People all over the world are always interested in investment opportunities that can increase returns online. For new traders, Forex trading and Binary Options are two of the most popular trading options that are available. There are different benefits as well as drawbacks of both types of investments. It is important to gather as much information on both as possible before deciding which to begin trading. One of the key differences between Forex and Binary Options trading is the element of risk. The Forex market is highly leverages where there are heightened risks and returns. With Binary Options, traders will have the ability to receive a refund on their investment capital. With Forex, there is no such option and with a loss, all of the investment will be lost.
The Forex (Foreign Exchange) market is currently one of the largest and most profitable markets in the world in terms of the daily turnover. The foreign exchange market assists international traders and their investments, by enabling currency conversion. A significant part of the large turnover is contributed by online Forex trading, which has been steadily increasing over the past few years. This trend is expected to continue well into the future.
Binary Options trading is the new kid on the block. It is a new version of Forex market trading that is simple in comparison, which makes the preferred trading method. Binary Options contracts have long been available and sold directly by the issuer to the buyer. They were generally considered “exotic” and there was no liquid market for trading these instruments between their issuance and expiration. Since mid-2008, Binary Options websites have been offering a simplified version of exchange-traded Binary Options. Currently the number of binary option traders are few compared to their Forex trade counterparts, however, market gurus are optimistic that with time the numbers of both binary option brokers and traders will increase exponentially.
Binary Options VS Forex
When it comes to ease of trading, Binary Options are the best choice. Most times, these trades can be placed with a simple four step process. Binary Options traders will choose and asset, enter an investment amount, select the date of expiration and execute the trade. With the Forex market, the process is not always so simple. In fact, Forex trading can be very complicated, which is one reason that most new traders will select to begin with Binary Options.
With Binary Options, it is much easier to get a risk to rewards ratio. These types of trades will offer a value that will be the return when the trade is complete. There is no way to increase this value, which is one of the drawbacks of Binary Options. With Forex trading, the earning limits are much higher, which is attractive to many investors. However, Binary Options do have lower risks and traders will find that they will lose less money when trading these over Forex.
There is also a difference with the ease of entry to the market. The Binary Options market was first designed for retail traders. All Binary Option brokers will open the market with very small deposits, some as low as $25. Forex brokers will usually have higher minimum deposit amounts, making it more difficult for new traders to enter the Forex market. Based on these differences, traders will be able to compare and contrast Forex and Binary Options and choose the types of trades that will best suit their individual needs and financial goals.
Binary Options VS Forex: Similarities
Before looking at how forex trading and binary options trading differ, let’s first address some general ways in which they similar.
- Both are tradable online and typically anytime the underlying asset market is open. For the forex market and binary forex options (usually) this means trading takes place around the clock during the week.
- You can begin trading either market with a small amount of capital, usually around $100, sometimes less. Since you don’t want to risk a lot on each individual trade likely you will want to start out with more trading capital than $100 though.
- Both allow you make or lose money based on which way the asset moves–currency or otherwise.
- Both are tradable on short-term time frames, although with forex trading you can also take long-term positions.
Binary Options VS Forex: Differences
Deriving a comparison between Forex trading and binary trading is not easy as they both have their own advantages over the other but here are some of the main differences:
- Forex trading requires professionals with experience in foreign currency trading while Binary Options is quite simple and easily understandable even to novices in financial trading. This simplicity makes Binary Options more appealing but do not think you don’t need to learn anything. Education is a big part of success in trading and this applies to binaries as well.
- Binary option trading has a higher level of profitability compared to Forex trading. The profitability rates of Binary Option trading often range between 60% and 85%. In Forex trading, the returns are uncertain and can only be determined after the closing of a position.
- Binary Option trading is safer compared to Forex trading. With Binary Options, some brokers offer up to a 15% refund in case of losses, which acts as a cushion for the Binary Option trader. Forex trading has no safety precautions in place (if you don’t use a Stop Loss order or other form of protection) and in cases of wrong investment decisions, the Forex trader may lose all money invested.
- Forex can be traded continually throughout the weekdays while with Binary Option trading, weekdays are at predetermined intervals. The trading of Binary Options is dependent on the commodity exchange hours and the local financial markets.
- Binary Options offer a lot more assets. Forex stands for Foreign Exchange so obviously only currencies can be traded, but when it comes to Binary Options, the choices are wider and include stocks, indices and commodities on top of currencies. More choices, more opportunities
- The Forex industry has a lot more regulation compared to Binary Options. However, in the last couple of years the top Binary Options brokers started to pursue regulation and this is a major step forward for clients’ safety.
- Forex is leveraged and this can be both good and bad, depending on how you look at it: you have the potential to make more but also you risk more. Binary Options are much simpler in this regard because they are not leveraged product.
- Although they are differentiated by the aforementioned features, Forex market and option trading have some similarities. Both are easily accessible to the public since they can be operated online. What is required of potential traders is simply a network connection and startup capital that can be as little as one hundred dollars.
Binary Options VS Forex – Important Terms
Forex: The maximum margin is established by your broker and it can be up to 1:500. Margin gives you option to increase your investment so you can make a larger profit if we presume you have a winning trade.
Binary Options: Margin is not used when trading Binary Options. You can still make a large return on your investment (up to 80% or sometimes 400%), so Binary Options are still very attractive for traders. The good news is that you can never get a margin call.
Payouts and Losses
Forex: With Forex you never know what is the maximum profit you can make on a trade. You can set a limit or stop order so that you can be guaranteed a certain percentage profit if the limit or stop is executed. The losses in Forex can be managed with limit/stop orders, the same way profits are managed. The maximum loss with Forex may be all of the money in your trading account.
Binary Options: Here you will know before the trade what can be your profit and what can be your loss which is definitely better for novice trader and less stressful.
Closing a position
Forex: it is you who chooses the closing time of the trade, basically you can do it anytime you want. You can do that between the market open hours and broker must accept your order – Most o the time that is all done in couple of second because of the trading volume Forex does per day.
Binary Options: Before you make your trade you have to select when you want the option to expire (example: 1 hour or 1 week from now) – at the “expiry time” your trade will close automatically. The broker offers you different types of options with predetermined expiry times. Some brokers allow you to close your trade early, but you will exit your option at a percentage of the expected return. The “early closure” option is not offered by all brokers, and might not be available during the whole time the trade is active. Another important point to mention is that some brokers allow traders to delay the expiry time, to the next expiry time. This is called “Rollover” and the traders will need to increase their investment by a certain percentage, sometimes 30% in order to be able to do this.
Forex: There are a variety of order types in Forex. The most important ones are the market (Buy/Sell) orders. Also there are more advanced orders such as: Limit, Stop, OCO (One Cancels the Other), Trailing Stop, Hedge orders, and others.
Binary Options: There are about five Binary Options types which you can trade. They include: High/Low (also referred to as: Call/Put or Up/Down), 60 Seconds Options, Touch/No Touch Options, Boundary Options, and Option Builder.
Forex: Depending on the broker since some will let you trade with very low budget and there on the other hand you have maximum trade which can lead up to 8 figures.
Binary Options: Again, you have predefined options here so you already know what you are dealing with based on your investment but the maximum trades can be 5 thousand and more.
Forex: When trading Forex you have to consider what are the spreads and rollover/swap, and if there are any commissions.
Binary Options: There are no spreads, rollover/swap or commissions when trading Binary Options.
So, as we can see, both ways of trading have their pros and cons, so it is up to every trader to determine which one suits best their preferences. Each one of these markets is meant for different types of traders. On one hand, Forex is a dominant market segment at the moment, while trading it is the full-time occupation of millions of people worldwide. On the other hand, binary options are a relatively new trend among Internet users and at the moment there are not so many people, who make a living by trading binaries. But, why not turn binary options trading into a full-time engagement?
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