Binary Options vs Forex Trading
Many online trading firms offer Forex Trading and, or Binary Options Trading. Both products are easily accessible in the sense that you only need a couple of hundred bucks to place a trade. Both products are easy to understand derivatives of somewhat complex investment products. In this article, we will explore the differences and similarities of Binary Options and Forex Trading after a brief introduction to both products.
What are Binary Options
Binary Options are one of the most simplified investment products. They are so simple that many compare them to video games or slots. When you place a Binary Options trade you decide whether the asset, such as a stock or currency pair will go up or down in price with a specified time limit. To put that into context, you set an investment amount, for example $100 and once the trade expires, for example after 60-seconds, the outcome of your trade is known. If you are successful, you typically get 80% of your initial investment as profit. If you are unsuccessful, you lose the whole amount.
What is Forex Trading
Forex Trading is a very popular form of short term investing. Most traders only hold their positions for a few hours or days at the most. Like Binary Options, Forex Trading doesn’t require you to physically purchase and take ownership of an asset to benefit from price fluctuations. Forex is traded with contracts, known as Contract for Difference. This means you don’t need to own any currencies, yet you can buy or sell any currency pairs supported by your broker. A CFD enables you to get exposure to many different products, while you never own a physical product when you close your position you get the profit added to your trading account balance. Similarly, any losses are deducted from your trading account balance.
The Differences – Binary Options vs Forex Trading
Both Forex Trading and Binary Options Trading have been very successful at attracting retail traders. In recent years, Binary Options has been phased out by regulators and the product has sadly earned itself a bad name due to many scams. There are still a few regulated Binary Options brokers operating, however, the number is minute compared to the thousands of Forex brokers active around the world.
Binary Options trading operates on strict timelines. As a trader, once you place a trade, you have no control over when a trade starts or ends. Before a Binary Options trade starts you select when the trade should expire. You specify that the trade should begin at 12:05 and conclude at 12:10 or you can enter the trade instantly and it will conclude in 60-seconds or 5 minutes. When you trade Forex your trades can be open for as long as you wish. Trades can be kept open for seconds to weeks.
When you place a Forex trade, your entire account balance is at risk of being lost if you don’t manage your risk with tools like a Stop Loss. Even so, a Stop Loss is never guaranteed due to slippage and other bad market conditions.
In contrast, a Binary Options trade can only cause you to lose the value of the contract. If your contract premium was $100, that’s all you will lose regardless of how much the market really moves.
With a Binary Options contract, just like how you know how much you will lose, you also know how much you will earn. The payout for a contract that closes in-the-money doesn’t change depending on market movements. Forex Trading doesn’t limit you on how much profit you can book when closing a trade.