One thing that every trader or investor will agree with is that every investment decision has its inherent risk and benefits. To more experienced traders, the question is more about your ability to trade wisely and professionally and less about the trading options you choose. In other words, you need to understand the dynamics of trading itself.
With that being said, let us jump into our discussion for the day. Binary options and forex trading are both similar and different in their own rights; it is, therefore, important for you to understand their differences and similarities if you really want to be successful with them.
While forex deal largely with currencies, binary options deal with everything from currencies, commodities, to indices, stocks and more. By the end of this article, you may even decide to consider investing in both forex and binary options.
What Are Binary Options?
Binary options is a type of financial instrument which requires the investor to predict the outcome of two possible results which already has a fixed reward. This means that the investor already knows what he/she will get if the prediction is right or wrong. In a situation where the investor gets the prediction right, they get the reward based on what was initially agreed, and where the investor gets the prediction wrong, they lose their initial stake.
It might interest you to know that the binary market initiative was derived from the binary system in which there are only two input options of 1 and 0. In binary trading, the market can only move up or down.
What is Forex?
Forex, which is also known as FX, involves the exchange of foreign currencies. It involves trading one currency for another, usually a stronger currency against a weaker one and vice versa. The forex market is unarguably the largest market in the financial investment world with a turnover of over $5.1 trillion every day.
One thing that is prominent with both forex and binary options is the initial affordability they represent for new investors when compared with other financial investment instruments. Let us now take a look at important factors that make both forex trading and binary options unique.
Here are some important facts to note between Forex trading and trading in Binary options:
11: Trade Duration
In forex trading, you enjoy a great deal of flexibility. You can decide to remain in a trade for as long as you desire, and you can decide to leave a trade whenever you choose to, all you need to do is place your “take profit” or “stop loss” at any point you choose.
In binary options, when placing a bet, you must also specify the duration of the trade, and you are required to quit the trade when the initial fixed time expires. Trade duration usually ranges from one minute to one hour. This is a very important point to consider when deciding between Binary options Vs Forex.
In forex trading, you have the ability to control your loss and profit. You can use the stop loss tool to lower your risk level to a percentage that your trading account can conveniently accommodate. Also, in forex, you can enjoy profit as much as 200 to 300% of your investment, there is no limit to how much you can make as profit in a single trade. Also, you can determine your potential reward relative to risk
Binary options is a bit different in the sense that you already know how much you will get as profit at the point of entering the trade and no matter what happens you cannot make more than that.
Furthermore, a standard binary options trade has a limited profit potential of between 65-80%, as such you tend to risk more than you’re trying to gain. Suffice to say that when you place a trade and everything goes well, you can only make a profit of about 65-80% of your initial investment. However, if the forecast goes wrong, the investor loses all his investment (100%).
For instance, if a trader in binary options places a bet of $20,000 predicting that the value of GBP/USD would go up within a specified period, and the investor’s prediction happens to be correct, the investor only receives $18,000 (80% of investment) as profit and the initial $20,000 that was invested. If the prediction goes wrong, on the other hand, the investor loses all the $20,000 that was invested (100% loss).
33: Trade size
Forex traders trade in lots, the lowest trade size is known as micro lots. Micro lots represent 0.01 lot size or 1,000 units of the base currency. Likewise, maximum trade size in forex can be as high as 100 standard lots which represent 10,000,000 units of the base currency. Minimum and maximum lot sizes in forex vary from one forex broker to another, but they are still within the above-mentioned sizes.
The lowest trade size you’ll find when trading binary options is $1, while the maximum you are most likely to find is $100,000. You’ll need to take this into consideration when deciding the financial instrument to invest in between Binary options vs Forex.
44: Volatility Risk
In forex trading, certain news or events can bring about sharp movement in your trading account, and your trade could come to an end if the sharp movement reaches your stop loss or take profit threshold. The forex market is highly volatile; this means that you can move from trading at a loss to trading at a profit in quick succession.
In binary options, external factors or news do not impact the profit outcome of a trade that is already in progress, and your trade will not come to an end until the set time that was initially agreed is reached.
In forex trading, there are lots of variables that you need to consider. Market conditions can impact the outcome of your trade and even make it a bit difficult for you to exit the trade as at when desired and this may bring about more loss.
There is far more simplicity with binary options. You already know what you’re going to lose and what you’re going to gain and it’s not going to change no matter the market situation.
Binary Options vs Forex: Which one to choose?
Both forex and binary options share a lot of differences and similarities. There are some traders, who would prefer the flexibility that the forex market offers. And there are other traders who would enjoy the simple and transparent nature that characterizes the trade in binary options. You, however, need to know that each of the attributes that characterize each financial instrument (binary options or forex) have inherent advantages and disadvantages.
Whichever financial instrument you decide to invest in, it is good for you to know that both financial instruments are avenues through which an investor can make profit. Investors only need to be cautious, analyze the market properly and know the amount of money that they are willing to risk.
And just like I mentioned at the beginning of this article, you can even decide to invest in both forex and binary options. If you understand how to trade forex, you most likely will know how to trade binary options as they both deal with movements in the financial market.
You can even try your hands and assess your trading style with a demo account to understand which of the financial instruments fits your personality and unique style.