Binary Options vs Forex

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Binary Options have become widely popular during the last two years. The main reasons for this, is that they offer high profit returns and they are easy to trade.

In this article I will try to outline the main differences between Binary Options and Forex, so that you can evaluate which is the better trading method for you. A good way to start is to provide definitions of both and look at an example of a trade.

Guest post by Peter Traychev of ActionBinary.com

After you read this article, please share your views with us! We encourage you to use the comment box at the bottom of this page.

Forex definition: When trading Forex you are speculating that the value of one currency will increase or decrease compared to another, in an attempt to make a profit. For example: The current price of EUR/USD is 1.30850 and you think the price will increase in the future. You buy 1 lot of EUR/USD and wait for the price to increase to the point where you want to close the trade and realize the profit you want.

Binary Options definition: When trading Binary Options you only have to predict if the price of an asset (for example currency pair or stock) will increase or decrease from its current price over a certain period of time. For example: The current price of EUR/USD is 1.30850 and you think the price will be higher in the next hour. So you place a “Call” option on EUR/USD and wait to see its price 1 hour from now. If your prediction is right you can make a profit of 80% of your investment.

Margin

Forex: You can use margin to trade Forex. The maximum margin is determined by each broker, and sometimes can be up to 1:200 or 1:500. Margin allows you to increase your investment capital so you can make a larger trade and make a larger profit if your trade is a winning one.

Binary Options: Margin is not used when trading Binary Options. You can still make a large return on your investment (up to 80% or sometimes 400%), so Binary Options are still very attractive for traders. The good news is that you can never get a margin call.

Payouts and Losses

Forex: With Forex you never know what is the maximum profit you can make on a trade. You can set a limit or stop order so that you can be guaranteed a certain percentage profit if the limit or stop is executed. The losses in Forex can be managed with limit/stop orders, the same way profits are managed. The maximum loss with Forex may be all of the money in your trading account.

Binary Options: Before you make your trade you will know exactly what is the payout and loss return percentage that you will get for the particular option, when it expires. Some brokers offer payouts up to 80% or sometimes 400% depending on the option traded. This means that if you invest $500 on an option and the payout is 80%, you will make $400 profit if the option is a winning one. Some brokers don’t offer “loss back”, which means that if your option trade is a losing one, you will lose the amount you invested in the trade, but not more.

Closing a position

Forex: You choose when to close the position. You can close your position anytime the market is open and the broker has to accept and execute the order.

Binary Options: Before you make your trade you have to select when you want the option to expire (example: 1 hour or 1 week from now) – at the “expiry time” your trade will close automatically. The broker offers you different types of options with predetermined expiry times. Some brokers allow you to close your trade early, but you will exit your option at a percentage of the expected return. The “early closure” option is not offered by all brokers, and might not be available during the whole time the trade is active. Another important point to mention is that some brokers allow traders to delay the expiry time, to the next expiry time. This is called “Rollover” and the traders will need to increase their investment by a certain percentage, sometimes 30% in order to be able to do this.

Orders Types

Forex: There are a variety of order types in Forex. The most important ones are the market (Buy/Sell) orders. Also there are more advanced orders such as: Limit, Stop, OCO (One Cancels the Other), Trailing Stop, Hedge orders, and others.

Binary Options: There are about five Binary Options types which you can trade. They include: High/Low (also referred to as: Call/Put or Up/Down), 60 Seconds Options, Touch/No Touch Options, Boundary Options, and Option Builder.

Trade size

Forex: Some brokers allow you to trade micro lots, which is 1,000 units of the base currency in a Forex trade. The maximum trading amount is determined by each broker, and can be up as high as 100 standard lots or $10,000,000.

Binary Options: Each Binary Options broker determines what is the minimum and maximum trading size for its clients. Sometimes the minimum trading amount can be as low as $5 per trade, and the maximum can be up to $1,000 or $5,000 or more.

Trading costs

Forex: When trading Forex you have to consider what are the spreads and rollover/swap, and if there are any commissions.

Binary Options: There are no spreads, rollover/swap or commissions when trading Binary Options.

Further reading: 5 Most Predictable Currency Pairs – Q1 2013

Get the 5 most predictable currency pairs

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19 Comments

  1. Curreny trading is great inspite the risk. That is how banks make profits .

  2. Loadedgun on

    Good very good and fits the theory (derivatives). But it is really a different ball game. I think it is also hard ball and you need to be fairly skilled in assessing direction and timing trades to succeed – the same thing that has many traders going belly up routinely in the Forex. But I like the sound of it. Also not sure if one can combine that trading the Forex.

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  5. Alguem utiliza algum corretor de opções binárias que possa recomendar?

  6. binary options on

    Thanks.. I really have the confusion about binary options and forex.. thanks for this article..

  7. Cash Back Binary Options on

    The thing is that the probability of win with binary options is always 50%:50% becasue you know the terms BEFORE you execute the deal. The only thing that changes is time – so you and the broker wait for the option to expire.

    With Forex, however, when you place the order there are many things that can change. Not only the time is passing but brokers can widen the spread, the execution on closing time might vary due to slippage, etc. So even, if your prediction is right the broker still can “play”.

    I don’t know if the same thing is true with binary opions. If anybody has noticed something please share.

  8. Got me into researching more of this kind of trading, there is really not as much regulation for these brokers as I would like and truth is, that it is not like the 50%-50% coin toss analogy, you are at disadvantage right from the start where you always get less reward than risk per trade, just my 2 cents.

  9. @Eric, there is regulation actually. Recently, Banc de Binary got its regulation from CySEC thus becoming the first Binary Options regulated broker in EU. This is a clear signal that regulation is coming to this market as well..

    Regarding the reward, I think you are right – 50:50% is not the actual probability because you have 80% for a winning trade and 5-10% for a losing one.. which is far from 50:50.

  10. @Peter, is right there is regulation for Binary Options but he is wrong about Banc De Binary being the first. SpotOption Ltd. was the first Binary Options provider to gain Cysec regulation, the majority of the webs binary platforms are powered by SpotOption and ones that are purely white labels are covered by SpotOption.

    If a Binary platform powered by SpotOption handles client money then they require Cysec regulation. Which allows them to operate throughout the European Union. It should also be noted that Cysec are the only MiFID regulatory body to consider Binary Options a financial instrument and it doesn’t appear like the other bodies are going to change their mind any time soon.

  11. @Ed, thanks for your comment. Actually, SPOTOption is platform provider and not retail broker. They work on White Label basis with brokers. In this sense, I would rather consider Banc De Binary is the first regulated binary options broker in terms of offering services to the end client. After all, regulations for professional and non-professional clients are different.

  12. andrew.edmondson on

    The Foreign Exchange (Forex) industry has been well known in the trading world for daily big turnover. Whereas, a binary option is the new form of trading which is simple in comparison to forex trade. Though both the markets have their pros and cons, however, due to the fixed risk and fixed returns options, binary trading grabs more attention.

  13. edmondson.andrew on

    The Foreign Exchange (Forex) industry has been well known in the trading world for daily big turnover. Whereas, a binary option is the new form of trading which is simple in comparison to forex trade. Though both the markets have their pros and cons, however, due to the fixed risk and fixed returns options, binary trading grabs more attention.

  14. Trading is a good thing. I lost a lot before I got to were I am today.

  15. Germaine Thomas on

    Are you are having issues accessing your investment with your broker ? Is your broker demanding for more funds before you can withdraw ? OR has your broker account been manipulated in any form ? You suspect shadiness from your broker and wish to get a full refund of all your investment ?

  16. Rita Rosa on

    Hello. I read the publication with great interest and attention, thank you. I have been working with Forex for several years. Forex brokers do bring a high income.