Most novice traders are faced with the dilemma of choosing between forex and binary options. Stocks and shares is sometimes another consideration. However, the latter requires more capital investment and, for this reason, forex and binary options is definitely a better choice for the individual that has less money to spare in the beginning stages. The charts to be used for forex and binary options trading are the same. However, many differences exist. Whatever may be the instrument of choice, the trader should have a clear trading plan, a reliable method and a comprehensive position management strategy prior to trading with real money in the market.
Binary Options Vs. Forex Trading – Similarities
Given below are some of the similarities between binary options and forex trading.
- Trading can be done round the clock, during an entire week, and both can be done online.
- The capital required for trading binary options and forex is small. Typically $100 is enough to start off, sometimes even less.
- Both forex trading and binary options trading rest on the principle that the trader can make by correctly predicting the direction of the assets’ price.
- Binary options and forex can be traded on short timeframes. However, long-term timeframes are possible in the case of forex.
Binary Options Vs. Forex Trading – Differences
Now, read on to find out the major differences between binary options and forex trading.
The main characteristic of binary options is that both the profit and the risk potentials are fixed at the beginning of the trade. As an example, if a binary options broker’s payout is 80% for an in-the-money trade, and if you are placing $10 on the specific trade, then you will either lose the $10 or get to make an extra $8 (over and above the $10 that you have placed on the trade).
However, it is different in forex trading. The risk potential of the trade can be controlled only by using the stop loss option. The result is dependent on how the trader places the trades. However, market conditions may cause a larger-than-expected loss. If a stop loss is not issued, the risk is high and cannot be measured. Analogous to a stop loss, a profit target (in terms of percentage or price) can also be fixed. Nevertheless, there is no guarantee that the price fixed will be reached.
As far as simplicity goes, trading in binary options is better than forex trades. In the former, there is no variability. On winning or losing a trade, you either gain or lose a predetermined amount. In forex trading, the amount of profit or loss is not known until the trade is closed. It is also true that there is no flexibility in the profits earned through binary options trading. The flexibility offers advantages at different levels when trading forex.
Forex trading allows the trader to customize rewards in relation to the risk. A stop loss order allowing a $100 loss can be placed on a trade; simultaneously a profit target can be fixed at $300. A trade is typically open till one of these values (or a value close to it) is hit. On the other hand, binary options brokers usually pay 60 to 80 percent for in-the-money trades and nothing for out-of-the-money trades.
To make a binary options trade profitable, winning percentage should be higher than or equal to 55 depending on the payouts offered by the brokers. In forex trading, though you may lose more trades than the ones you win, you may still be able to make profits as you can customize the risk-to-reward ratio.
Whereas some traders will like the flexibility and be willing to take on the risks offered by forex trading, others are attracted by the simplicity of binary option trades.
Another major difference is in the magnitude of the price movements in both these trades. Whereas binary options trades offers payouts of 60 to 80 percent even when the price of an underlying asset barely changes. In such a state, forex traders will refrain from making trades because the volatility is not enough to make a decent profit. As far as forex trading is concerned, it is important to determine not only the direction of the currency movement but also the range of deflection of the value (either way). With binary options, on the other hand, the extent of variation does not matter. As an example, if you are placing a Call option on EUR/USD assuming the price will rise in the coming 15 minutes, whatever be the rise (whether 1 or 100 pips), you will earn the full payout. The risk is also known in case the trade expires out of the money (a drop of 1 or 150 pips).
In forex trading you can decide the timeframe for opening and closing the trade. However, when trading in binary options, you must choose from among the timeframes that are made available to you. Those traders to whom the idea to fixed timeframes appeals will take to trading binary options, whereas those traders who want to trade on any timeframe that they want and open and close positions at prices that they determine will opt for forex trading.
The above is not an exhaustive list of differences and similarities between binary options and forex trading, but will give you a basic idea of how they work. This may help a novice trader to make a diligent choice. Both types of trading allow the trader to make profits.
Rounding up, whereas binary options trades are simpler and offer fixed risk and profit potentials, forex trades offer more flexibility in terms of profit potential, timing as to when to enter and exit the trade and how to manage the trade in between. Both have their own advantages as well as disadvantages.
Depending on the risk appetite, and considering other factors that are cited above, it is recommended that the novice traders try a demo account with a forex binary options broker and decide which is best suited for their requirement.