When taking a closer look at binary options and Forex, we first need to understand the similarities and differences between the two. In the following article, we present answers to the questions: what are and how do binary options work? What is Forex all about? And the key, what is better: trading with binary options or via Forex? We invite you to read on!
What are binary options?
Binary options are unique options — derivative financial instruments whose characteristic feature is an asymmetrical payment profile. Their value depends on a particular underlying asset, which usually is the rate of a currency pair, for example, EUR / USD, GBP / USD, USD / JPY and USD / CHF.
Investing in binary options involves speculation as to whether the price of a given asset will rise or fall at a given time (at the so-called option expiry date). If the investor assumes that the cost of the asset will increase, he chooses the CALL option. On the other hand, if he predicts that the price of a given asset will fall, he selects the PUT option.
Provided that his speculations turn out to be correct, he will be paid the invested capital together with the calculated commission. However, if the investor incorrectly predicts the asset’s price, he will lose the whole amount invested in a given option. For this reason, binary options have become known as “all or nothing” options.
Forex — what is it?
Forex is one of the names describing the international foreign exchange market — interchangeably, the terms Foreign Exchange Market or FX Market are also used. Forex is nothing but a market in which one currency is exchanged for another at a fixed rate. As a result, forex trading is characterized by high volatility — the trader decides both the direction of the currency and the specific level it will reach.
It is the largest and most liquid market globally, with daily volumes exceeding several trillion dollars. Binary options are an alternative to traditional Forex trading for people starting their adventure with trading.
Binary Options and Forex — Similarities
There are some similarities between binary trading and Forex trading. Both markets allow interested parties to trade online on trading platforms and enable them to start investing with a small amount of capital. In both types of markets, users speculate on the rise or fall of an asset. The profit potential is excellent but requires that you speculate correctly.
Binary Options vs Forex — differences
1.Risk and reward
Forex users decide whether an asset will go up or down and predict what level it will reach. This means higher risk and variable returns. To avoid losses, traders can use trade control tools such as stop-loss, which protects Forex users from losing funds above a certain amount. Once this amount is reached, the trade is closed automatically. A trader can also decide that an exchange will be completed once a particular profit value is reached. Binary options trading is safer in this respect — the trader knows the maximum profit or loss before entering the trade in advance. For binary options, however, the potential gains are usually lower than those for successful Forex trades.
Binary options trades are conducted within a specific time frame that is independent of the trader. Each option has a start time and an end time. At expiration, the trade is automatically closed. Meanwhile, in Forex trading, traders enter into businesses that last from one second to many months — they can open and close them at any time during that time.
The forex market is open 24 hours, five days a week, allowing traders to react to world events efficiently. However, this does require risk management procedures to be in place. On the other hand, binary options can be traded when the underlying asset market is open, which is during standard trading hours.
Binary options trading allows traders to trade currencies, stocks and commodities. In contrast, the forex market provides a limited selection of currency trades.
Binary options or Forex — which to choose?
In conclusion, binary options are a beneficial solution for risk-averse traders. The key features of binary options trading are:
- A predetermined profit or loss.
- A fixed trade expiration time.
- Access to a diverse range of binary options.
On the other hand, Forex means no limits on potential profits and losses — although it is possible to introduce limits within the so-called stop loss. In addition, the lack of a set time for a trade to expire and limited trading opportunities are features that distinguish Forex from binary options. The riskier Forex, however, can yield higher returns on investment.
Binary options and Forex are two different financial markets. To be successful as a trader, it is helpful to understand the differences between the two. The final choice of form of trading should be tailored to your individual expectations of returns and acceptable level of risk.