Binary Options vs Forex Trading

Binary options are option contracts with fixed risks (a fixed, predetermined loss if the option expires out of the money) and fixed gains (a fixed, predetermined profit if the option expires in the money). When trading binary options, a trader must decide whether an underlying asset, such as a stock, commodity, or currency, will rise or fall within a certain period of time. In this case, traders know in advance the size of their profit if their prediction turns out to be correct. Binary options trading works similarly to roulette: If the prediction turns out to be wrong, the trader loses all the money he is risking (option premium), while if the prediction turns out to be correct, he gets his money plus profit. As a rule of thumb, a trader will make a profit of 80% of the amount he risked on all binary options where his prediction turns out to be correct, although this figure can vary depending on the underlying asset, broker and other factors. For example, if a trader risks $10 on a binary option, betting that the value of the EUR/USD pair will rise, and his prediction turns out to be correct, he will receive $8 plus his initial investment. If the value of the currency pair falls, the trader will lose 100% of the money he risked on the trade.

Total Risk

Since the total risk exceeds the potential winnings on any binary options trade, to make money on binary options in the long run, a trader must win on most trades. Since Forex trading allows users to set their own profit targets against stop loss orders, traders can profit even if they don't win on most of their trades. Of course, there are some similarities between binary options trading and Forex trading. Both financial markets are accessible and traded online (from anywhere there is internet), and both allow traders to begin trading with small amounts of capital. In both types of markets, participants speculate on the direction in which an asset is moving. If a trader makes a correct prediction regarding the direction of the market, both speculation options offer great profit potential.

However, there are some differences between binary options and Forex. In the binary options market, traders only have to predict whether the value of an asset, such as a stock, will rise or fall within a certain period of time. In this sense, there is no variability in risk or profit potential. Binary options get their name from the binary system, in which there are only two entries - 1 or 0. Similarly, in binary options there are only two possibilities - up and down.

High volatility

Currency markets are characterized by high volatility and high risk for traders if they do not apply a sound money management plan. In currency markets, sometimes referred to as Forex markets, traders must not only decide which direction the price will go, but also predict how much the market will rise or fall. Thus, both the ultimate risk and reward are unknown unless the trader is disciplined and uses stop loss and take profit orders on all trades. In Forex, there is no limit to the amount of money a trader can make or lose unless he or she uses certain tools to control risk. One such tool is the stop loss, which is used to ensure that the trader does not lose more than a certain amount. In other words, once the trader loses a certain amount, the trade is automatically closed. Similarly, the potential reward can also be set in advance. The trader can decide that he wants to close the trade once he reaches a certain profit value. Thus, the maximum loss in Forex could be all the money in the trading account. However, this will happen if the trader is careless and fails to control the risk, which is the mistake that beginners usually make.

Trading time periods

Binary options trading is based on specific time and time periods. A trader cannot control when a trade will start or end once it begins. Before beginning a binary options trade, the trader must choose the expiration time of the contract. Each option has a beginning time and an ending time. When the option expires, the trade is automatically closed. Some brokers allow their clients to close the option before the expiration time, but in this case the deal will be closed with a percentage of the expected profit. Not all brokers offer this option. Similarly, some brokers allow traders to postpone the expiration of an option until the next expiration period. This option is known as "rollover" and is only available if the trader increases their investment by a certain percentage. In Forex trader trading, traders can make trades lasting from one second to many months, opening and closing trades whenever they want. This flexibility has its advantages and disadvantages.

Trading Margin

In Forex trading, there is a tool known as margin, which greatly increases a trader's ability to buy and invest. Each Forex broker determines the maximum margin amount. For example, a margin of 1% means that a trader has to invest only 1% of the total value of the trade. Thus, on a $10,000 trade, the margin requirement is only $100. Margin allows traders to increase their investment capital so that they can earn more profits from winning trades. Margin is not a tool available for binary options.

Order/Trade Types

Currently, there are five main types of binary options offered by most binary options brokers. These include High/Low binary options, 60-second options, Touch/No Touch binary options, Limit or Range binary options and Pairs binary options. Some platforms also have option constructors. There are many different types of orders for Forex trading. The most common and important are market buy/sell orders. However, there are also more complex types such as limit orders, stop orders, OCO orders (one cancels out the other), trailing stops, hedging orders and others. Forex trading and binary options trading are very different, and it is important to understand these differences in order to become a successful trader, whichever you choose.