The trading of binary options has grown over the past few years. This growth rate has significantly impacted the financial market industry with traders considering binary options as a feasible choice with more and more people knowing what binary options are. However, Forex is still a popular choice with most people torn between these two options.
Let’s take a look at the major differences between binary options and Forex trading, as well as the positives and negative aspects of binary options.
Projected Profit/Loss
A binary option is a category of options in which the investor knows with certainty the possible profit/loss. The profit/loss depends on the outcome of a zero-sum market proposition. The trader will make a fixed profit/loss. Binary options are available against assets such as commodities, stocks, indices and events. Forex trading on the other hand involves speculations about the value of currencies. The predicted increase/decrease in value drive the resulting profit/loss. There is no way to know the amount of profit/loss beforehand. For example, if you speculate that the price of EUR/USD will increase in the future, you purchase 1 lot of EUR/USD. Then you wait for the price to jump to a point you deem profitable enough and then close the trade.
Time Frame
Binary options don’t require you to wait for long time periods to realize a profit and there is no purchase involved. With Forex trading you have to make a purchase and then wait until the value rises. With binary options you simply trade on predictions. The predictions are usually connected to the value of a particular commodity or currency and have a specified date associated with it.
Expected Outcomes
Binary options can result in two pre-determined outcomes. If your prediction is right then you get the profit. In case you turn out to be wrong, you already know the amount you will lose. Forex trading is not that simple, the value of currencies is volatile and reacts to complicated factors. There is no way to accurately predict the amount you will lose.
Orders Types
The basic order type in Forex is the Buy/Sell order. There are also more advanced types of orders which are governed by specialized rules: Trailing Stop, Limit, OCO, Hedge orders and more. The binary trader has a choice between five different types of binary options: Up/Down, Boundary Options, Touch/No Touch Options, 60 Seconds Options, and Option Builder.
Trading Costs
Forex trading involves keeping an eye on commissions, rollover/swap agreements, spreads and more. This complicates things for investors, especially for beginners. With binary options none of those aspects come into play.
Closing Position
In Forex trading, the trader chooses when to close the position. The broker is obligated to accept the closing decision whenever it is made and execute the order. Binary trading on the other hand involves setting an expiry date on the option at the time of purchase. After the expiry time lapses the trade will close automatically. Brokers will often offer predetermined expiry times. Early closure is possible but only allowed by some brokers. Early exiting means you only get a certain percentage of your expected return. The opposite case, that is late closure, is also allowed, this is called “rollover”. Traders need to increase their investment by a fixed percentage in order to take advantage of late closing.
Trade Size
The trading size for binary options is determined by the broker. They simply define a maximum and minimum range. In some cases the maximum trading amount goes up to $5000 or even more. The minimum amount per trade can be as low as $5.
These ranges differ significantly in Forex trading; some brokers allow trading of micro lots, each lot is composed of 1000 units of the base currency. The maximum range can go as high as 100 micro lots, amounting to $10 million.
Why You Should Consider Binary Options
Binary trading has a few distinct advantages over Forex including:
- Binary options involve a known reward and risk.
- There are no commissions involved.
- Tons of options when it comes to different strike prices and expiry dates.
- The investment amount can be customized.
- Access many different kinds of asset classes.
- Traders looking at considering binary options need to pay close attention to the terms and conditions of their individual brokers. Carefully consider the risks, payouts and calculation of expiry prices before trading.
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