forex or vice versa. However, an astute trader would take advantage of binary options and try to make additional profits during the course of the trade

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