Forex vs Binary Options ?
Forex and binary options are two vehicles by which traders can earn money from trading. However, it is important that traders compare the two and decide for themselves which one to go along with. They have some similarities between themselves and also some key differences. With this article, it is hoped that the questions many new traders have about the key differences between Forex and binary options on various online media are settled once and for all. So what are the key points of comparison between the Forex market and binary options ?
Leverage and margin requirements for participating in each market are areas where there is a wide difference between the two markets. The forex market is a leveraged market. The tick by tick movements of currencies are actually quite small, and it costs a lot of money to setup positions in the forex market. That is why leverage has to be provided for forex trading so as to allow traders to control position sizes that their capital ordinarily cannot hold. With leverage forex traders only have to come up with a portion of the required capital (the margin) to enter a trade. Therefore, the forex trader does not have to come up with 100% margin for trades.
In contrast, binary options payouts are not dependent on tick by tick movements; they are rather expressed as a percentage of the amount invested in a trade. Therefore, there is no leverage in binary options and traders have to come up with the full capital (i.e. 100% margin) required for the trades.
Most forex trades depend on the currency pairs to show strong trending action in each direction (upwards or downwards) to produce trade results. Therefore, more profits can be made when currencies are trending than when they are range-bound.
In binary options, there are different trade types and these do not necessarily depend on an asset having to trend in order to make profit. The Tunnel trade for instance, actually requires the market to trade within a range of prices for the trader to receive the payout. So profitability in terms of market direction is one area where there is a difference between the forex and binary options market.
Presently, the Forex market is better regulated than the binary options market. The Forex market is more established and has clear cut rules under which market players and operators may do their business. Enforcement of sanctions by Forex regulators is also very strict.
Regulation in binary options is not universal; there are still many regions where binary options are not regulated. Where such regulation exists, enforcement still remains weak generally.
Reward to Risk Ratio
The reward-risk ratios are better in Forex than in binary options. How is this possible? In Forex, it is possible to get a single trade which has a reward to risk ratio of 3:1, meaning that it is possible to get trades where 3 pips can be attained in profit for every 1 pip set as the stop loss. Where such trades are obtained, it will take 3 consecutive losses of the same magnitude to cancel out the profit attained from the winning trade. What this means is that it is possible for Forex traders to still make money even if they do not win majority of their trades within a given time period.
In contrast, binary options only payout 80% on the average for each successful trade, but a losing trade will lead to 100% loss of the invested amount. Therefore, the binary options trader needs to win majority of the trades by a factor of at least 2:1 in the long run in order to stay profitable.
Rate of Return/Loss
When it comes to the rate of return or loss, there are differences between the forex market and binary options market.
In binary options, the returns are fixed and the loss amount is known. Therefore, a trader going into a binary options trade knows ahead of time how much money can be made or lost in a trade.
In forex, the degree of profit or loss cannot be determined with certainty. There are no limits to the amount of money that can be made or lost in the trading process. This is because Forex does not offer a fixed return on trades. Even where a stop loss has been used, excessive slippage can cause a stop loss for a losing trade to fail. In the same vein, there is no guarantee that a trade will hit the Take Profit point that has been set by the trader in a trade.
When it comes to timelines for trades, what is the difference between the forex market and binary options market? Forex trades do not have timelines. In other words, they do not expire. A forex trade can remain open for days, weeks or even months, and can only come to an end if the trade hits the stop loss/take profit price areas or if the trader closes the trade manually.
All binary options trades expire. The expiry time for each trade must be chosen from the default list at the time the trade is being setup. The common time lines for binary options trades are 60 seconds, 2 minutes, 5 minutes, 15 minutes, 30 minutes, 45 minutes, 1 hour, 2 hours, 4 hours, End of Day, End of Week and End of Month.
Forex trading presents only one way of executing trades, and that is the Long/Short or Buy/Sell trades which are used to profit purely from the direction of movement of the asset.
The binary options market has the Call/Put or Up/Down trades which mimic the Buy/Sell trades of the forex market, but there are other trade types which do not measure asset direction and which still present ways to make money in binary options e.g. the boundary trade.
It is very clear from what has been discussed above that there are differences between the Forex and binary options markets. Each of these differences could present an advantage or a disadvantage to the trader. It all depends on how these differences are exploited during the trading process.