Forex and binary options trading are similar in many ways, however, there are distinct differences between the two. This article will define the main differences between Forex and binary options, allowing you to decide which method of trading the financial markets is best for you.
Defining Forex and Binary Options
The best way to begin this discussion is by defining Forex and binary options, then examining a trading scenario for each.
Forex has been actively traded by a wide range of traders since the early 1990’s, when regulations made the Forex markets accessible to retail traders for the first time. Since then, it has become one of the most popular forms of trading around the world. When trading the Forex market, you are essentially speculating whether or not the value of a currency will rise or fall in comparison to another currency. For example, if the current price of USD/GBP is 1.40550 and you have determined that the price will increase, you can buy one or multiple lots of USD/GBP and wait for the price to rise to a level at which you will realize your desired profit and close the trade.
Binary options came onto the trading scene rather recently, but have since exploded in popularity. In binary options trading, you simply predict if the price of an asset will increase or decrease in price over a predetermined period of time. For example, if the current price of USD/GBP is 1.40550 and you feel the price will fall in the next half an hour, you would place a “put” option on the USD/GBP and wait to see what the price of the asset will be in half an hour. If your prediction proves right, you have the ability to make an 80 percent return on your investment.
Leverage
One of the reasons for Forex’s popularity is the availability of leverage. Leverage allows you to win maximum profits with minimal risks. The maximum amount of available leverage is determined by each broker, but it usually ranges from 1:50 to 1:500. The higher the leverage, the more investment capital can be used to place larger trades and realize higher profits.
Binary options brokers, on the other hand, do not provide traders with leverage. However, binary options still provide traders with the ability to make up to an 80 percent return on their investment, which is attractive to many traders. It also eliminates the likelihood of receiving a margin call from an overly leveraged losing trade.
Payouts and Losses
In Forex trading, there is no set maximum profit level for each trade. You have the ability to earn as little as one percent for a trade or as much as 500 percent. You can also set trailing stops that can guarantee a certain amount of profit after a trade moves in a profitable direction. Losses in Forex trading can also be managed by way of stop/loss orders. You can set a stop/loss order for whatever amount you want, ensuring that you cannot lose or risk any more money than you would like for any particular trade. However, without using stop/loss orders, you may risk losing all of the money in your trading account.
With binary options, you know exactly what your profits and losses will be before placing a trade. When an option expires, you will either win up to 80 percent of your investment or lose it all. For example, if you place a $500 trade and it is successful, then you would make a $400 profit with a payout percentage of 80 percent. Depending on your broker, if the trade is a losing one, you will either lose 85 to 90 percent of the investment amount or the entire $500.
Closing a Position
Forex trading allows you to close an open position whenever you want. Due to the liquidity of the Forex market, you can close a position and lock in your profits or minimize your losses any time that the market is open.
Binary options are much different. Before placing a binary option trade, you must select when you would like the option to expire. The expiry time could be as short as one minute or as long as one week. Your trade will automatically close at the chosen expiry time. However, binary options brokers also provide you with different options regarding expiry times. For instance, some brokers allow you to close trades early, but in doing so, you will only be able to profit from a reduced percentage. This early closure option is not provided by every broker, and might only be available during a certain time while the trade is open. Some brokers also allow you to rollover the expiry time to the next. However, traders must often increase their initial investment in order to take advantage of this feature.
Types of Orders
There are a wide variety of orders that traders can execute in Forex as well. The most popular and significant orders are market orders, often called Buy/Sell orders. For more experienced and advanced traders, Limit orders, OCO orders, Stop orders, Hedge orders, Trailing Stops, and other orders can be executed.
Conversely, there are only approximately five types of orders available to binary options traders. These orders include Call/Put options, Touch/No Touch options, 60 Second options, Boundary options, and the custom Option Builder.
Trade Size
Most Forex brokers allow you to trade a variety of lot sizes, such as micro lots consisting of 1,000 units of the base currency, mini lots, and standard lots. Traders have the flexibility of being able to trade multiple lots for each trade as well. So, a trader can trade five micro lots or as many as 100 standard lots for any given trade. For added perspective as to the profit power of this trade size flexibility, 100 standard lots would equate to $10,000,000.
On the other hand, binary options brokers determine the minimum and maximum trade size for all of their clients. Some brokers may set a minimum trade amount as low as $5 or $10 per trade. While the maximum trade amount can be $1,000 to $5,000 or more.
Trading Costs
Most Forex brokers do not charge commissions or any type of fees. Instead, they make their money off of the spreads between the currency pairs. Highly liquid pairs, such as the EUR/USD, can have spreads as low as two pips. Therefore, they have no vested interest in the outcome of each trade, because they make the same amount of money regardless of whether a trader wins or loses.
Due to the fact that binary options traders can only win up to 80 percent for each winning trade and stand to lose up to 90 percent or more for each losing trade, binary options brokers make their profits from losing trades. This is something that every binary options trader should consider.
As you can see, there are many differences between Forex and binary options. Traders have profited wildly from each, but choosing between the two ultimately comes down to comfort and preference. With a little education and understanding of the financial markets, you can be successful in Forex or any trading environment.
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