When indulging in forex, people are usually on the search for simpler, and quicker ways to make money. There’s a huge potential of making money in this space, but a sensible comprehension of rewards, risks, the accuracy of speculations, and price fluctuations are just a few examples of the trade’s prerequisites. Binary options are just part of the global forex market. And most beginners want to learn as much as they can about binary options vs forex trading, the risks involved, in what ways they differ, and which one is better.
Binary Options Vs Forex Trading – The Basics
First and foremost, it’s important to note that binary options differ from conventional forex trade in terms of fees, risks, payouts, and has a varying investment process and liquidity structure. Binary options are excellent alternatives as far as speculating and hedging are concerned, but only when you have comprehensive knowledge of the outcomes.
What are Binary Options?
A binary option is a financial product with a fixed payout where the trader predicts the outcome from two possible results. If the prediction is correct, you get the amount initially agreed.
On the other hand, if the outcome is wrong, you lose your initial investment.
As you may have guessed, the term binary stems from the possibility of two results, either winning or losing.
What is Forex Trading?
Forex trading, on the other hand, is a worldwide market where banks, institutions, traders and investors exchange speculations on buy/sell currencies. This form of trading is conducted on the interbank market, a channel where currencies are traded round the clock.
The forex market is the biggest trading market, boasting a daily turnover of around $5 trillion.
Binary Options Vs Forex Trading- The Similarities
Before we jump into the primary topic, it’s worth looking at how these two aspects are similar. Both forex and binary options are tradable online, as long as the underlying asset market is open.
You can also start trading with an amount as small as $100, making them accessible to anyone with good internet connectivity. You make or lose money depending on which way the currency or asset moves and both can be traded on short time frames.
Also, binary options do not require a hefty investment to make a substantial amount of money. It is the same as with forex trading thanks to leverage and margin.
Binary Options Vs Forex Trading- The Differences
Form of Trading
People tend to compare binary trading with gambling due to future prediction and the time frame. Let us assume you intend to open a position of $50.
If all goes well, you’ll win the trade with an additional $40. The return percentage here is 80%, but if you lose the trade, you lose 100% of your capital.
In order to make the trade profitable, you need to win the maximum trade, and there’s no chance to avoid making a loss once you open a position.
In forex trading, however, you do not have to predict the future price of the asset in order to win a trade. Here, you need to analyze the market using varying tactics and tools, and the trading time is usually longer compared to binary options.
Given you need to predict a larger target area rather than the asset price, you can close the deal anytime you wish.
Potential Gain
Forex markets have a greater risk and higher variability for traders. Sometimes, you need to predict how high or low an asset will go in addition to the direction.
As such, you do not know for certain the final status of profit and risk. Simply put, there is no definite limit to how much money you can make unless you use some tools to control trading.
You can partially control the profit/loss scenario of your forex trade by implementing a stop order and take-profit.
On the other hand, with binary options, you know the exact risk before placing any trade. Keep in mind that the risk is always higher than the potential gain, and there’s no chance to stop a loss after opening the trade.
In terms of profitability, with binary options you know the possible profit and loss. In a simple forex trade, profit and loss can be “infinite”.
Trade Error
In binary options, there are simply two actions to take, meaning that the margin of error during entry is quite small. However, there are no limit orders to close, keep track of or adjust as in forex.
So, if you do not pay attention when forex trading, you might forget to place change or exit orders, which can lead to more loss than you could ever imagine.
Market Access
When trading forex, you can open positions at any time of the day or night from Monday to Friday. The market is available during the weekends, but it is often limited and not ideal for many types of traders.
Binary options, on the other hand, can be traded when the underlying marketplace is open. If you wish to trade binary options for currency pairs, you can do so round the clock for five days per week.
Volatility
This is usually a non-issue with binary options trading. Any trade you make often contends with the volatility caused by events or news, and once your prediction is right, you no longer have to worry about the sudden changes and reactions in the market.
However, volatility can be a huge effect on the value of your position in the forex market. As such, you need a solid risk management strategy in order to prevent losses.
Binary Options Vs Forex Trading- Conclusion
As you can see, there are many substantial differences in these seemingly similar forms of making money. If you are a beginner, you might find this information a bit overwhelming, but you need to learn all the ins and outs before indulging.
When it comes to market analysis, binary options is simpler compared to forex trading, but when done right, both can be really good sources of money. None is better than the other, and the best opportunity boils down to your trading goals.
