Binary Options vs Forex Trading: The Ultimate Comparison
In this article, we will be discussing binary options vs forex trading for beginner to advanced traders. Our goal is to enrich your knowledge about trading on currency pairs and other commodities on different trading platforms.
A lot of Forex traders also trade binary options, and Forex is one of the markets that binary options traders can place trades on. This means they’re often spoken of as if they’re the same thing.
In reality, binary options and Forex trading are two very different financial products. Both provide opportunities for traders to make a great deal of money, but in very different ways.
What are binary options?
A binary option is a way to make money on the natural fluctuations of all kinds of markets. You choose any stock, commodity, index, or currency pair. Then you make a prediction as to whether that particular market will be above or below a certain price point by a certain time.
If your prediction is correct you’ll win back a certain amount over what you used to purchase the option. For example, if you purchased the option for $50, you might get $100 back.
If your prediction is incorrect, then the broker keeps your money. You adjust your strategy and try again another day and in another way. Key take ways of Binary Options are,
- Up front profit/loss establishment
- Expiry time for binary options trade is selected based on the up front
- Binary options expanded throughout many industries with diverse range of trade options
- Binary options trading is available during the traditional trading hours only
- There will be no potential for leverage of trading in binary options
What is Forex Trading?
Forex is the foreign exchange market, specifically the foreign currency exchange.
The price of different currencies fluctuates rapidly around the world, so savvy traders can make money converting one form of currency into another. At its most basic, you purchase a currency at its current value and then sell the currency when it goes up.
For example, if you think the Euro is likely to do better than the dollar over time, then you might buy Euros when they cost significantly less than the US dollar. So you might spend $10 for $7 of Euros. That seems like a bad deal…until the value of the Euro shoots up. Then your $7 of Euros might be worth $12 American dollars.
This is a very simple example, of course, and doesn’t get into futures markets or forwards markets. Yet it helps to demonstrate how Forex trading can help savvy individuals turn a nice profit. Key take ways are,
- Trading facility with unlimited profit/loss boundaries (though profit/loss order limits can be customized)
- Forex trading requires no set expiry time
- In terms of diversity, binary options trading is more diverse than forex trading
- Forex trading is available 24 hours 5-days week (you can trade any moment you want)
- Potential of forex trading is high in terms of leveraging the trade
Key Comparison: Binary Options and Forex
Well, the key comparison between forex and binary options is huge. Whether it is about the trading time, accessibility to the market, or online trading, etc.
Forex trading market remains open 24 hours for 5 days every week. Forex prices react fast with the news, noticeable events throughout the world. So, if you are actively observing the market, you will have opportunity to trade following those events or news. In forex trading, weekend trading also possible though there will be limited functionalities active for trading compared with week-days.
Binary options trade can be done on the underlying assets based on the price while the market is open. It means that you can trade only when the market is open and allows traders to place their trades. We will explain advantages and disadvantages for both type of trading in the following sections below.
Binary Options vs. Forex Trading: Profitability Comparison
It depends on how much you have to invest.
If you only have a little bit of capital to work with at first, binary options are the way to go. That’s because Forex trading comes with a “margin call.” As a result, most Forex traders have to keep at least $500 in their accounts at all times to begin making any money.
Binary options also make a lot more on a single trade. They come with a fixed, predictable payout, which helps with risk management. This same fixed payout can work against you if you’re trying to make big payouts though: when you have a lot of capital to work with, Forex may pay more.
Forex or Binary Options: Risk Comparison
Forex is ultimately riskier than binary options, because binary options come with a fixed risk and fixed payouts. Binary options are also a lot less risky for beginners, simply because these options are a lot easier to understand, on average, than Forex is.
In reality, many very sophisticated traders opt to use a mix of both. As you grow in trading sophistication you might begin doing the same. IQ Option is one platform that will let you run many different types of trade at the same time, allowing you to diversify your strategy and manage your risk.
Forex vs Binary Options: Duration of Trade
In forex trading, you can independently trade regardless the expiry time. The meaning is that, you can enter or exit any trade any moment you want. There is a single condition you must check is that, no open trade can close in weekend when the market is not open.
Now, in binary options trading, there is a fixed time frame of trading, which is one minute to one hour. However, there are some specialized brokers that allow it’s users to trade before the exit time at a lower return than agreed when started.
As well as, it is possible to increase the expiry time of a trade in binary options trading for achieving a higher profit return. However, you should know that, not all brokers offer binary option trading facility.
Forex vs Binary: Diversity Comparison
Forex trading can only happen on different currency pairs. However, there are many currency pairs available for trading and among them four are most popular. Keep in mind that, if you can proceed with proper strategies, you can earn more from any currency pairs.
On the other hand, in binary options trading system, there are many different kinds of trading facilities available. It includes, different commodities, traditional stock trading, and currency trading facilities. It’s the major reason, why many brokers cannot provide binary options trading.
Volatility Comparison: Forex Trading & Binary Options
One of the major advantage of binary options trading is that, it does not get affected by the volatility of the trading market. And it happens during your trading if your prediction is correct and until it reaches the expiry time. So, if the prediction is right, your investment will not be hurt by any sudden volatility.
One of the major disadvantage of forex trading is that, it is highly affected by the volatility, and it happens due to the news or any significant event. If you want to play safe, you must be implement proper risk management for your trading.
Leverage Comparison: Binary Options & Forex Currency Trading
Leveraging trade for increasing profit opportunities in any trading is a good option. If you can use the leverage for minimizing the losses in proper way, can make up to 500 times comparing the initial investment in forex trading.
For better understanding, we can explain it in this particular way for making it easier for you. Forex traders can make more profit without risking their investment within shorter time frame. Another thing is that, you do not have to invest more for leveraging your profit, you can do it with less investment.
In the end, it is not guaranteed, that you will surely make leveraging your profit. Basically, it depends on the several factors such as, sudden market movement, traders’ decision while trading, etc.
As of the binary options trading, it does not offer any leverage feature for trading.
Final Verdict: Binary Options vs Forex
Now, its your turn to analysis trading factors before you start trading in any system between both binary and forex trading. We have explained every features, advantages and disadvantages of them.
There are several risks, you may consider while trading. The amount of profit potential is depended on the investment amount and on the market movement. Additionally, you should consider learning different trading strategies before start trading.
However, in binary options trading, it offers fixed risk (loss) and fixed reward (profit) for traders. If you want to play safe then you may consider trading in binary options.
On the other hand, for forex trading, it may bring higher return comparing to your investment. Additionally, you need to consider that the risk is greater in forex trading comparing to the binary options trading.
We hope now you understand everything you need from our discussion on binary options vs forex trading. If you are still confused about any of it, consider reading the entire article again.