Binary Options and Forex trading are two of the common trading platforms which offer an opportunity to speculate the direction of a certain asset and offer great profit potential in case the prediction is correct. The online financial trading platforms allow the users to start their trading journey by using a small amount of capital. Although both of these trading platforms have profit as their mutual goal, they have some major differences which let one win over the other in some cases.
Here’s a comparison between Binary Options vs Forex trading to enlighten you from their differences before you embark on a trading journey on either platform:
Extent of Risk
One of the major attributes of forex markets is high variability which obscures the determination of ultimate profit and loss. The traders are responsible for deciding the direction of the asset as well as for predicting the value of the asset. Since traders are not limited to making or losing specified amounts, the risk and reward on respective extremes is equally high.
To eliminate the frequent chances of extensive loss, traders are given options to control their trading. Stop loss and Potential rewards are two of the important tools which forex traders can use to stop their losses and profits after the trade reaches a pre-determined amount from either side.
In short, there is no 100% assurance that you will only lose the pre-determined amount. One way to prevent the entire loss of money from trading accounts is the use of limit/stop orders which aid in the management of profits as well as losses.
Contrary to forex trading, binary trading options involve zero variability. As the name indicates, you either lose all of your money or achieve all of the profit. A specific amount, known as the premium at risk, is controlled by the binary options trader to enter the trade. In case of loss, this is the only amount which you will lose entirely. Moreover, you can easily foretell the actual maximum loss or gain which will come from the trade. Brokers also offer you the facility of “folding” trade which can help you reduce your losses if certain conditions have been fulfilled and it has to be done before the expiration date.
Binary Options vs Forex: Transaction costs
A binary options trading does not involve the payment of additional transaction costs. The trader only has to look out for what is conventionally added in the final yield.
Unlike the binary options, forex trading involves additional transaction costs. These costs are usually in the form of commissions or spread, sometimes both. The commission is usually paid to the broker and dealer in relation to the spread type which depends upon the currency pair being used for trade. Whereas the Spread is actually the difference between ASK and BID and it has to be paid to cover brokerage service costs. Spread is paid in the form of pips.
Being highly variable, forex trading offers you an opportunity to trade for time lapses ranging from seconds to months. This characteristic has its own pros and cons as stated earlier.
Once the binary trade starts, traders cannot control on its beginning and end time. Just as the timelines for binary trade are fixed so is the starting and ending time for each binary option. Although the brokers may offer you trade extension and limiting options such as “roll over” and “early closing” respectively after investing or withdrawing a percentage of the amount, you do not enjoy the freedom of trading any time using any amount of money.
Margin is a tool by virtue of which traders can continue to invest specified amounts if a trade seems to be a winning one. The maximum margin is set by the broker and it offers the traders a chance to increase their profit through more investment.
Binary Options trading lacks the perks of margin availability.
Surprise Volatility risks
Setting up an adequate risk management procedure is necessary because of the high susceptibility of forex market subject to the market shifts. Any swift turn in the events can result in effecting the trade value to an incredibly large and quick extent.
Although the max risk and max reward are always set in binary options trading, you do not have to worry about sharp shifts in the market if your speculation turns out to be right. Because the binary options are capable of preserving through the volatility resulting from certain fugitive events, the prevalence of surprise volatility is unusual in the binary options market.
Trade Faux pas
Forex trading involves a high degree of adjustments and tracking in relation to limit orders and closing of trades. A careless broker may give rise to greater losses than speculated because of his negligence in matters of placing an exit/close or adjusting the limit orders.
Since the binary options trade revolves around managing only two “open” and “close” options, there are way lesser risks of trading errors to be observed from the broker’s side.
In forex markets, trading is limited to conventional currency pairs only. Traders can place orders by selecting from a number of order types such as Buy/Sell, hedge orders, Limit stop, trailing stop, and OCTP etc.
Contrary to the limited forex trading choices, you can make use of currency pairs along with a number of trading choices in binary options trading. Some brokers also offer a break from conventional trading by offering you an opportunity to trade your business ideas on various stock indices, individual stocks as well as commodities
The spot market is no less than a gold mine for the maximization of profit on fruitful trades. Trade maximizing techniques such as scaling and trailing can be used to be a consistent part of long-trend profitable trades going on in the market.
Binary options trading limits you in terms of profit maximization because of its expiration dates and profit limits caps. Once you have places close to the trade or it expires, you are straight away out of the trade.
Forex and binary options trading are two of the excellent trading platforms. Depending on your preferences and trade expertise in relation to the views explained in this article, you can safely conclude which type will be the best for you.