Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.

Trading binary options vs. Forex

Author: Martin Moni
Martin Moni
All publications of the author

If you’re looking to kick off your trading career, then you might have already seen the various instruments offered by Forex companies. The most popular of these instruments are binary options and Forex trading, and the choice between the 2 will determine how profitable you will become as a trader.

We have already looked at the history of binary options and how they work, but just how does this trading system stack up to its more popular rival, the Forex market. Both of these trading systems are recognized by regulatory bodies, and are the most popular option for the retail trader. Before investing your money with a broker, how about we look at arguments from both angles before making the leap:

In favour of binary options

There are certain reasons that make binary options very lucrative, and why more investors are choosing to invest in this market. Some of these are:

Variety of financial instruments

The Forex market only allows traders to work with foreign currencies, and trade currency pairs like the GBP/USD, EUR/USD, etc. Binary options, though, are not limited to foreign currencies – you can still trade currencies, but also get access to stocks, commodities futures, and indexes. More is always better, because as the trader you get a variety of instruments to work with and maximize your profit by hedging all these instruments.

Specified returns

With binary options, you know exactly how much profit you are going to get from the trade. Every trade you make is merely a speculation on whether the value of the stock, commodity, index or currency pair will either be higher or lower than its value at the time of the trade. Since there are only 2 options, win or lose, you know exactly how much you are going to gain or lose at the time of trade.

The advantage to knowing this information beforehand is psychological. A Forex trader has to spend time staring at real-time Forex charts as the markets oscillates up and down, and close the trade only when they feel satisfied with the result. As for the binary options trader, the stress ends once the trade is placed, and they can move on to another trade or other businesses depending on their trading strategy.

Security of funds

Every Forex trader is wary of the moment they receive a margin call from their broker via email. When this happens, it requires that the trader deposits more funds into their trading account quickly to avoid losing their entire capital. This is a situation many Forex traders find themselves in during moments of financial turmoil like after major financial news announcements are made.

A binary options trader, however, doesn’t have to worry about margin calls because, as we have already seen above, the returns are specified and known. The trader knows right from the start that they are either going to lose their investment or gain the pay-out percentage specified by the broker. Some traders view this as a disadvantage, the idea that you can lose all your investment in a single trade, but it really isn’t.

Consider the period after the Brexit vote, or the time that came to be known as Black Thursday when the Swiss National Bank (SNB) de-pegged the franc from the Euro. These situations led to major losses for Forex traders, most of whom were stopped out. On the other hand, a binary options trader whose expiration date had not been reached would still be comfortable knowing that they were still in the game. Additionally, markets have a way of bouncing back from major market moves, so this provides added security to the traders’ funds.

Did I mention insurance cover for binary options trades? Well, you should know that insurance is also offered by some brokers for every trade, which helps you regain some of your capital, in case the trade is a loser. This takes away the risk of losing all your investment making your finances more secure.

Absence of financial costs

The broker already includes their profit into the pay-out percentage offered for each trade, which is why the pay-out is less than 100% and ranges from 67% to 81%. This crosses out any hidden charges which may be experienced in the Forex market in the form of spreads or commissions, and you get the exact profit you expected.

In favour of Forex trading

Just because binary options are so lucrative doesn’t rule out the Forex market as a lucrative financial investment. After all, why would there be so much volume being traded every day is it wasn’t a great alternative? Here are some of the reasons Forex trading is still so active and popular:

No need for huge initial capital

While binary options require a substantial initial deposit, you can get into the Forex market with as little as $100 or even less. However, this is not recommended because you become more prone to margin calls, but it’s a great start for someone looking to get a taste of Forex trading.

There are many Forex brokers in the world, and this has bred tough competition forcing them to lower their required initial capital and tightening spreads in order to attract investors choosing a Forex broker. Some of the brokers even offer bonuses as high as 100% on top of the capital deposited, essentially doubling your trading capital. These incentives attract first-time investors who would like to give Forex trading a try with as little as $100 initial deposit.

Multiple trades

Even with a small capital, a Forex trader is able to make many trades in a single day. This is called scalping, and enables even a trader with limited capital to earn huge profits. With binary options, this is difficult to do, since the expiration date for the trades is usually hours ahead.

Safety in numbers

Both the Forex market and binary options market are over-the-counter systems, meaning that there is no centralized system to monitor all trades, leaving room for crooked brokers to scam traders out of their money. However, there are still some differences.

The Forex market has been in existence for a very long time, and is monitored by various Forex regulators around the world. It caters to retail traders like you and I, but also to large institutions like hedge funds and mutual funds. Of late, there has been a proliferation of traders from all walks of life, and the Forex market is more robust than ever. The result, people share their experiences through real Forex broker reviews which point to crooked brokers. These networks of rating brokers keep them in check, and they tend to avoid getting a bad name.

On the other hand, binary options were only recognized by regulators in 2008, and there aren’t as many participants. As a result, there have been numerous cases of traders being cheated, and since there aren’t many reviews for binary options brokers, it’s difficult to find reliable binary options brokers. The Securities and Exchanges Commission (SEC) actually warned investors about binary options because they recognized this risk.

Variety of trading instruments

To make Forex trading even more lucrative, brokers have created various tools on their Forex trading platforms that help you maximize profits. Use of trailing stops, stop losses and taking profits all help to keep your trades manageable and to avoid margin calls.

Chances of huge returns

A Forex trader is not limited by an expiration date, and since the market runs for 24 hours, they can maximize their profits by holding on to winning trades. This is just not an option with binary options, because regardless of how much the markets move in your favour, the returns will always remain constant.

Which system best suits you?

After looking at the advantages of either system, you might still be wondering where you are going to make your stand, and this comes down to your personality. Looking at some of the common mistakes traders make, you will find that it’s got more to do with their personality than expertise, so here’s how you know where you fit in:

Characteristics of a binary options trader

Successful traders of binary options have certain attributes that lead them into this system instead of Forex trading. If you have these qualities, then binary options would be a good option for you:

Part-time trader

This is the kind of trader who only makes a few trades at a time, or is involved in another kind of business and trading is merely a side-job for investment. The fixed expiration date for the trade at a particular time in the future is an advantage to this individual because they know exactly when they need to place the next trade.

Long-term investor

Trades in the binary options system can be placed as far away into the future as the trader would like. This could be in terms of weeks, months or even years, which makes the system favourable for someone looking for a long-term investment strategy.

Substantial trading capital

Unlike the Forex market where a trader can get started with a very small capital of around $100, you need a lot more to get into binary options.

Characteristics of a Forex trader

About 90% of all Forex traders lose money, 5% of the rest barely eke out a profit, but there’s the last 5% of traders who make tremendous profits. These traders can be identified by the following characteristics:

Hard work

To succeed in Forex trading, you must be ready to make time to study the Forex charts and Forex calendar. This could mean hours of staring at your computer screen before placing the trade, then following it up with patience as you watch the markets move.

Patience

Of the 90% of traders who lose money trading the Forex market, impatience is perhaps the most common flaw. Most of them will close a trade as soon as they notice it’s not going their way, only for the trend to turn around. To become profitable, you have to wait for a trade to ‘mature’, and then hold on to a winning trade for as long as possible.

 

Watch this animation for a recap of the differences between the two financial instruments:

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Risk Warning: Your capital is at risk. Statistically, only 11-25% of traders gain profit when trading Forex and CFDs. The remaining 74-89% of customers lose their investment. Invest in capital that is willing to expose such risks.
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