The Difference between Binary Options and Forex Trading

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Binary Options vs. Forex Trading: Understanding the Difference

Forex trading and binary trading are quite different and it is important to understand these differences in order to become

The article was written by Connor Harrison from Binary Brokers (BBZ). BBZ makes an effort to educate their traders so that they can understand recommendations regarding binary options, international legislation, risk management and other issues related to trading.

Binary options are option contracts with fixed risks and fixed rewards. In binary options trading, the trader must decide whether an underlying asset, such as a stock, a commodity, or a currency, will go up or down during a fixed period of time. Traders are shown up front the value of their earnings if their predictions are right.

Roulette

Binary trading works in much the same way as a roulette: if your prediction is wrong, you lose all the money you risked, but if your prediction is right, you receive your money back plus a return. A common set-up is for the trader to make 80% of what they bet on any trade that they get right. For instance, if a trader puts in $10 dollars betting on the value of the USD/EURO going up, and the guess is correct, he would receive $8 dollars plus his initial investment. If the value of the same currency drops, however, the trader loses 100% of the money that they put in.

Connor Harrison, BBZ

To make money in binary options in the long run, you must win the majority of the bets. Since forex trading allows users to set their own profit targets vs. stop loss orders, traders can still make a profit even if they do not win the majority of their trades.

There are of course some similarities between binary trading and forex trading. Both financial trading markets are tradable online, and they both allow users to start trading with small amounts of capital.

In both types of markets, users are speculating on which direction an asset moves in. In the case of guessing correctly, both trading options provide strong profit potential.

However, there are some differences between binary options and forex. In a binary market, traders only guess whether an asset, such as a foreign currency, will go up or down in value over a fixed period of time. In this sense, there is no variability in the risk or in the profit potential. The binary market is named after the binary system, in which the only two input options are 1 or 0. Similarly, in binary trading, the only two options are up and down.

Higher variability, more risk

Forex markets offer higher variability and more risk for traders. In forex markets, sometimes known as FX markets or currency markets, traders must decide not only in which direction as asset will go, but must also predict how high or low that asset goes. Thus, the ultimate risk and profit is unknown.

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In forex, there are no limits to how much money a trader can make or lose, unless they use certain tools to control trading. One tool is a stop loss, which prevents traders from losing more than a certain amount. In other words, once the trader has lost a certain amount, the trade automatically closes. Similarly, the potential reward may also be fixed beforehand. The trader can decide that he wants the trade to close once it has reached a certain profit value.

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The maximum loss in forex would be all the money on your trading account. In forex, both losses and profits can be managed with limit/stop orders.

Timelines

Binary trades operate on specific timelines. The trader has no control over when a trade begins or ends once a trade has started. Before a binary options trade begins, users must select when the order expires. Each option has a start time and an end time.

At the expiry time, the trade automatically closes. Some brokers allow you to close early but you will exit your option at a percentage of the expected return. Not all brokers offer this option.

Similarly, some brokers allow traders to delay the expiry time to the next expiry time. This is called “rollover” and is only possible if traders increase their investment by a certain percentage.

In forex trading, users can take trades lasting from one second to many months, since they can open and close the trade whenever they feel like it. This flexibility has both advantages and disadvantages.

Margins

Forex also has a tool called margins. Each broker determines the maximum margin. Margins allow traders to increase their investment capital so that they can make a larger profit if the trade is a winning one. Margin is not a tool available for binary options.

There are five types of binary options you can trade. These are high/low, 60 seconds options, touch/no touch options, boundary options, and option builder. There are many different types of orders in forex. Buy/sell are the most important type. However, there are more advanced types such as limit, stop, OCTO (one cancels the other), trailing stop, and hedge orders, among others.

Forex trading and binary trading are quite different and it is important to understand these differences in order to become a successful trader.

Binary Options Vs. Forex

Binary options trading has long existed over-the-counter, only experiencing a massive growth spurt in the last few years.

Now, approximately 90 companies (including those who white label their products) offer some sort of binary options trading service.

So okay, it’s a growing industry… But why should you involve yourself in it?

There are many advantages and disadvantages to both binary options and spot forex.

Max Risk

One of the great things about binary options trading is that you always know the exact maximum gain or loss in advance.

The trader controls the premium at risk to enter the binary option trade, and that is the only amount that can absolutely be lost.

Most binary option brokers even allow you to cut your max loss by “folding” your trades ahead of expiration after certain types of trade conditions have been met.

In contrast, with spot forex, even with a stop loss order set, you cannot be 100% certain that you will lose only the pre-calculated amount that you risked.

While improbable, there’s always the chance that certain issues may affect your final max risk like slippage, lack of liquidity to execute a stop order at the desired price, a broker’s trading platform goes down, etc.

Trade Management Flexibility and Maximizing Reward

Aside from High/Low options, many of the binary option plays are only available at certain times of the day or week, and most times the strike prices are set by the broker.

With spot forex, you are able to enter limit orders for any price or execute a market order at any time during open market hours.

In terms of exiting open trades, some binary options brokers allow you to close options trades early, but usually only after a predetermined amount of time has pass after the option trade has opened and before it closes.

And as mentioned before, the value that is returned to the trader is based on whether the market is in-the-money or out-of-the-money and of course, with a piece going to the broker.

In spot forex, you can close your trade at any time (except on weekends with most brokers). Even if it’s one second into the trade, you can get out and book profits or reduce losses.

Finally, if you think there’s going to be a long trend and you want to maximize your profit on it by holding it as long as possible, you can do so in the spot market using scaling in and trailing stop techniques.

With a binary option, the expiration date and cap on profits limits you; you’re out of the trade as soon as you close or the option expires.

Depending on your risk and trade management preferences, either trading instrument can be good or bad depending on how much time you want to spend in front of your trading platform, how active you want to be, or what you expect the market may do.

Transaction Costs

In binary options trading, there are no additional transaction costs other than what is normally factored into the final payout.

In spot forex, the transaction cost comes in the form of a spread, a commission, or both. We’ve already discussed this in a previous chapter, but feel free to revisit the lesson and read up on it again.

Trade Choices

Another great thing about binary options trading is that you aren’t limited to just currency pairs like with most retail forex brokers.

While currency pairs are the most common assets you can trade, with some binary options brokers, you may also have the opportunity to trade your ideas on a limited number of individual stocks, stock indices, and even commodities.

Volatility Risk

Surprise volatility is not usually an issue in binary options trading. Any trade you take can weather the volatility caused by certain events.

The max risk is still set, but so is the max reward.

In spot forex, however, sharp swings can affect the value of a position greatly and very quickly, which makes the additional task of setting up proper risk management processes very important.

Trader Error

The margin for error when entering a trade is very small in binary options trading.

This is due to the fact there are only two actions to take with binary options: open and close.

There are no limit orders to keep track of, or to close or adjust. In spot forex, an inattentive trader may forget to place exit and/or adjustment orders, potentially creating a loss greater than he/she intends.

Binary Options vs. Forex

8th November 2020

Binary options trading has experienced significant growth over the past few years, but its popularity does not mean that it is the right investment for everyone. While binary and Forex trading could offer noteworthy profit potential, they are quite different and may not serve the same needs. Find out which one is best suited to you.

Binary Options

When trading binary options, you invest in whether an asset such as a commodity, a stock or a currency, will increase or decrease in value during a fixed time-period. The trader is shown the value of their earnings up front. In other words, you know exactly how much profit you will make on your investment should your prediction be correct, when making your trade.

If your prediction is wrong however, you lose 100 percent of your initial investment. There is no variability in this form of trading since you can only decide whether an asset’s value will go up or down, but not by how much.

  • Profit/losses are established up front
  • The expiry time for a trade is selected up front
  • A diverse range of binary options across many industries are available for trade
  • Binary options can only be traded during normal trading hours
  • No potential for leverage

Forex

Forex trading is the global platform where currency is exchanged. It is the world’s largest marketplace by far, with more than USD 5 trillion being traded daily. Trading takes place in pairs and a trader compares the value differentials between two currencies, such as the US Dollar and the Euro. Forex trading has high variability. On top of deciding in which the direction a currency will move, traders must also predict how high or low it will go.

  • No limits on profits/losses (although limits/stop loss orders can be enacted)
  • There is no set expiry time for Forex trades
  • Forex is less diverse than trading binary options
  • Forex trades can be made 24/5
  • The potential for high degrees of leverage exists

Key comparisons

The Forex market is open 24 hours per day, 5 days per week. Contrary to other markets, the accessibility of Forex offers the clever trader an opportunity to react quickly to news and world events. Although weekend trading is not favoured by most traders, it remains open with limited functionality.

Binary options are traded when the underlying asset’s marketplace is open. Generally, this means that it operates during standard trading hours. Trades can, however, be made on currency pairs. In that case, trades can be made 24/5.

Both opportunities can be accessed on online trading platforms.

Access to the Market

The Forex market is open 24 hours per day, 5 days per week. Contrary to other markets, the accessibility of Forex offers the clever trader an opportunity to react quickly to news and world events. Although weekend trading is not favoured by most traders, it remains open with limited functionality.

Binary options are traded when the underlying asset’s marketplace is open. Generally, this means that it operates during standard trading hours. Trades can, however, be made on currency pairs. In that case, trades can be made 24/5.

Both opportunities can be accessed on online trading platforms.

Trade duration

Before entering a binary options trade, you will select its expiry time which can range from one minute to one hour. There are some brokers who allow traders to exit the trade earlier at a lower return than agreed. It is also possible to extend a binary option trade in order to achieve higher returns. It is important to note though, that these options are not offered by all brokers.

In the Forex marketplace you are in control of your trade and can exit at any time you choose. With that said, open trades cannot be exited on weekends when the market is closed.

Diversity

Binary options trading offers a wide range of markets, including stocks, commodities and currencies, whilst the Forex market offers a much smaller choice of trades. Although Forex trading mainly takes place in the four major currency pairs, there are many more pairs available.

Risk and reward

Trading in binary options is appealing because you already know the maximum profit or loss before entering any trade. Traders can simply enter the trade and wait for its expiry time, knowing that a loss is capped at their initial investment. The potential gains are usually lower than successful Forex trades, however. Profits from trading binary options range between 65 and 80 percent of the initial investment, whilst potential gains of 200 percent or higher are common amongst experienced Forex traders.

The Forex market offers more variability and higher risk. Besides simply deciding in which direction a currency will move, traders must also predict how high or low it will go. The risk of a trade is therefore unknown. To manage their risk, traders enact a stop loss order, which prevents them from losing more than a certain amount or percentage of their initial investment.

Volatility

Volatility does not affect binary options. As long as your prediction when making the trade is correct when the option reaches its expiry time, your investment will not be hurt by surprise volatility.

Forex is significantly affected by surprise volatility, often caused by news events. It is, therefore, crucial to set up proper risk management procedures when trading in Forex.

Leverage

Using leverage can significantly increase the profit potential of a trade, although it is important to approach leverage responsibly in order to minimise losses. Leverage ranges from 50 to 500 times the initial investment in Forex trading. This means that Forex investors have the ability to make significantly greater profits in a short amount of time with less upfront investment – although profits can never be guaranteed and remain affected by market movement and decisions of traders.

In comparison, binary options trading offers no leverage whatsoever.

The verdict

The opportunity best suited to you is entirely dependent upon your investment goals and your appetite for risk. Because trading in binary options offers fixed risks and fixed rewards, it is well suited to the risk-averse trader. Forex may at times provide higher returns, but is more complex and is undertaken with more risk than binary options.

With a lot of practice and a little luck, Forex trading can be lucrative and exciting. While countless investors have enjoyed great success, it is important to note that profits can never be guaranteed.

Contact the experts at One Financial Markets today to take your first guided steps in learning the marketplace.

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Differences Between Forex & Options Trading

You will learn about the following concepts

  • Risk Factor
  • Easiness
  • Profitability Factor
  • Accessibility

Traders will always argue which type of trading is better – trading Forex or binary options. Every person, engaged in trading either way, knows that they both have certain advantages and disadvantages. If you have not taken a closer look at the specifics of Forex trading and binary options trading, then you are probably not aware of the major differences between these two types of trading. Let us point out several differences.

Risk Factor

Both Forex and binary options trading involve risk. However, if we take a closer look at both types of trading, we may draw the conclusion that binary options trading is a bit less risky due to the fact, that you know how much you are going to earn or lose before you place the trade. This is a huge advantage over Forex trading. This way you have better control over your money.

Best Forex Brokers for United States

Another considerable advantage of trading binary options over Forex is that you will not be that dependent on leverage. Every Forex trader knows that he/she must take advantage of the leverage offered by his/her broker, in order to be able to trade with decent amounts of the asset/s he/she has chosen. Although leveraged trades will bring you a larger profit, they will also multiply your losses in case your trade goes awry. As a result, there is a greater possibility for novice traders to lose their money quicker, while operating in the Forex market.

Trading binary options has another advantage – you have the opportunity to refund a portion of your trades, if you feel that your projections will not turn out to be accurate. However, this option is not offered by all brokers.

Easiness

Participating in the binary options market is fairly simple, as trading operations lack the complexity of operations in the Forex market. You may need to set several parameters of the trade, but in most cases you will be able to place a trade in just 3-4 simple steps. On the other hand, placing a trade in the Forex market involves setting additional parameters of the trade in order to limit your losses, manage risk levels, etc. The reason why trading binary options is quite easy is that the trader can only choose between two types of orders – Call or Put. In the meantime, Forex traders are faced with a more difficult choice.

Profitability Factor

In binary trading the amount of money you make will depend on your investment, knowledge, experience and last but not least – on the profit percentages offered by your broker.

In most cases the profit percentage your broker offers will vary between 60%-80%. The percentage entirely depends on the type of options you are trading, because the payout for certain types of options can be up to 300-400%. The fixed payout percentage gives you accurate information on how much money you will make from the trade. This way, as a binary option trader, you can control your money better and quickly calculate how much money you are going to earn, and how much you feel comfortable to lose.

Binary traders are quite active in the market – they often make over 10 deals per day. If you are one of the traders who deal with 60-second binaries, then it is very likely that you will make over 40 trades on a daily basis. In the meantime, Forex traders have to be more careful, while placing trades and, in many cases, they end up placing just 3-4 trades in a single day.

Accessibility

Binary options have quickly gained popularity among retail traders, because they do not require huge investments and are a great way of generating a decent amount of passive income. On the other hand, Forex traders need to invest larger amounts of money, especially if the leverage offered by their broker is lower. Do not forget that leverage is a great way to multiply your profits, but it is also the quickest way to lose all the money you deposited. One should not be tempted by the prospect of making large amounts of money in no time.

Conclusion

Both ways of trading have their pros and cons, so it is up to every trader to determine which one suits best their preferences. Each one of these markets is meant for different types of traders. On one hand, Forex is a dominant market segment at the moment, while trading it is the full-time occupation of millions of people worldwide. On the other hand, binary options are a relatively new trend among Internet users and at the moment there are not so many people, who make a living by trading binaries. But, why not turn binary options trading into a full-time engagement?

The difference between forex trading and binary options

Let’s explore the differences between binary options and forex trading. The way that binary options work is much easier to understand, accordingly they are better suited to traders who prefer a “light” approach to trading. But don’t make the mistake of considering binary options as a financial product for beginners. It is important to approach any type of trading in a serious manner.

Here are a few things to consider to decide whether binary options are right for you.

Psychological weaknesses. Many psychological factors are eliminated with binary options. For example, the impulsiveness and greed that cause traders to stray away from their initial trading plan. Unlike forex trading, you cannot modify a binary option trade once it is initiated. This prevents many trading errors linked to emotions.

Losing more than your investment on a single trade. A binary option has a risk and a fixed return which are known in advance. There is no leverage (a sort of credit offered by the broker), there is no margin. You cannot lose more than the amount invested on the single trade. With forex trading, you can lose more than your investment (your margin) with a single position and the loss is amplified by the leverage a broker provides you with. Options are therefore more appropriate for traders who lack the rigour needed to manage risk and exit trades. Nevertheless, the risk of losing all your money is identical with both the forex and options!

Price movements. With binary options you only speculate on the rise or fall of an asset within a specific period of time. This means that even a difference of 0.1 pip can decide the outcome, unlike forex trading where you have to anticipate a greater price change for an equivalent result. Depending on your strategy and market conditions, this can either be an advantage or a disadvantage.

Time constraints. The expiration of an option after a certain time can complicate the task. A forex trader has the advantage of being able to keep a position open as long as he wants, but on the downside, he must exercise caution in order to close the position with a profit or loss at the right time. Again, options are more suitable for traders who lack discipline or are heavily influenced by their emotions because they don’t have to make any decisions once the trade is validated. A disciplined trader who follows strict risk management rules will obtain better results with forex trading.

Choosing the best binary options broker

This is not part of the trading process, but it is an important step, because the world of binary options is plagued by dishonest brokers who use very aggressive and deceptive marketing techniques in order to lure naive customers. We suggest that you select a regulated and established broker that also provides services for forex traders (such as ETX Capital) for the following reasons:

1. Prices: You need to know where the prices that are displayed come from in order to be able to compare them, this will give you a distinct advantage in terms of price conflicts (which should be rare with a forex broker that is genuinely regulated).

2. Regulation and reputation: an established forex broker that has a good reputation provides more peace of mind and security for your money than an established binary options broker because regulation of forex brokers is stricter. Binary options are still far from being truly regulated trading instruments. Binary options brokers have a long ways to go to clean up the industry’s bad reputation, largely caused by unscrupulous participants.

This doesn’t mean that you shouldn’t open an account with a broker specialised in binary options, but if you choose this solution you will need to perform a lot more due diligence to assess the broker’s seriousness.

3. Demo accounts: this is extremely important. It is still rare to find brokers specialised in binary options that offer demo accounts. Yet it is essential that you start out with a demo account. This is an important item to consider before choosing a broker.

4. Risk Warning: if a broker’s website doesn’t display any sort of risk warning, stay away from it! If they offer a huge bonus and say that it is easy to double your account in a very short time and without experience, stay away! If a binary broker calls you even though you haven’t asked for anything, hang up immediately because it is likely to be a scam. Salespeople who spend their time on the phone are professional liars and manipulators.

Comparing risk: forex trading vs. binary option trading

Both of these instruments cannot be fairly compared in terms of their risks, because they work differently and produce different results. The most common criticism against binary options is that you will lose your initial deposit faster than if you were trading the forex. This is false, you can also lose your money very quickly trading the forex. Both of these trading instruments are extremely risky for investors!

The biggest problem regarding binary options’ negative reputation is the lack of information that traders are provided with. Options traders have a very limited choice of demo accounts to develop their skills and binary brokers offer little to no educational materials. This is in contrast with forex trading because you can easily find books on strategies and many forex brokers invest resources to educate traders on the fundamentals.

However, forex trading offers greater flexibility in managing risk, because an option’s expiration time reduces the amount of possibilities you have to react and adapt the strategy to market conditions. With this in mind, risk in forex trading is lower for disciplined traders who understand leverage and management of positions with rules that leave no room for improvisation.

The brokers’ business model

Forex trading is advantageous in terms of the brokers’ business model, because you can open an account with an STP broker (direct market access, the broker is just an intermediary) that has no conflict of interest with its clients.

The binary options industry is still young. There are no liquidity providers or clearinghouses (except in the US where there are two regulated exchanges, the Nadex and the Cantor Exchange), brokers therefore offset trades internally with a “B-Book”. This practice also exists with some “market maker” forex brokers, and depends on customers’ profiles, trades are not always sent directly to the market, the brokers can choose to take positions that offset yours. This doesn’t necessarily mean that they are dishonest, there is nothing wrong as long as they don’t manipulate prices and traders who profit are easily able to withdraw their money.

Nevertheless, it’s not a secret, brokers who practice “B-Booking” have a conflict of interest with their clients. When clients lose, binary brokers make money and vice versa. Brokers can afford to do this as the statistics are on their side: most traders lose money.

Conclusion

Trading in all its forms requires great discipline. You need to develop and test a trading strategy and develop risk management rules. The risk associated with forex and binary trading is the same – you should only invest money that you can afford to lose.

Regulation of forex brokers offers better protection of your funds, unlike many offshore binary brokers that offer no guarantee on your deposits. STP forex brokers have no conflict of interest with their clients, as opposed to binary brokers who all use a B-Book to “bet” against their clients.

Both trading instruments offer a risk/reward ratio, but binary options allow you to know the potential risks and profits in advance. Binary options eliminate some of the psychological weaknesses that affect traders, but their simplicity prevents traders from using more sophisticated strategies or optimising their investments in real time.

In conclusion, contrary to popular belief, the ease of use of binary options doesn’t mean that this type of trading is for beginners, but rather for traders who – despite their previous experiences – are not able to control their emotions when managing their positions. Professional traders do not use binary options because they offer less freedom to develop multiple strategies that are more adapted to the rapidly changing conditions of the forex and stock markets.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    1st Place! Best Binary Broker 2020!
    Best Choice for Beginners — Free Education + Free Demo Acc!
    Sign-up and Get Big Bonus:

  • Binomo
    Binomo

    2nd place! Good choice!

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