Binary Options vs. Forex? Which One Is For You?
The online trading space has grown tremendously in the last few years, thanks to notable technological advancements which have made financial trading accessible and convenient for many global investors. Unlike older forms of traditional trading where one had to be physically present in order to trade, online trading offers flexibility since investors can carry out trades even while on the go by simply using a mobile trading app provided by many online brokers. Since opening to the public market in 2008, binary options trading has attracted a vast number of financial traders, owing to the simplicity that this form of online trading offers as well as the lucrative returns. Forex trading is also extremely popular and in terms of volume of trading, it is by far the largest market in the world.
As a new financial trader, deciding which financial market to venture into may be confusing and if you do not take the time to understand the different types of trading and their many benefits and disadvantages, you could end up losing your hard earned money. As a result, before committing financially to any online trading activity, you need to ensure that the financial market you wish to trade exposes your investment to minimal risks and that it attracts a reasonable return on investment.
To assist you in making a decision, we will examine forex and binary options trading; outlining their similarities as well as their differences.
Distinct Differences Between Forex and Binary Options
Forex trading is a form of investment where traders speculate and leverage on price changes between currencies. Forex trading has been in existence for many years but it was initially dominated by large corporations, financial institutions, hedge funds, wealthy individuals and central banks. Today, with the introduction of the internet, any investor can easily trade forex online and this includes buying, selling and exchanging currencies.
Binary options trading is an online investment venture which is characterized by fixed contracts where the seller has the right but not the obligation to exercise an option. Binary options contracts are usually known as ‘all or nothing’ or ‘fixed return’ contracts. The reason for this is that there are only two possible outcomes to every trade. That is, a trader will either win a set amount of money or lose a fixed amount of money. Binary options enable traders to make speculations about the direction that the price of an asset will move, either up and down, and today, most brokers offer a wide variety of global assets to trade. These include forex or currency pairs, stocks, indices and commodities.
Forex trading stands out as one of the financial modules where traders can use margin in order to increase their trading capital. The maximum margin varies from one broker to another and can be up to 1:500. Margin trading allows a forex trader to increase their investment amount and consequently, increase their potential returns.
Margin trading is not used in binary currency trading. However, binary options traders can still rake in big returns which can be between 60 to 90% on each trade. Some brokers also offer a variety of trade options and some of these, such as the One Touch option, offer a payout as high as 500% on a trade that ends successfully.
Payouts and Losses
Forex traders do not know the maximum profit or loss they can make at the onset of a trade. Instead, in order to protect their capital, they can use a take-profit order or a stop-loss order. Knowing exactly where to place these orders can be challenging and risky especially if the trader is driven by greed. Losses are managed using a stop-loss order and it instructs the broker to sell an asset once it reaches a certain price. Without the order in place, if an asset’s price declines rapidly, you could quickly see the funds in your trading account disappear. In the same way, the take profit order is often used by forex traders. This order specifies the exact rate or the exact number of pips from the current price point where a current position must be closed in order to secure the profit of the trade.
Unlike forex trading, a binary options trader knows exactly what they will gain or lose, to the last cent, even before they make their investment. This is one of the many benefits of this form of online trading. Binary options trades are characterized by fixed payouts which are set by the brokerage firm and this percentage amount is clearly marked on the trading platform for each trade. Today, brokers offer payouts between 60 to 90% for standard options and between 200 to 1000% for high-yield options. This means, for example, if you invest $1,000 on a trade option attracting an 80% payout, you will make $800 in profit if the trade ends successfully or ‘in the money’. You will also get your original investment of $1,000 back. In the case that the trade ends ‘out of the money’ or unsuccessfully, a trader will only lose their invested funds and not a cent more. Many brokers also offer a rebate of up to 15% on unsuccessful trades which means that they will return a percentage of your invested funds.
How you manage open trading positions is integral in the success of a trading career. In forex trading, you are able to choose when to open or close a trading position. This means that you, as a trader, have the final say on when to close a position, provided the market is open and the broker accepts and executes the order.
When placing a binary trade, a trader is required to choose the expiry duration which defines the length of the trade. The expiry durations provided by the broker range from a few seconds right up to one year. Different expiry durations attract different payouts, with the shortest expiries usually attracting the highest payouts. Unfortunately, a trader cannot end a trade early but instead, has to wait until the trading contract expires.
Despite this limitation, some brokers offer their traders a chance to manage their trading positions by changing their expiry durations using a set of risk management tools. The Early Closure tool allows a trader to end a trading contract before expiry is reached in order to lock-in profits. However, a trader only receives a percentage of the potential returns once this tool is used. Another important tool offered by binary options brokers is the Rollover feature which allows traders to lengthen the expiry time of a trade. In this way, a trader is able to increase the odds of a losing trade turning into a winning trade before the trade expires. In order to use this feature, a trader will need to increase their investment amount by a fixed percentage. The Double Up feature allows traders to leverage on lucrative positions by enabling them to open a duplicate trade and in this way, they are able to increase the potential returns.
Flexibility is king when it comes to financial trading but unfortunately, forex does not offer much variety. The most common and important options are the Buy/Sell orders. Other advanced orders include Stop, Hedge orders, Trailing Stop, Limit, OCO (one-cancels-the-other) and others.
On the flipside, binary options trading is more flexible since traders are offered a basket of trading options to choose from. Some of the options offered by almost all brokers include 60 Seconds, also known as turbo options, Call/Put, High/Low, Up/Down, Pairs, Ladder, Boundary options, Long Term, Touch/No Touch, One Touch, Range and many others. Each option is easy to trade and offers a fixed rate of return per trade.
In terms of trade size, forex trading is flexible since some forex brokers allow their clients to trade micro lots – 1,000 units of the underlying currency. However, the maximum investment per trade is determined by the broker in question and can be up to $10,000,000-100 standard lots.
In binary options trading, the maximum and the minimum amount of funds required to invest lies solely with the broker. Some brokers offer a minimum investment amount of only $1 per trade while others might require a minimum of $20 per trade. The maximum investment also varies and some brokers offer a maximum limit of $20,000 per trade. Since some brokers offer different types of accounts, which are aimed to cater for different trading needs, each account type might have different trading requirements.
As a forex trader, you need to be aware of the existing fees and commissions charged by the broker as well as the details of the spreads and swap. With some brokers, these fees can be excessive, which can negatively affect your profit margin and hence you have to pay close attention when selecting a broker.
In binary options trading, there are no hidden fees and commissions. What you see is exactly what you get. For instance, if a trade has a payout of 80%, you will receive exactly that, not a penny less. The only fees that might be levied by brokers are withdrawal fees but this information is provided in detail on a broker’s website.
Distinct Similarities Between Forex and Binary Options
Unless you are from another reality, you have obviously come to terms with the fact that any investment attracts a substantial amount of risk. The same applies to binary options and forex trading yet it has been said that options trading offers a level of fixed risk since a trader knows even before they trade, exactly what they stand to lose.
Both binary options and forex trading have the same set of requirements. You only need to have access to internet connection, a trading platform and starting capital. Nothing more!
When it comes to binary options and forex trading, it is crystal clear that both investment ventures have their positive and negative attributes. Despite this, binary options trading can be viewed as more lucrative and less risky, not to mention more flexible and simple to trade. Before stepping into the trading arena though, take the time to fully understand each type of trading and then pick the one that suits your trading style, needs and preferences.