When new traders are first starting to figure out what they want to invest in, they are usually indecisive about which trading route they should take. The choice typically comes down to Binary options and Forex since they are the most accessible form of trading for someone who doesn’t want to invest a huge amount of money to get started.
There are quite a few differences between forex trading and binary options, as there are similarities, so it’s not surprising that beginner traders feel confused by the choice. We will go over these characteristics to give you a better idea on what they have in common and how they differ. Our rundown will hopefully help you figure out which market may be better suited for you.
Similarities Between Forex and Binary Options
- With both types, you are trading online and whenever the market is open. This typically means that for both types, trading takes place during the week and around the clock
- To begin trading there is no need to invest large sums of money
- Both types of trading require a prediction on asset movement – regardless of the asset type
- Both binary options and forex are tradable within short time frames. Forex also allows for long term positions
Differences Between Forex and Binary Options
Surprisingly, there are quite a bit more differences between Forex and Binary Options than one might imagine. Let’s see what are they:
Fixed vs Flexible Outcome
When you trade with binary options you are immediately aware of the two possible outcomes of the trade. This means that both risk and profit are fixed. Depending on the specific broker’s returns and your investment, you are never in doubt about how much you stand to gain or lose.
Forex is a bit different, meaning there are a lot more variables in play. Depending on your trading strategy this might be both good and bad. The risk factor can be controlled by a stop loss feature, however, market conditions may make the trade not able to be executed. This may result in losses bigger than anticipated. If you decide not to use a stop loss function, then the trade risk is basically unknown.
Variability is a big differing factor between the two types. With binary options trading, you are well aware of your profit and risk before it expires. However, with forex trading, your potential risk and profit are not known until the trade is closed. Depending on what kind of a trader you are, this can be a great thing seeing that fixed profit and loss leaves very little room for flexibility when it comes to risk and reward ratio.
Reward – Loss Ratio
Like we mentioned, with forex you are able to customize your potential reward in relation to your risk. Placing a trade with a stop loss function can leave you expecting a $100 loss but at the same time, you stand to possibly gain $300.
With binary options, you are typically seeing reward being less than your risk. If you lose the trade, you normally lose your complete trade investment. If you win, on the other hand, you returns are usually 60% to 80%.
When it comes to percentages, with binary options you would need a winning percentage of about 55% or higher to break even or make a profit. With forex, you are able to make a profit even if you lose more trades than you win.
The flexibility of forex trading is certainly appealing, however, there are a lot of traders of all profiles that prefer the simplicity and transparency of binary options trading.
Price Movement Range
The range of price movement is another thing where binary options enthusiasts are in a possibly better position than forex traders. When the price of an underlying asset is making only small movements, binary options traders can still get their 60% to 80% payout, while forex traders need higher volatility rates to be able to make a satisfactory profit.
With forex, you have to be able to predict not just the price direction but also the magnitude of the movement.
When trading binary options you do not need to think about the magnitude of the price movement whatsoever. You get your fixed profit regardless, as long as you correctly predict the price direction within a predetermined time frame.
Time Frame Ranges
When it comes to time frames, that is another significant difference between the two types of trading. With binary options you are working with time frames that are already predetermined for you, your only job is to select the one you want. With forex, on the other hand, time frames range from 1 second to months. You can open and close the trade whenever you wish.
Those traders that like the sense of transparency and simplicity of knowing fixed risks and rewards along with predetermined time frames will wholeheartedly choose binary options. Others may prefer the flexibility of forex trading because they feel they are able to succeed more in a more adaptable trading environment.
Which Trading Method Suits You The Best? Try Out a Demo Account!
Obviously, this is just a short summary we provided for you in order to help you decide which trading type you might prefer, not a conclusive list of all possible similarities and differences.
As you are probably able to tell, both markets provide a fertile ground for maximizing profit potential. The only thing you need to decide is where you would feel more comfortable, taking into account your existing trading style, if you have one.
If you are a complete beginner and you are simply unable to deduce where you stand to possibly profit the most, make sure you educate yourself on binary options and forex trading. That way you know you will make the best possible decision for yourself and your trading future.
Like we noted previously, both forex and binary options have their advantages and disadvantages, depending on which characteristics are important to you and which will make you make better trading choices. We would strongly suggest you open a demo account with both a forex broker and binary options broker in order to decide which one is for you, without actually spending real funds while experimenting. Demo accounts are an amazing way of practicing and developing strategies while trading in a risk-free environment.