Binary Options have become widely popular during the last two years. The main reasons for this, is that they offer high profit returns and they are easy to trade.
In this article I will try to outline the main differences between Binary Options and Forex, so that you can evaluate which is the better trading method for you. A good way to start is to provide definitions of both and look at an example of a trade.
Guest post by Peter Traychev of ActionBinary.com
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Forex definition: When trading Forex you are speculating that the value of one currency will increase or decrease compared to another, in an attempt to make a profit.
For example: The current price of EUR/USD is 1.30850 and you think the price will increase in the future.
You buy 1 lot of EUR/USD and wait for the price to increase to the point where you want to close the trade and realize the profit you want.
Binary Options definition: When trading Binary Options you only have to predict if the price of an asset (for example currency pair or stock) will increase or decrease from its current price over a certain period of time.
For example: The current price of EUR/USD is 1.30850 and you think the price will be higher in the next hour. So you place a “Call” option on EUR/USD and wait to see its price 1 hour from now.
Profitability of A Forex Trade VS Binary Option Trade
If your prediction is right you can make a profit of 80% of your investment.
Forex: You can use margin to trade Forex.
The maximum margin is determined by each broker, and sometimes can be up to 1:200 or 1:500.
Trade Management Flexibility and Maximizing Reward
Margin allows you to increase your investment capital so you can make a larger trade and make a larger profit if your trade is a winning one.
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.
1. Initial Investment
The maximum loss with Forex may be all of the money in your trading account.
Binary Options: Before you make your trade you will know exactly what is the payout and loss return percentage that you will get for the particular option, when it expires.
Some brokers offer payouts up to 80% or sometimes 400% depending on the option traded. This means that if you invest $500 on an option and the payout is 80%, you will make $400 profit if the option is a winning one. Some brokers don’t offer “loss back”, which means that if your option trade is a losing one, you will lose the amount you invested in the trade, but not more.
Closing a position
Forex: You choose when to close the position.
You can close your position anytime the market is open and the broker has to accept and execute the order.
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.
2. Forex VS Binary Options During Trades
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: Some brokers allow you to trade micro lots, which is 1,000 units of the base currency in a Forex trade. The maximum trading amount is determined by each broker, and can be up as high as 100 standard lots or $10,000,000.
Binary Options: Each Binary Options broker determines what is the minimum and maximum trading size for its clients.
Sometimes the minimum trading amount can be as low as $5 per trade, and the maximum can be up to $1,000 or $5,000 or 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.
Further reading: 5 Most Predictable Currency Pairs – Q1 2013Get the 5 most predictable currency pairs