Forex vs Options trading, what are the differences? There are many financial tools that you can use to make profits. However, binary options and forex are the two most common ones. For newbies, the detailed comparison between these will support you to make the most fitting decisions.
In this blog post, we will provide you with insights into each financial investment tool. Moreover, you can also find the pros and cons of these trading methods. So, you can decide the profitable trading type which is suitable for your personal preferences.
What is forex trading?
Forex trading is the practice of speculating on the exchange rate between two different currencies, such as the British pound and the US dollar. Forex is the world’s most liquid financial market.
Forex is simply a long-term trade, but you can close it at any time. Additionally, you can set the Take Profit and Stop Loss levels when trading. In detail, the profit of Forex trading depends on the number of Pips and lots at the closing time.
To explain, a Pip is the smallest price movement of a currency pair rate. Additionally, it reflects the fourth decimal number in the pair’s value. For example, a Pip in the USD/CAD is 0,0001 USD. Additionally, the Lot size refers to the number of shares you buy in one order.
In forex trading, you are completely unable to determine neither the profit nor the loss of the trade until you close the order and end the trade. If you do not set a Stop Loss, you can potentially lose all of the money in your account.
What is binary options trading?
Binary options trading is an all-or-nothing trading type based on the price fluctuations of currency pairs or other assets. It means there are only two options for traders to choose from that are the price will go up or down. If your prediction is right, you can win a percentage of your betting money. In contrast, you will lose all the betting money.
Binary Options appeared on the market much later than Forex.
Forex vs Options trading – Similarities and key difference
The similarities between binary options and forex
There are three similarities between these two financial instruments. Firstly, they all work in the same way of making profits. To explain, traders need to predict the asset moves. In case of right decisions, investors will gain a lot of profit from both types of trading.
Secondly, these financial tools are tradable online. And last but not least, they allow traders to start with small amounts of capital. Besides that, there are many assets and currencies available in both trading markets.
However, they are still distinctive financial instruments with many differences.
Forex vs Binary Options trading – The key difference
Understanding the key difference between Forex vs Binary Options can help traders choose the best one. As we mentioned above, the binary options market was established much later than Forex. It leads to fewer articles and research comparing these two financial tools. Moreover, there are some parallels between them that confuse investors. As a result, many traders apply technical analysis from the Forex market to the Binary Options market. Consequently, they face losses and have no clue of losing reasons.
The key difference between Forex vs Binary Options trading is the entry point. To explain, the entry point is defined as the asset’s price at which investors make an order. Moreover, it is a part of the trading strategies that minimize trading risks and eliminate trading emotions. Therefore, deciding the right entry point can help traders optimize winning chances.
The entry point will be defined differently among Forex and Binary Options.
The entry point of Forex
In the Forex market, traders will define the entry point as the lowest price that they will buy a stock. For example, you are interested in stock but its price is too high. So, you wait until the stock’s price is down 20% and buy it. At the buying price, it is defined as the entry point of the Forex market.
Forex traders expect that the entry point is the bottom price or when the market hits the bottom. Thus, the asset’s price will go up after experiencing these zones. Therefore, they can make profits in the long term.
The entry point of Binary Options
In the binary options market, the entry point reflects a reversal candlestick model. To explain, after a reverse, traders expect the candles will go for only one trend in a short period of time. Hence, they can make the right prediction and increase winning chances by choosing good entry points.
However, it does not mean traders cannot use binary options for long-term trades. Instead, investors can use trading tools such as [TB] MT2IQOPTION to preset a series of orders. Thus, the tool will support traders to automatically make orders. So investors just need to focus on researching and testing trading strategies.
To summarize, the key difference between Options vs Forex trading is the entry point. In other words, it reflects the long-term and short-term of the market trend. To support, the long-term trend will decide Forex’s profit while the short-term one can ensure the binary options success.
Forex vs Options – The Detailed Comparison
In order to provide deep insights about these two financial tools, we summarize differences in the table herein.
| Characteristic | Forex Trading | Binary Options |
| Strategy | Traders take a short or long position based on price fluctuations of a currency pair. | Traders anticipate the price movements of a currency pair and earn a fixed payout due to win or lose outcomes. |
| Access | 24 hours | Each asset or currency pair will have its own trading hours based on the opening and closing times of the four biggest stock exchanges. |
| Trading Costs | There are many types of fees. | No added fees. |
| Trading Risks | Profits and losses are high but unpredictable. | Traders are aware of how much they will earn or lose at the beginning. |
| Time period | There is no fixed expiry date, traders can close their order at any time. It is usually a long-term order. | Expiry dates or times are set by traders at the beginning. It is usually a short-term order. |
| Easiness | Forex trading requires more technical analysis and risk management practices. | Traders just simply put a Call or Put order. Moreover, investors can see quick results. |
| Leverage | Yes | No |
| Volatility | High | Low |
Now, we will dig into a more detailed comparison between Forex vs binary options.
Forex and binary options work differently
In the forex market, traders can generate profit by predicting currency pair price movements. Thus, investors will take a short or long position to sell stocks in the future. For example, in the beginning, the current price of the EUR/USD pair is $1.16180. Hence, you expect the price will go up in the future, which leads to a buying decision. Then, when the currency pair reaches your predicted price, you close the order and take profit.
On the other hand, in the binary options market, your objective is to correctly predict the price movements of a currency pair at a specific time. As a result, there are only two possible outcomes: right or wrong (profit or nothing). Moreover, the expiry date is normally shorter than the forex market. For instance, it can be 60 seconds, 1 minute, 5 minutes…
If you make the right prediction, you will win an agreed profit at the beginning. Normally, the payout rate is lower than 100% (for example 80%). It means if you bet $100, you will get $80 if you are right. In contrast, you will lose $100 if you fail the order.
Leverage and margin deposit of Options vs Forex
The leverage allows traders to increase their initial investment with a certain ratio. Thus, it is an attractive tool suitable for aggressive traders who want to make a profit quickly.
On one hand, the leverage can be used in the forex market. Depending on brokers and types of assets, investors will have various leverages to trade. For example, some common leverage can be 1:100, 1:888, 1:1000, or 1:2000. It means you can make an order which is up to 100 times more than your initial investment. However, it is a double-edged sword that helps traders rapidly increase profit but also becomes a great financial thread if they lose.
On the other hand, the binary options market does not allow investors to use leverage. To be specific, the highest value order that investors make cannot exceed the money in their account.
Forex vs Binary options trading – Profit and Loss comparison
In the forex market, traders do not know how much they will earn or lose with an order. However, they can set Take profit or Stop-loss levels to manage trading risks. The greatest loss that investors might face is all the money in their accounts.
On the other hand, brokers will let you know the amount of money you will earn with an order in the binary options market. Hence, traders can better manage their trading risks as well as capital with binary options. The greatest threat that traders need to deal with is their initial betting money of an order.
The differences in closing time of Binary Options and Forex
In the forex market, traders can flexibly close an order whenever they want to. Usually, it happens when the market is open. However, this flexibility also generates more difficulties for investors. To explain, if they do not define their closing point, they can face great losses.
In contrast, traders need to determine the expiry time before making an order. After the expiry time, the order automatically closes and traders will know their result immediately. In some cases, brokers may let investors close their orders before the expiry time. However, you cannot close the order randomly or at any time. Furthermore, it costs a part of the betting money.
Trading volatility of Forex vs Options
The forex’s trading volatility is based on the number of lots that investors own. Additionally, some brokers allow you to trade a micro lot which is 1% of a standard lot. Moreover, the number of maximum trading lots is decided by brokers. Normally, the highest standard lots that can be traded are 100 or ten thousand dollars.
In the binary options market, different accounts will have their own trading volatility requirements. Usually, binary options brokers will allow speculators to start trading from $1.
Binary options and Forex trading fees
- Forex trading fees: There are many types of trading fees including spread, rollover, swap, or overnight fees…
- Binary options trading fees: No added fees as the forex market. Traders only pay broker’s operation fees that are included in the final payout.
Forex vs Options trading – which one is better?
After understanding the differences between Forex vs Options trading, you can choose your best-fitted financial tool based on your requirements. To explain, forex trading will be more suitable with investors who can spend time researching and closely monitoring price movements. Besides that, traders who want high profits and flexibility in closing orders also love forex trading.
However, if you are fancy with a more straightforward financial tool that requires less time and clearer risks, binary options trading can be considered as a sensible option.
Conclusion
When looking at forex vs options trading, there are many differences that traders should be aware of. In this post, we have shown you all these differences with the pros and cons of each financial tool.
In order to choose the better one, investors should determine their trading preferences by themselves. On one hand, forex trading is a full-time job for a million people worldwide. On the other hand, binary options trading is a newer profitable tool and easier to enter than Forex. Please comment on which type of trading that you prefer!