Binary Options vs. Forex | Introduction
Now if you reading this article, you’re probably either a trader who is already trading forex looking to explore the world of Binary Options trading, or you’re a total newbie who is looking to learn the differences between Binary Options vs. Forex Trading in your quest for financial freedom. We’d attempt to explain the key differences between Binary Options trading vs. Forex trading in a simple and straight-forward manner below.
Binary Options Explained | Binary Options vs. Forex
Binary Options in simple terms means you’re betting that the price of an underlying commodity (be it a forex pair, commodity or stocks) goes up or down in a given time-period. As such time is a critical factor in the success of your trade entered.
You also know upfront how much your returns would be should the trade be successful. Returns of more than 80% ROI (Return on Investment) is the norm in binary options trading. Yes it really is that high! As a trader you also have the option to ‘fold’ the trade or close the trade before the set time-period is reached – thereby limiting your losses (i.e. a ‘stop-loss’ option of sorts vs. forex trading).
In Binary Options trading as opposed to Forex trading, your losses are also limited to the maximum amount of the trade. I.e. if you traded with USD 100 per trade, then your maximum loss is limited to USD 100 should the trade go side-ways.
The following points highlight the main points of Binary Options Trading discussed above:
- A trade’s Profit or loss is established up-front.
- The expiry time for a trade is also selected up-front.
- A diverse range of underlying assets ranging from forex, commodities, cryptocurrencies, stocks etc. across many industries are available for trade in Binary Options.
- Binary Options can only be traded during normal trading hours. However Digital Options (another form of Binary Options trading offered by IQ Options is available after normal trading hours)
- No potential for using leverage.
Forex Trading Explained | Binary Options vs. Forex
Forex trading is the global platform where various currency is exchanged. It is also the world’s largest marketplace by far, with more than USD 5 trillion being traded daily. Trading takes place in forex pairs and a trader compares the value differentials between two currencies, such as the US Dollar and the Euro (USD/EUR) pair for instance.
Forex trading also involves a high amount of variability. On top of deciding in which the direction a currency will move, traders must also predict how high or low it will go. Losses are also NOT LIMITED, meaning if you don’t practice a consistent and proven stop-loss strategy – the potential losses you’d incur from a trade that go sideways is – UNLIMITED! This is one of the major downfalls of forex trading vs binary options trading, and is something a new trader should definitely keep in kind, when executing his/her forex trades.
In Forex trading vs. Binary Options, there is not set expiry time. This means that you can have an open position lasting for days, weeks or even months if you have the stomach for it. Of course we truly hope for your benefit, that you have a robust stop-loss strategy in place to cater for any unpredictable swings in price.
Do also keep in mind the commission and various charges that your forex broker would subject you to when you keep a forex trade open over an extended period of time. You should always take this into account to work out the profitability of the trade at the end of the day. This is especially important when executing trades with thin or slim profit margins.
Being the biggest trading market, forex trades can be executed 24 hours a day from Monday to Friday. Forex trading also allows the use of leverage, meaning you could trade with USD 100 with a leverage rate of 1:10, be effectively trading with USD 1000. Of course with leverage comes the issue of managing risks and again having robust stop-loss strategy to account for unpredictable swing in prices.
The following points summarise the main points of Forex Trading as discussed above:
- No limits on profits or losses per trade (although limits / stop loss orders can beput in place)
- There are no set expiry time for Forex trades (days, weeks etc)
- Forex is less diverse than trading binary options in terms of the instruments available.
- Forex trades can be made 24/5
- The potential for using leverage exists in trading
Binary Options vs. Forex | Compared
#1 Return on Investment
When it comes to Returns on Investment, Binary Options vs. Forex trading offers a fixed, significantly high amount of return (we are talking about a minimum return of 80% ROI – Return on Investment), which you’d be hard-pressed to find anywhere else. Binary Options Trading as compared to Forex Trading also offers transparency – meaning you’d always know how much you can potentially earn when your trade goes the way you want it to.
In Forex trading, although you can potentially earn more than 80% if the stars align your way, there are a SIGNIFICANT number of unknowns, for most instances forex trade returns average less than 10% per trade. In addition, the number of unknowns, the time you’d have to hold the trade, the commission you’d have to pay per trade and the risks your trade is exposed to often negate the return you’d make on forex trading.
VERDICT : Binary Options is the clear winner for offering a FIXED and HIGH ROI in a short period of time.
In Binary Options vs. Forex trading, your trades is only kept active or open for a fixed time interval. These time-intervals can be selected from as short as 30seconds, 1 minute or 2 minutes etc. These short time periods mean that you can always be ready to watch your trade pan-out accordingly. If you think the trade would not end up the way you want it to – you always have to the option to ‘close-out’ the trade – thereby limiting your losses.
In Forex trading however, due to the variability of the trade, you’d have to be keeping an eye on your trade the entire time it is open! This means keeping an eye on your trade on your mobile whilst using the toilet, in bed, at work etc. Basically you’d be keeping your eyes glued to your phone or your computer the entire time your trade is open which can be hours or days for that matter.
You had also better have employed a robust ‘stop-loss’ strategy on your trade to catch any unwanted swings that would wipe-out your trade. All of these means that forex trading requires a lot more monitoring on your part to ensure a profit on your trade. Even then, the profit that you may obtain after going through all of the above may not even reach 10% per trade!
VERDICT : Binary Options is the clear winner for earning a significant ROI within a short period of time.
In Binary Options vs. Forex trading, the use of leverage is not available. You’d always be limited to the amount of funds you put in to trade. This works great if you’d like to always know that should the ‘shit hits the fan’ your loss is limited to the amount you have put into your account. Say if you invested USD 1000 to jump-start your investing journey, if you got all of your trades wrong and made all of the wrong decisions – you’d have burned USD 1000 at the end of the day.
This also means that even if you’re a SUPER-AWESOME trader, you trades would be limited to the amount of funds you have and what you can make out of it – although with average returns of 80% per trade – yoru invested money would turn into a pot of gold in no time at all with Binary Options trading.
In Forex trading however, the wonderful world of leverage is widely available and used. This means that with your USD 1000 in your account, with a leverage ratio of 1:10, you’d effectively be trading with a capital of USD 10,000, and with a ratio of 1:100, you’d effectively be swinging around USD 100,000! Now do bear in mind however, should your trade go sideways – your risk exposure is to the entire amount! So before you start trading like no tomorrow – ensure that you understand this about Forex trading.
VERDICT : Forex trading is the winner. (However if your risk appetite suits limiting your losses – Binary Options trading could be a better fit for you)
#4 Diversity of instruments
In Binary Options vs. Forex trading, as the underlying instruments available to trade is virtually limitless – you have the option to trade in forex, cryptocurrencies, stocks, commodities etc – you are literally spoilt for choice. Think there’s an opportunity in trading gold today? Sure it’s available in Binary Options trading. Spot an opportunity in trading the USD/AUD pair? Absolutely, you can do that too in Binary Options trading.
However for Forex trading, as the word implies – you are only limited to trading the forex pairs available. Although this by no small feat is small – you can trade all the major pairs, exotic pairs etc – you’d still be limited to trade only forex currency pairs and won’t have other instruments available.
VERDICT : Binary Options trading is the winner here for the variety of trading instruments you’re able to trade on.
#5 Learning Curve
In Binary Options vs. Forex trading – all you literally have to do is observe the trend of the instrument and select whether the price of the underlying instrument would go up or down over a fixed period of time (say 30 seconds). Although a basic understanding of technical analysis and chart reading would come in handy in indentifying trade opportunities – essentially this is all you have to do to get the trade right.
Forex trading however does require a significantly steeper learning curve, in terms of risk management and chart or technical analysis knowledge. You’d also need some understadning of the geopolitical situation of the various countries and currencies you’d be trading on. The use of leverage in forex trading (should you choose to do so) also means that your ‘stop-loss’ strategy employed has to be robust and be able to account for any unpredicted change in prices.
VERDICT : Binary Options is the clear winner for ease of learning to trade for a new trader.
Binary Options vs. Forex | Summary
In summary, as you can see from the above, Binary Options vs. Forex trading offers some significant advantages over forex trading in terms of returns, instruments available to trade on etc. Binary Options trading is also great for beginners and has a significantly LESS learning curve in getting started trading. In fact you could get started in the next 5 minutes by simply registering for a FREE TRADING ACCOUNT with the global leader in Binary Options trading platform HERE.
When it comes to Binary Options vs. Forex trading and making the smarter choice, you should always consider the following factors as an individual trader :
- Return on Invesment
- Risk / Reward ratio
- Learning curve required
When it comes to all of the above, Binary Options trading is the CLEAR WINNER – as compared above.
For a comprehensive review of IQ Options Binary Options broker – check out our detailed REVIEW HERE.