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NO20 - Differences between Binary Options Vs. Forex

"So far we have introduced you to the concept of options trading and we delved deeper into the world of binary options. By now you have an understanding of what are binary options and the different types of binary options that you can trade. But to take this a step further and to ensure that you get a full understanding of how binary options work, we will show you how binary options and forex trading are different from each other. By the end of this article, you will have gained complete knowledge about how binary options are different from forex trading including the subtle differences between these two financial products. Although both binary options and forex relate to the same market, the way they function are different in aspects such as leverage, risk and so on. Read this article to get a better understanding that will help you in the long term when trading forex."

Binary options as you already know by now, is a pure speculative bet on the direction of the currency pair within a specified period of time. In the previous sections we learned how binary options work and how they could be used to hedge the risks from the forex brokers.

We have already covered a lot of information on the forex or the currency markets. Now that we know what binary options are and what is forex trading all about, the question is how these two products differ from each other.

The best way to understand the difference between trading binary options and trading forex. Here are five main differences between binary options and forex.


1. Binary options are fixed risk bets, while forex isn’t

When you trade binary options, the risks are fixed. The amount that you invest in the binary options trade is the most that you can lose. With forex, the risk is basically what you set it to be. For example, if you trade forex with a stop loss all the time, then this would be a fixed risk bet too. However, when you do not trade with a stop loss, the risk can be quite big.

The main difference here is that with binary options, regardless of how you trade, the only amount you can lose is the amount that you have risked on the binary options bet.


2. Binary options gives fixed profits

Just as with fixed risks, the profits are also limited in binary options. What this means is that when you trade binary options, you already know what percentage of your risked amount can be turned into a reward.

For example, a binary options trade with a payout of 85% means that you can get only 85% of the amount that you risked. With forex, the rewards are open ended. Meaning that your reward per trade depends on where you put your target or take profit level.

Another main difference between binary options and forex is that, when you trade forex, there is a higher chance of you making more than the amount that you risked. With binary options on the other hand, you are only limited to the payout percentage.

Only with the exception of some exotic binary options contracts, in most cases, you cannot even expect a 100% return on your risked amount with binary options.


3. Forex trading is based on leverage, while binary options aren’t leveraged

When you trade forex, there is a good chance that you will be using leverage to control higher units of the contracts. The leverage can be as small at 1:5 or as high as 1:200. Regardless, in order to make a profit from trading forex, you will have to use leverage in order to make any meaningful gains.

With binary options, there is no need to leverage. This is because you are simply betting on the outcome of the direction of the security and the binary options broker simply pays you a return on the amount that you invested.


4. Position sizing is possible only with forex

When you trade forex and your trade is in your favor, there is a good chance that you can continue to build up on the trade by additional new positions. This is called position sizing in forex terminology.

With binary options you can of course open multiple contracts, but in the legal sense this does not fall under the category of position sizing.


5. With forex you will incur overnight fee

When you have a position that is left open overnight, you will be charged positive or negative swap fees or the overnight fees. This is due to the cost of funding of the currency pairs that you are trading. The overnight swap fees are on top of the commissions or spreads that you pay.

With binary options, even if you trade a long term contract such as weekly or a monthly expiry, there are no overnight fees charged to your account. The only cost that you will incur is the amount that you invested. If your contract expires in the money, you will get rewarded as per the payout percentage.

If your binary options contract expires worthless (out of the money), then you will lose your risked amount. Besides these, there are no additional costs involved.

The above five points are the main differences between forex and binary options. With this article, you should now be able to understand the differences between these two financial products.

Read 596 times Last modified on Sunday, 12 May 2019 08:14

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