For less experienced traders, binary options and foreign exchange or forex are considered two of the more accessible markets that can be explored. But in order to come out successful for the greater part of the time you spend on this financial endeavor, it’s essential to have a clear understanding of what each entails.
To help you get started on deciding which one appeals more to you and fits your purposes better, provided below are notable similarities and differences between trading binary options and forex markets.
What are they?
First off, in binary options trading, you (the trader) need to predict whether the price of an asset (such as a stock or a currency pair) will increase or decrease from its current amount by an indicated time (or expiry time).
With forex, you speculate whether one currency’s value will increase or decrease in comparison to another; the speculation is made in the hope of making a profit. You think the price of one currency will rise in the future, so you purchase a lot of that currency and wait for it to increase until it reaches the point where you attain the profit you want and you close the trade.
Are there any similarities?
Generally, both forex and binary options can be traded online, which means that trading can take place round the clock. Also, traders can start out trading a small capital for both markets, which can be more or less than about $100, so there’s no need to risk too much if you’re just setting out to trade. As mentioned, both require speculating on the direction in which the price of an asset moves. And you can trade for the short term with both forex and binary options (forex traders, though, can also opt to take long-term positions).
Does one market involve more complex processes than the other?
Binary options may have a slight edge over forex in this respect. With binary options, you may find it easier to trade because of relatively simpler steps to take — you need to select the asset and your strike price, choose the position size, identify a preferred expiry time, and then confirm your trade.
When you trade forex, aside from determining the asset type and the price entry level, you will also need to compute limit and stop orders and position the size of the lot. Where binary options traders only need to decide between two orders, forex traders may need to manage under 10 orders.
What payouts can you expect?
Before making your binary options trade, you will know exactly what you stand to gain or lose for that particular trade when the expiry time arrives. You either win or lose the amount you invested (and not more) in the trade.
In forex, on the other hand, you don’t have a clear picture of the maximum profit you can make from a specific trade. You can, however, manage losses with the use of limit or stop orders; this way, you can be guaranteed a profit at a certain percentage upon execution of the stop or limit.
Any trading endeavor will require a fledgling investor to learn about the processes, gain valuable experience, and develop an instinct for making many of the decisions that are involved. As such, it helps to be mindful about getting the right education for trading — get advice from mentors, hone skills on demo trading accounts, and put much thought and heart into every single trade you make.