What Are The Differences Between Binary Options And Forex Trading

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What’s the difference between binary options and day trading?

Binary options and day trading are both ways to make (or lose) money in the financial markets, but they are different animals. A binary option is a type of options in which your profit/loss depends entirely on the outcome of a yes/no market proposition: a binary options trader will either make a fixed profit or a fixed loss. Day trading, on the other hand, is a style of trading in which positions are opened and closed during the same trading session. A day trader’s profit or loss depends on a number of factors, including entry price, exit price, and the number of shares, contracts or lots that the trader bought and sold.

An option is a financial derivative that gives the holder the right, but not the obligation, to either buy or sell a fixed amount of a security or other financial asset at an agreed-upon price (the strike price) on or before a specified date. A binary option, however, automatically exercises, so the holder does not have the choice to buy or sell the underlying asset.

Binary options are available on a variety of underlying assets, including stocks, commodities, currencies, indices and even events, such as an upcoming Fed Funds Rate, Jobless Claims and Nonfarm Payrolls announcements. A binary option poses a yes/no question: for example, Will the price of gold be above $1,326 at 1:30 p.m.? If you think yes, you buy the binary option; if you think no; you sell. The price at which you buy or sell the binary option is not the actual price of gold (in this example) but a value between zero and 100. The trading range fluctuates throughout the day, but always settles at either 100 (if the answer is yes), or zero (if the answer is no). The trader’s profit/loss is calculated using the difference between the settlement price (zero or 100) and your opening price (the price at which you bought or sold).

Binary options traders “gamble” on whether or not an asset’s price will be above or below a certain amount at a specified time. Day traders also attempt to predict price direction, but profits and losses depend on factors like entry price, exit price, size of the trade, and money management techniques. Like binary options traders, day traders can go into a trade knowing the maximum gain or loss by using profit targets and stop losses. For example, a day trader might enter a trade and set a profit target of $200 and a stop loss of $50. Day traders, however, can “let their profits run” to take full advantage of large price moves. Of course, day traders could also let their losses get out of control by not using stop losses or by holding onto a trade in the hopes that it will change direction. Day traders buy and sell a variety of instruments including stocks, currencies, futures, commodities, indices and ETFs.

Binary Options and Forex: Common Features and Differences

In the financial market, there are many different methods of profit making and trading instruments, which, despite the relatively similar principles of work, offer certain advantages for investors. Today we will consider the common features and differences between the now-classic direction of investment activity – the Forex market and the innovative type of trade contract – binary options. We will analyze the capabilities of these tools and determine the list of advantages that they provide to traders.

Trading on the Forex market

Technically, the work of investors in this sector of the market is built on the classical format of speculation in financial assets. Here, the trader needs a forecast for the forthcoming change in the value of the asset and draw up a contract for the purchase or sale based on an analysis of the trading quotations of a certain financial instrument. Speaking as simply as possible, the principle works here: it is more expensive to sell – it is cheaper to buy or vice versa. From the difference in the value of the asset, the investor makes a profit. At first glance, everything is simple and accessible. However, today classical methods of trading no longer completely satisfy the needs of investors. First, for a trader to receive a certain amount of profit, the quotes of the asset should change their indicators towards the forecast of the trader in a fairly large range. Even taking into account the leverage that is almost always used in this direction of trading, in order to get 100% of the profit under the contract, it is necessary that the price move away from the level of the transaction registration by at least 100 price points. The difficulty is that it is very difficult to generate such a forecast. In addition, when using forex contracts in trading, taking a profit takes a long time: sometimes market positions are open on the market for several weeks or months, while commissions are charged for each day of work of the contract with the investor! It turns out that without earning an income, the investor already incurs serious expenses.

And the last. Forex began to lag far behind in terms of liquidity from binary options. The standard level of profitability of this market for a simple investor today is up to 20% per year, which is a low financial indicator.

Binary Options

Despite the fact that this contract format is available on the market since 2008, it is still considered an innovative method of making a profit. If you deeply analyze its technical side, you can say that its algorithm is very similar to the mode of trading in the Forex market. Yes, here, as well as in classical trading, are used as an object of valuation of quotes of financial assets, the same principles of technical analysis of the market are applied, and profit depends on correct forecasting of quotations movements. But on this, perhaps, similar features of the tools end. Now about the advantages of options.

First, when trading with binary options, a trader does not buy or sell assets, as in Forex. Here, a trader concludes a deal to drop or increase the price of an asset. The volume of changes in the value of the asset here is of secondary importance, and only the direction of the market’s movement comes to the fore. Profit binary option brings the movement of quotations towards the forecast by only 1 point.

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Secondly, in the binary market, each contract has a fixed level of profitability, which is known to the investor even before the deal is registered. At the same time, the volume of profit here can fluctuate from 65 to 90%.

Thirdly, options have a regulated period of action in the market, which is established directly by the trader. The range of the binary contract can range from 60 seconds to several hours. Thus, a trader can not only regulate the time of profit, but also effectively manage the trading capital.

Finally, due to the high level of profitability of binary options, high profit-making rate and the simplest mode of option operation, investors of this market can receive up to 3000% within a year.

Summarizing the article, you can clearly say that the innovative methods of trading, binary options, today are significantly ahead of the classic approach to profit forex market for absolutely all financial and technical indicators.

“General Risk Warning: Binary options trading carry a high level of risk and can result in the loss of all your funds.”

Binary Options or Forex Trading, which is the best?

Binary Options or Forex Trading, which is the best?

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Last Updated: Sep 5, 2020 @ 7:18 am

Hi guys! It seems majority of us are confused with the differences between binary options and forex trading.

As this is our first article in our binary options series, we’ll be looking to give a brief overview of what it is all about and then compare it with the forex trading.

This will be beneficial to you especially if you are new to it and looking to start trading .

What are Binary Options?

In simple terms, Binary options are types of trade options where the payoff (reward) received is either all or nothing at all. This type of option has really gained popularity in recent years with more binary options brokers appearing day by day.

In this type of trading, there’s no need to worry about liquidity and volatility of assets any longer when executing digital option trades. It fixed payout and there are only two possibilities in this type options. First, either the price of the current rate of asset will rise or fall within a specified time frame. Your ability to predict correctly, the result of your binary option trades will determine the reward you’ll get after the trade has expired.

Terms like “In the money” and “out of the money” are binary options jargons often used to denote when a correct prediction has been made within a specific time frame or incorrect prediction made within the same time respectively.

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It is very simple to understand and use because the most important thing you need to know is to predict correctly, the asset’s trend direction within a specific time frame.

Assets traded in options could be stocks, commodities, indices and forex. Since it have expiry times and dates, your fixed return price is also known as the strike price.

What i consider best aspect is that regardless of how much the instrument or asset has moved, you are paid a fixed return on expiry provided the correct prediction was made. On the other hand, a trader who predicts wrongly on the asset’s direction will end up losing a fixed part of his or her investment or can even lose it all at expiration.

If a trader believes the market trend of an asset will go higher at a specific time, the trader would purchase a “call” while traders that believe the market trend of the same asset will go down for that specific time frame would purchase a “put”.

In both directions, you can make money by earning a fixed return on your investment provided the correct prediction was made.

For a call to make you money, the current price of the asset must be above the strike price at expiration. In the same vain, for a put to make money, the current price of the asset must be below the strike price at expiration.

One major advantage of trading options is that both the risks involved and reward are known. This simply means that it doesn’t matter how much he trade moves in favour or against the trader. One the factor is always certain, win a fixed proportion of your investment or lose a fixed proportion of the same investment.

Because of the high rate of return on investment often witnessed ( e.g 70%, 80% and up to 90% returns), one would think it’s a quick way to become very rich overnight. Don’t think that way because the major demerit is that the reward is always less than the risk staked on a trade.

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However, many binary option traders who apply the right strategies may quickly become rich �� .

Differences between Binary options and forex trading

Traders, especially newbie traders find it difficult differentiating between foreign exchange trading and digital options.

Though quite similar, both are not the same because they deal with different assets.

  • Forex trading deals with trading live currency exchange rates while binary options can be used to trade stocks, commodities, indices and forex.
  • In binary options, there’s no liquidity or volatility issues while in traditional option (forex trading included), such liquidity issues always arise and can lead to huge losses if not properly managed.
  • A beginner who decided to start trading options immediately can start off instantly with no technical knowledge required. In foreign exchange market, you need to learn most of the terminologies, skills, risk management rules, fundamental and technical analysis e.t.c before you can start trading.
  • In options, no matter the rate at which the price of an asset has moved in favor or against you, you will still receive the same fixed payout provided you predicted the market trend direction correctly. In foreign exchange market, the extent at which the price of a currency pair moves in favor or against you is always considered and it determines if you will profit or lose in a position.
  • In binary options, there are no spreads (commissions paid to forex brokers in terms of pips) to worry about. In foreign exchange market, spreads are the only way brokerage firms get paid for offering trading instruments to their clients.
  • Digital Options provide a full payout due to a single pip movement. In foreign currency trading, a the amount of pip movement is what determines the either the extent of profit or loss you will get from a position.
  • In binary options, there’s a risk to reward ratio meaning that both the risks and reward involved in a trade are known even before entry. In the foreign exchange market, there’s no defined boundaries of risks and rewards and therefore the profit and losses can be limitless.
  • The payout amount is not proportional to the amount by which the option ends in the money in options. As long as the trade is in the money by even one tick (regardless of how much in the money it is), the winner receives the full payout amount. In the foreign exchange market, the payout amount highly depends on the instrument involved, the extent of movement, and the broker.
  • In digital options, knowing the magnitude and direction of price movement is not required but it’s one of the key concepts you must learn before you can start trading forex.

Similarities between Forex trading and binary options

  • Both involve substantial amounts of risk.
  • Both are traded with the help of brokerage firms.
  • You can apply your forex knowledge in binary options and still make money
  • The brokers are regulated by the same companies like the CFTC , SEC or CySEC

Which do you consider the best between Binary Options and Forex trading?

I don’t know about you but for me, I trade options most of the time and rarely trade foreign currencies. Even if i consider trading forex, i use free signals so that i won’t have to monitor my trades all day long.

To trade binary options, you need to register with a broker that offers quick support to its clients, high return on investment, simple and easy to use trading platform.

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