Most new traders don’t know the difference between binary options trading and forex trading. In fact, most novices think that they are one and the same thing. However, that is not the case. Although both binary options and forex trading have some key similarities including the ability to access both trading platforms online and ability to trade 24 hours, 5 days a week, these two forms of trading have a major difference that set them apart.
In this article, we are going to dwell deeper on major differences between binary options trading and forex trading to help you make a wise decision when choosing which platform to trade on.
One major difference between binary options trading and forex trading lies on the level of risk involved. In binary options trading, you either win or lose. This means that if your prediction is right, then you are going to get your money back plus the profit. For instance, if you place a trade of $10 with a payout of 80%, if you win then you are going earn $18.
On the flip side if you lose your trade, then you are going to get nothing meaning that you are going to lose even your initial investment. Forex, on the other hand, is a bit different. The risk involved is more variable. A stop loss can be used to control the level of risk involved. A profit target can also be used to boost the trader’s profit margin. This can work for or against the trader. It all depends on the move that the trader makes.
Ability to control risk
In binary options trading, you will always get to know the amount you are going to gain or lose upon trade expiration. For instance, if you place a trade of $10 with a payout of 80%, then you will know from the onset that you are going to earn a total of $18 if you win your trade. In fact, some binary options traders allow their traders to cut their loss by folding their trades before expiration.
However, that is not the case with forex trading. Unlike binary option where you can easily know the amount that you are going to get when you place your trades, it is very difficult to know that amount that you are going to earn in forex trading. Even if you have set a stop loss order, you cannot be 100% sure that you will only lose the exact amount that you had risked.
There are many factors that make it very hard to predict the amount that you will lose in forex trading. Some of these factors include a lack of liquidity to implement a stop order at the preferred price and slippage. The brokers trading platform can also go down thus preventing you from executing the stop order.
The difference in the price movement
In binary options trading, the amount of profits that you are set to get when placing your trade will not change regardless of how the market is performing. This means that if you have placed a trade of $10 with a payout of 60%, then you will get a total of $16 regardless of how the asset that you have invested in will perform on the market. In other words, binary options have price certainty.
On the other hand, forex trading is heavily affected by market volatility. This means that if the market is not in your favor, then your profit margin will also reduce. As such, forex trader not only has to worry about which direction the market will move but will also have to worry if the market will go for or against them. With binary options, the magnitude of price movement does not really matter.
This means that if you buy USD/EUR call option hoping that the price that will go up in the next 10 minutes, it does not really matter if the price goes up by 3 or 100, you will still get the payout that you had agreed on. Binary options trading exposes you to a known risk.
The difference in the trading time frame
With binary options, you have no option but to trade within the time frame that has been provided to you. On the other hand, forex trading allows you to trade at any time and for as long as you want. This means that you can choose trades that last for 10 minutes or ones that last for many months. Forex trading gives you the freedom to close or open trades as you wish.
The difference in transaction costs
In binary options, there are no hidden or additional costs. All costs that you will incur are factored in before you place your trades. Forex trading, on the other hand, has many costs that come in the form of commission, spreads and in some instance both.
The difference in trade choice
Binary options allow traders to invest in many assets such as stocks, commodities, stock indices among many others. However, that is not the case with forex trading. Just as its name suggests, forex trading limits you to just currency trading.
Margin of error
Binary options trading involves a very small margin of error. This is because it only involves two actions including close and open. There are no orders that you need to keep track of. As a result, it is nearly impossible to make errors.
On the other hand, forex trading involves errors. A trader can easily forget to make necessary adjustments to the order or even create a loss that is far much bigger than what he/she wanted.
In conclusion, the is no doubt that both binary fusion and forex trading have huge potential. Binary options are highly recommended for traders who are looking for a simple and straightforward form of trading. When you choose binary options trading, then you will know the risk involved, how long the trade will last and how much you will get if you win your trade.
On the other hand, forex trading is a bit complex because there are many things that you need to consider including when to get in and out and strategies to use to manage your trades. We advise traders to try out demo accounts of both binary option and forex trading then determine which one suits them most.