Binary Options vs. Forex Trading
December 12, 2016
Recent years brought an amazing development for the online industries and retail forex trading was one of those industries benefiting the most. Technological developments made it easier and easier for forex brokers to offer their customers access to the currency markets.
But these developments also meant that new industries were born, such as the binary options industry. Binary options trading virtually exploded in popularity in the last years and binary options brokers are trying to diversify their portfolio in such a way to offer their clients the possibility to trade the forex market as well.
The other way around is valid too, as forex brokers, in a desperate need to keep their clients, are diversifying into the binary options business. What is the difference between the two, if any, and what are traders supposed to choose?
Forex Trading Generalities
The forex market is the biggest financial market in the world where traders are changing hands in trading currencies. These currencies effectively represent economies and the way an economy is performing is being seen in the way a currency is moving.
Currencies are grouped in currency pairs based on the world’s reserve currency, U.S. dollar. As such, the currency pairs that have the U.S. dollar in their componence are being called major pairs, while all the other currency pairs are called crosses.
Some forex brokers are further differentiating between different subcategories, like exotic pairs, minors, etc., but this is just that: a further subdivision. What is important to know is that the world’s reserve currency, the U.S. dollar is the one that the forex dashboard is being built upon.
Trading the forex market is straightforward: if one is believing that a currency is going to appreciate against another one, then it should be bought via the currency pair that represents the two. If the trader is right, a profit is being made, based on the difference between the trade’s closing price and the opening one.
The same is valid when selling. This is one of the main advantages of forex trading: one can sell something that it is not mandatory to own in the first place.
What is Binary Options Trading?
Like the name suggests, binary comes from the only two directions a financial product can move: either up or down. Therefore, when trading a binary option, a trader is required to choose the direction the product is going to move.
The products that are offered for trading binary options are somehow similar to the ones a forex broker is offering: mostly currency pairs, indexes, commodities, sometimes CFD’s (Contracts for Difference). However, binary options trading is a bit different than forex trading.
Firstly, traders can only buy a binary option. Never sell! If the direction one is expecting to come is to the upside, the trader is buying a call option. If it is the downside that is wanted, the trader buys a put option.
To give you an example, in binary options trading, if one thinks that the EURUSD is going to move to the upside, he/she will buy a call option. If he/she thinks it will move to the downside, will buy a put option.
Secondly, to win when trading binary options, one must indicate a time horizon. It is not enough to know the direction of the market, but to put a time element on your forecast is needed.
This is much difficult than it sounds and it represents one of the reasons why binary options brokers are offering a big reward for a winning binary option.
Finally, the potential gain/loss in a binary option that is traded is known in advance. In most of the cases, it represents a percentage of the invested amount, typically bigger than 65% and can go in some cases all the way to 80%.
Besides call and put options, there are other types of options offered to be traded, but in general, the principle is the same. Time is involved in binary options trading, whereas forex trading doesn’t have this “small” requirement.
One thing that traders need to consider when trading binary options is the fact that this business is less regulated than the forex business. This makes room for a lot of crooks and capital is at risk.