While Forex trading has been prevailing from the late 1970s, binary options are relatively new to the market and recently gained popularity among retail investors after its approval by the U.S. Securities and Exchange commission in 2008. The forex market is the biggest and most liquid financial market with daily trading volumes exceeding $3.5 trillion. Binary options are preferred by novice traders because of the high returns (up to 80% of initial investment) and easier accessibility. This article talks about the pros and cons of both investments and helps you evaluate which is suitable for you.
Method of trading
Forex trading is done using currency pairs in which you exchange one currency for another and try to achieve profit by using the difference in rate of exchange between those currencies. Hence forex trading requires users to speculate whether value of one currency will decrease or increase compared to some other currency in order to make profit. For instance, if you are trading EUR/USD currency pair and the current ratio is 1.30849, you will buy more Euros in exchange of Dollars if you believe the exchange rate of Euro against Dollar will increase in future. Once the Euro price increases as per your expectation, you will again sell it back to purchase more dollars.
Binary options are also called digital options or all-or-nothing options because of their nature of payouts. In binary options, users have to speculate the price movement of the underlying asset. Unlike Forex market where the asset is always currency pair, binary options allows users to trade with any underlying asset such as commodities like gold or silver, stocks and equities, currency pairs, market indices etc. The users can choose any of the underlying asset and choose the strike price and expiry time for the trade. Both binary and forex options are available for day trading and hourly trading as well.
Ease of Access
In order to trade with Forex, you need to open a trading account with any reliable Forex broker. Most forex brokers demand for a minimum deposit of $1000. Forex trading requires good understanding of market trends and some technical expertise as well. Traders should understand the spreads, contracts, bid/ask prices, position lot sizes and know how to place stop-loss or limit orders. The forex market involves complex trading operations such as setting stop-loss to limit your losses, leveraging, choosing the spread size, managing risk levels and analyzing market trends etc. Some of these might be complicated for novice traders and if any mistakes are done in live trading account, they can lose money easily. Forex market is open on 24-hour basis for 5 days a week.
Binary options have become more popular among retail investors because of their simplicity and ease of use when compared to Forex trading. Binary options do not require extreme market expertise or understanding of technical analysis tools. You can open a trading account with any licensed binary options platform with a minimum deposit of just 250 dollars. You can place the trades using binary options with just 3-4 easy steps. You need to choose the underlying asset, strike price, expiry time of the trade and then place the order. You can choose either a “Put” or “Call” option depending on whether the asset price will decrease or increase in future. Binary options are also available on 24/7 basis and you can trade anytime from anyplace using mobile trading platforms.
Support for Leveraging and Social Trading
Majority of the forex trading platforms offer support for margin trading or leveraging. Traders can leverage up to 1:200 which helps them to trade larger positions with less investment capital. This is especially helpful if you want to trade a larger volume and do not have sufficient balance in your trading account. For example, if you are trading with a margin of 200:1, then you can trade up to 200,000 dollars by having just 1000 dollars in your trading account. But it is also risky at the same time because traders will suffer heavy losses if they don’t win that trade and can run into huge debts. Most forex trading platforms do not have support for social trading.
Binary options do not have support for such leveraging options. Hence you don’t have the risks associated with leveraging when you invest in binary options. Also traders can gain as high as 80% of their investment with binary options. Binary options have support for social trading which allows new traders to copy the transactions of successful and experienced traders in the social network.
In forex trading, you can never estimate how much profit you can make from a particular trade. You can either set stop-loss or limit order in order to ensure certain fixed profit for that trade. When you use leveraging, you have risks of margin closeout if you lose a trade with huge margin. You can even lose all the money in your forex trading account if you make one wrong decision. Also in Forex trading, you will lose lot of money as commissions to the brokers.
With binary options, the profits can be high as 80% of your initial investment and hence profit depends on how much money you invest for a particular trade. The payout is always fixed and hence you can be sure of how much profit you can make from a particular trade. Also if you lose that particular trade, then you will lose all the money you invested on that trade. So the loss is also predetermined in binary options which make it more reliable. You will either gain 80% of invested amount as profit or lose all the money spent on that particular trade. With binary options, you don’t have to pay commissions as high as forex trading.
Both these trading methods have their pros and cons and traders need to choose carefully based on their experience level and market understanding. Forex options have been prevailing for long time and binary options are relatively new with lot of scam brokers existing in the market. So you should be careful before opening a trading account with any binary options broker. Binary options are especially suitable for novice traders because of their ease of access, social trading support and higher payouts.