Introduction To Comparing Forex & Binary Options

In an open market, it is usual for traders to come across two opposing arguments for a single trading concept. Some market participants may have a positive outlook towards a particularly risky investment, while the same product may be vehemently opposed by other sections of the market. It is difficult to attain a common ground for any instrument, with success of a market depending on its ability to satisfy a fair majority of the intended audience. The same rule holds true for the financial markets, where the risky nature of investments has generated both positive and negative response from market participants.

Forex and Binary Options trading are two of the most modern retail trading products in the markets that have achieved a massive amount of acceptance among retail investors. The success of Forex trading has in many ways led to the opening up of stock trading and other financial products to the mass market, which has indeed created a highly competitive marketplace for investors. Regardless of the availability of different financial products, Binary Options and Forex trading is perceived to be the favourite among all the other markets.

Contrary to popular opinion, Forex trading and Binary Options trading are two entirely different trading concepts. Some traders may argue that both products have numerous similarities that make them interchangeable, but in reality, traders must understand that both markets involve significantly different approaches to trading and investments. In our comprehensive comparison guide of Forex V Binary Options, we touch upon some intrinsic differences between FX and Binary trading, and which investment opportunity better suits traders according to their trading characteristics.

 

 

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The Basic Concept Of Trading In Forex & Binary Options

Forex trading is a market where buyers and sellers exchange currency pairs through an open exchange, a broker, or through a liquidity provider. Forex transactions are primarily geared to satisfy the needs of the demand and supply of the markets, in order to make international payments for goods and services. Speculators also take advantage of the rising and falling prices of currency pairs by buying and selling currencies for the short or the long term. Forex trading is similar to the traditional forms of stock trading and is more in line with the traditional notions of investing in the markets. It is the main reason why Forex trading is synonymous with all the other investment opportunities and is considered as a valid financial instrument by a majority of global investors.

Binary Options trading is an alternative and exotic investment product that only became popular quite recently. Binary Options is not a new concept, as investors used to deal in binary options trading for a long time to hedge their investments against market fluctuations. Binary options trading was one of the more attractive alternatives to Futures trading, as binary options used to provide instant results. However, in the modern world of investments, binary options trading has characteristics and features that are similar to the concept of gambling and sports betting. Binary options trading involves investing in the markets by betting on the future price or direction of an underlying asset within a predetermined expiry time. If the wager on the direction of the asset is right, traders earn a fixed income, while a wrong call will result in the loss of the entire investment amount.

A Few Key Similarities & Differences Between Binary Options & Forex

Traders may be able to find common ground between FX and binary options trading, but it may be difficult for beginner traders to find an accurate representation of the core differences between the two financial products on their own. Expert investors may also look to analyse the different features of Forex and binary options trading, which is why we have come up with some of the essential similarities and differences between the two markets:

Similarities Of Forex & Binary Options Trading

  • Both forms of investments allow traders to start trading with a small capital outflow. It is possible for traders to start trading with just $1, which is considered to be one of the major advantages of both Forex and Binary Options trading.
  • FX & Binary Options trading offers the ability to invest in Forex and commodities markets, while some brokers also provide an opportunity to invest in stocks, indices, bonds, and ETFs.
  • Forex and Binary Options trading is a 24 hours market, where traders can trade the markets 24X5. Currencies and commodities are typically active throughout the day, which provides a great option for traders to be flexible with their trading schedule.
  • All the underlying instruments in Forex and Binary Options allow traders to choose their preferred duration of trade, which facilitates both short-term and long-term trading.

Differences Between Binary Options & Forex Trading

  • Binary Options trading is a simple product that has a fixed risk and reward per trade. Forex trading is more complex in its approach, as there are a number of different parameters that affect the outcome of a trade.
  • Binary options trades will often result in a trade outcome, which can either generate a fixed percentage return for winning trades or up to 100% losses in losing trades. Forex trades can have varying results, with a potential for unlimited profits and losses.
  • Even though both products offer shorter time-frame trading opportunities, binary options trades have a fixed time of expiry, at which time the option will expire with a potential trade outcome. Forex trades, on the other hand, have an indefinite expiry time, and the trades can be held live without worrying about trades closing out of the money. Traders can close their trades manually or through predetermined trading levels.
  • Binary options trades have a maximum of 24 hours expiry for long-term binary options, with only a select few brokers offering extended expiry options. Forex trades can be held open for days, weeks, months, and even years.
  • Binary options enable traders to fix their risks prior to opening a trade and can have a fairly solid idea about the potential losses that will be incurred per trade. Forex trading cannot guarantee any set profits or losses, and even if traders use stop losses, market volatility can extend the losses beyond the predetermined levels.
  • Profits and losses in Forex trading are determined by the scale of market movement and the direction of markets, while the direction of trend plays a more vital part in the outcome of binary options. Of course, there are binary options products that provide payouts according to predetermined strike prices, but such levels are determined by the broker and not the trader.
  • Conflict of interest is generally higher for Binary Options trading than for Forex trading. Therefore, traders may theoretically lose more money to the brokerage in binary options, when compared to FX companies.

An Evaluation Of Risks In Forex & Binary Options Trading

The Forex market in itself has a high amount of liquidity, but the changes in the market may be too minimal for the likes of an average institutional trader. Forex trading may not be predominantly risky for larger investors, as the changes in the market are too minute to create any significant account drawdowns. Forex trading involves trading contracts in standard lot sizes, where traders will be required to invest at least $100,000 for standard lot trading. Therefore, in order to open up the market to smaller investors and speculators, Forex brokers started providing the convenience of margin trading, which involves leverage. The process of using leverage is what makes Forex trading risky, as trading on margin involves both massive upsides and dangerous downsides.

Forex brokers are known to offer a leverage that starts from 1:50, which can increase all the way up to 1:3000. A standard 1:100 leverage signifies that the broker moves 100 times the initial investment made by the trader on a particular position. Therefore, a profitable trade will ensure that traders can enjoy 100 times the returns for a smaller capital outflow, but on the flipside, losing trades will result in 100 times the risk. Leverage is one of the primary reasons why Forex trading is labelled by the global investment community as one of the riskiest investment ventures in the global financial markets.

Binary options trading is also a highly risky investment product in its own right. Unlike Forex trading, the risks of trading are not derived from leverage, but it comes from the gambling nature of the product. Traders only make a single buy/sell call for their binary options trade, and the potential trade outcome is determined by the market, and sometimes by the broker. Binary options brokers and casinos have a lot in common, where the house has the higher odds. Despite the incredible returns in binary options that can promise up to 95% in payouts, losing trades can result in 100% losses within a short span of time.

Although seasoned binary options traders can turn the odds in their favour, the risks of binary options trading are compounded by the broker redundancies and scams orchestrated by binary options companies. Companies may also manipulate the markets to ensure that traders lose their investments at the time of expiry. We are also aware of binary options companies that indulge in financial malpractices, but the same risks also apply for Forex brokers. The risk of trading with a non-regulated broker, both in Forex and Binary Options, are quite significant. Nevertheless, there are different types of risks prevalent in both FX and Binary Trading, and it is up to the trader to choose a market that is more suitable to their risk appetite.

Cost Of Trading In FX & Binary Options

From a perspective of trading costs, Forex may be considered to be more expensive than Binary options trading, as there are multiple costs involved in Forex trading such as spreads, commissions, and SWAPs. Conversely, Binary Options trading is more economical, as there are usually no fees associated with trading at most brokerages. However, it is also important to understand that Forex brokers are typically compensated by the cost of trading since clients’ orders are passed on to other traders or a liquidity provider. Regulated Forex brokers are legally banned from inducing any conflict of interest by trading against their clients, and are not allowed to be counterparties to their traders’ positions.

Binary options contracts are agreements between brokers and traders, and this is where there is a maximum conflict of interest in binary options trading. Binary options brokers make money from losing traders, which is why most binary options companies want their traders to trade with a higher trading capital. The odds are stacked heavily in a broker’s favour, and it is one of the primary reasons why most binary options traders lose money. It is also an important reason why binary options brokers don’t charge any fees or commissions.

There are a few binary options brokers that charge added commissions and fees for trading, as these brokers don’t become a counterparty to their traders’ positions. These companies work merely as an exchange house that facilitates a platform for buyers and sellers to make up the market. Most of these brokers are regulated by top regulatory bodies that stipulate the best trading conditions for investors, leading to a reliable binary options environment.

Earning Potential – Binary Options Trading Versus Forex Trading

The earning potential for Forex and Binary Options trading is vastly different and is dependent on a wide variety of trading conditions. Several factors contribute to the potential for profits, which include, but not restricted to, initial investment amount, market dynamics, products, assets, and other trading conditions. It is not feasible to compare the potential payouts and risks of FX and binary options due to their obvious differences, but it is safe to assume that trader characteristics play a vital role in deciding the outcome of a trade.

Binary Options trading offers a fixed payout for every in-the-money (ITM) trade, while out-of-the-money (OTM) trades can result in complete loss of the investment. The payouts for ITM trades can range from 50% to 1500% for different types of binary options products such as high/low, touch/no-touch, range, ladder, and turbo options. OTM trades can result in 100% loss of the money invested, with an option to earn a maximum of 25% refund at select brokerages.

In comparison, Forex trading offers unlimited potential for gains and losses, but the actual earning potential is limited by the leverage, lots traded, and the scale of movement of the asset. For reference purposes, a short 50 pip positive move for a position on the EUR/USD pair that uses 1:100 leverage can earn up to 50% profits, while the same movement in the opposite direction of the trader’s position can result in a 50% loss. Of course, profits and losses are only realised at the time of closing a trade, and hence, the trade outcome varies according to the market fluctuations.

The fixed payout potential of binary options trading may suit some traders, due to the fixed risk/reward per trade, while the more flexible and fluid trading nature of Forex investments should satisfy the more conventional trader. Regardless, Forex trading may provide a bit more added advantage for regular traders that depend on the markets to provide them gains, while binary options trading may be suitable for traders who can make the right calls about the trend of an asset, without worrying about the magnitude of movement of the markets.

Ability To Manage Trades

Forex trading offers much better options to be flexible in their approach and manage trades according to their trading strategies. Binary options are mostly ‘set it and forget it’ trading products, where users have limited opportunities to modify their investments before the expiry time. Of course, some binary options brokers may provide the option to close trades prematurely or to extend trade expiry times with an increased investment. However, binary options trading does not offer the increased trading flexibility that is usually relished by Forex traders.

Binary Options & Forex Trading Platforms & Resources

Forex traders employ the best trading tools available in the markets to ensure that they have the ability to perform a comprehensive analysis of the financial markets. Forex trading platforms have traditionally been far more advanced and feature-rich than binary options platforms, and are usually designed as an installable desktop platform. Binary options trading platforms, on the contrary, are mostly designed as web trader interfaces, with only a handful of brokers preferring to create a feature-rich trading platform similar to an FX trading platform. Both industries have highly reliable and top-performing trading platforms, which are designed by independent third-party software developers. Some of the most popular Forex platforms include the MetaTrader, the cTrader, and the TradingStation, while the popular binary trading platforms include SpotOption, TechFinancials, and Tradologic.

As far as the web and mobile trading platforms are concerned, both Forex and binary options brokers offer dedicated web trading interfaces, along with dedicated mobile trading apps, but in this case, the Forex platforms have the overall edge. Forex platforms are indeed far superior when it comes to charting options, trading tools, analytics, and other trading options. Since binary options brokers generally limit the number of available features, professional binary options traders use a combination of Forex and binary options trading platforms for through research and analysis of the markets before investing.

Both binary options and Forex brokers offer access to a comprehensive array of trading resources, but binary options brokers offer better trading information such as free signals and market analysis. Forex brokers usually charge a premium for such services, while binary options brokers are also known to provide free training to its users. Regardless, traders can combine all the free resources with other online information to generate a better trading environment for their investments.

Psychological Aspects Of Forex & Binary Options Trading

Binary options trading is a fast-paced investment product, as trades can be over within the matter of a few seconds. Forex trading can also be inherently risky, as high volatility can mean that massive movements in the markets can result in margin calls or large account drawdowns. Therefore, both markets require traders to be mentally strong and exercise extreme patience while trading. There is a high chance for traders to turn to a gambling mentality, which is truer in the case of binary options trading. However, the unlimited losing potential of Forex can make it a far riskier investment opportunity for high-risk traders.

High-frequency traders such as scalpers and news traders have to sustain several emotional challenges to be able to profit from the markets consistently. Professional traders have accumulated years of experience in the markets by acquiring all the essential knowledge of trading and accruing market exposure, in order to trade profitably. There aren’t any major differences in the psychological approach towards Forex and binary options trading, as long as you understand all the basic concepts and dynamics of both financial products.

Forex Vs. Binary Options – A Conclusion

It is virtually impossible to choose between Forex and Binary Options trading, as traders have varying levels of requirements and risk-thresholds. Both products have their advantages and drawbacks, as the risks in the market are relative to a trader’s strengths and weaknesses. A highly profitable binary options trader may struggle in the Forex market, and the vice versa may be true in the case of Forex traders. There are also cases where traders successfully invest in both markets for the maximum returns, while some traders may find it hard even to generate break-even returns.

With patience, education, experience, and the right trading partner, traders can make consistent gains from both binary options and Forex trading. Regardless of your trading strategies, make sure that you team up with a reliable broker, for both binary options and Forex trading, as the choice of a broker can enhance your chances for success in the financial market.