Perhaps one of the most common dilemmas traders have is whether they should be trading binary options or forex. After all, in some ways, both binary options and forex trading look similar.
Binary options allow traders to profit on the currency pair direction with a fixed payout and limited risk.
Both these markets deal with currency pairs and some contracts for differences (CFDs), such as gold, silver and crude oil. Also common to both is the fact that speculators, who make up a majority of the retail trading group, want to profit from the volatility in the markets.
With two similar looking markets, it is not surprising traders often ask themselves whether it is better to trade forex or binary options. In this article, we attempt to lay out the differences between the two, so you can make a choice.
Binary options trading, as we know it, has only been around for a few years. The ability to speculate and to make a profit on which way the markets will move no doubt became one of the major attractions for traders.
Additionally, the fact one can trade binaries with just a small starting capital, and theoretically be able to turn that small investment into a profit, is one of the most talked about aspects of binary trading.
Some called it the revolution in retail trading, but the truth is binary options simply evolved from the futures and options market, which was widely the purview of seasoned professionals.
The options market allowed traders to speculate, especially on shares and indices, without having to risk more than what they had invested. This is what forms the basis of binary options trading.
Advantages of trading binary options
There are certain distinctive advantages that binary trading has over other types of trading, such as forex or even stocks.
For example, the biggest factor that stands true to the testament of binary options trading is that it offers limited risk. This means that traders will not lose a cent more than the money they invested in the contract.
Secondly, with binary trading, you don’t really have to worry the price of an asset in a day or a week from now. This is essential to other types of trading as price plays a big role in determining how much money you make.
With High/Low trading, the trader only needs to be concerned with whether price will rise or fall over the period of his contract’s expiry time. This suddenly makes trading a lot easier, and you can see why.
The broker pays you a fixed return, up to 100%, for every successful trade. You don’t need 100 pips to make profit, just one pip in the right direction is enough.
Disadvantages of trading binary options
There are always two sides to every coin, and so it is with binaries trading as well. Despite the relative ease of this trading instrument and the apparent reasons why it has become such a big hit among traders at all levels, there are some inherent shortcomings with binary options.
For one, there is not much control on your contract once you make that trade. In forex or other conventional forms of financial trading, you can manage your risk once your trade is on. This can be done by hedging or using market correlation or other such techniques, which when applied correctly can actually minimize your risk.
With binary options, this is not the case because the moment you enter the trade, you can either expect your contract to close in the money, which will pay you the full profit, or close out of the money, which will give you a loss. However, it is worth mentioning you can sell back the contract to the broker before the original expiry to minimize your loss.
Forex trading has evolved into a fascinating world today that dwarfs almost all other markets. Being unregulated and traded over the counter, the forex industry quickly blossomed into a trillion-dollar industry in terms of average daily turnover, a fact you might have come across many times!
With forex, traders with just a small amount of capital can quickly build a bankroll, provided they are experienced and know how to trade. It is this aspect that draws many people to trade forex. However, most traders expect forex trading will be easy only to discover the hard way that markets can be a tough and unforgiving.
However, many traders, despite failures, continue to keep going at it. There are quite a few success stories as well, with the name George Soros instantly coming to mind. Soros was the man who famously broke the Bank of England, which made him a household name in trading circles almost overnight.
So, no wonder then that almost every new trader who wants to, or wanted to, trade forex has at some point dreamed that his or her trading will make him or her rich, if not as rich as Mr. Soros.
Advantages of trading forex
One of the clear advantages of trading forex is that you do not need to have a huge capital to begin trading. This instantly reduces the entry requirements for trading forex and makes it more affordable for traders worldwide.
The fact that one can use leverage has led many traders to switch from trading stocks to forex as it is a lot easier to trade with a 1:100 leverage than a 1:10 leverage. However, leverage does have its own downside as well and is one of the reasons why traders end up blowing their accounts.
With forex, one can trade a wide number of currency pairs, making it easy for traders to pick and choose, and forex perhaps is only limited by the number of currency pairs your broker offers you.
Disadvantages of trading forex
As mentioned, leverage is both good and bad. Usually, it is bad when used without knowing how it works, and this is sadly the case with forex traders.
When one begins to recklessly trade with high leverage, the losses can also significantly increase, leaving forex traders vulnerable to losing more than their invested capital.
With forex, you must also be cautious in your strategy as your profits depend on your analysis as it is the price that matters more than direction.
How to start in trading
Having understood the pros and cons of binary options and forex, it is up to the trader to decide what he or she wants to start trading with. The decision to choose one over the other needs to be carefully thought out, but know that there is no right answer.
You can make and lose money trading binary options or forex, and these risks are real.
However, once you have decided whether you want to trade forex or binary options, the best place to get started is by using price action and fundamentals strategies. This will ensure that beginners to trading have their foundations set firmly, and after all, all the indicators you see are based off price alone.
So, why not take time to understand how price action and fundamentals-based strategies work?
To conclude, binary options and forex are two ways one can trade in the financial markets. The money-making scope is real, but the road to success is one that requires a lot of patience and perseverance.
Just as you would dedicate time and effort to pursuing something you love, trading also requires a lot of dedication and practice to succeed.
Remember your choice (binary or forex) is not what determines your success, but rather whether you have spent enough time in learning how to trade.