Forex vs. Binary Options
If you have been learning about binary options trading, doubtless by now you have also started picking up some tips and tricks for trading Forex. The two are very closely related, mostly because you can trade currencies either way. Binary options is simply a different way to trade—and you can also trade other assets. Should you trade binary options or Forex? There is nobody who can make that decision for you. I will attempt to break down the differences between the two in this article so that you can make an informed decision.
How Binary Options Trading Works
First off, let’s get through the basics. With binary options trading, you are predicting the direction that the price of an asset will move (up or down). That is the most basic type of trade. For example, let’s say you are trading GBP/JPY. You believe the price of the currency will be higher after fifteen minutes than it is now, so you choose “up,” or “high,” or “call” (they all mean the same thing). The price goes up, and after one hour you are paid for your investment. There are also other trade types, including Range, 60 Seconds, and One Touch.
How Forex Trading Works
There is only one type of trade for FX. Let’s say you believe that GBP/JPY is going up. You buy a lot, wait, and see what happens. You can exit the trade whenever you want. Note that price must move for you to make a profit. With binary options range trading, you can actually profit with price sitting still.
Now you know the basics for each, let’s go on to the differences.
In Forex, you can trade on margin. This is also known as trading on leverage. Basically, you borrow money you do not have from your broker to control a larger investment stake than you could control with only your own money. You can trade on incredibly high leverage with FX. Ratios may go as high as 1:200. You do not have to trade on margin, but if you have a very small account, you will only have a few brokers to choose from that allow you to trade very small increments of money. Others force you to trade specific lot sizes.
A lot of people think that margin trading does not exist with binary options, but this is not true. The bonuses which binary options brokers offer are actually a form of leverage, because you cannot extract them as cash until you reach a certain trading turnover. Until then, they are only available for you to use trading. So you are controlling money you do not possess. Eventually that money can become yours. Margin trading is useful to some traders, but others avoid it, whether they are trading binary options or FX. You need to have a money management plan which guides you in making these decisions. Don’t have one yet? Read more about it here.
Cost of Trading
With FX, there are rarely any commissions, but there is a fee you have to pay called a spread. This is a difference between the bid and offer price which goes to your broker’s advantage. It is a kind of built-in fee that you pay each time you place a trade. So basically, if you entered a trade and exited at the same price, you would actually lose a small amount of money. You have to be at least slightly profitable to break even. The fees are tiny, but would add up over time if you failed to profit repeatedly.
There are no fees, commissions, or spreads to pay on trading, though there may be fees tied to withdrawals and wire transfers. These fees are avoidable. You can read more about them on this page. That is not to say however that there is not something similar to the spread in currency trading, and that is the payout percentages. Most binary options brokers will pay you about 65-85% on a winning trade, and return 0-15% of your money when you lose. There is always a gap between the two that plays to the broker’s advantage. Just as with FX, you have to win more than half of the time to break even.
Types of Trades
Usually with FX trading, you can only make simple buy-or-sell trades. There is such a thing as a “hedge order,” but since both your buy and sell activate, you are effectively breaking even until you close the wrong one. Either way, you are basically in a buy or sell trade.
This is one area where I would say binary options offers a pretty clear advantage over FX trading. There are several different types of trades with binary options. Along with the standard High/Low, there is also One Touch (you wager price will touch a particular value before the time expires), No Touch (the opposite), and Range trading, where you wager that price will stay in a given range. This lets you profit even when the market isn’t moving. There are also 60-second trades, which are very fast High/Low trades. The only advantage FX would have over binary options in this category is if you prefer the type of trade that you can do with Forex over these other types of trades.
Assets to Trade
With currency trading, obviously you are trading currencies. You cannot trade other types of assets.
This is another area where binary options has a clear advantage. Not only can you trade currencies, but you can also trade stocks, indices, and commodities. Some brokers also offer bonds and other financial instruments. Learn more on what to trade here.
You are usually required to trade a certain set lot size. A “micro lot” generally amounts to 1,000 units of a base currency, for example. There is generally a maximum lot you can trade as well, but it is often very high. One hundred standard lots for example could add up to something like $10 million. Forex is great if you have a large account. It may be unsuitable if you have a very small one, unless you find a broker which allows you to trade whatever amount of money you want (custom lot sizes—Oanda offers these).
Each broker determines the minimum and maximum investment amount. The maximum amount may vary, but typically ranges between $1,000-$5,000. There are a few brokers which are suitable for traders with larger accounts, but in general, binary options trading is geared toward traders with smaller accounts. You may be able to trade as little as $5, but that is typically for 60-second options. Twenty-five dollars is a more common amount for High/Low trades.
This is one area where I would say that FX trading is a lot simpler than binary options. You get to close your position whenever you want. That can be right away if you want, or it could be hours, days, weeks, even months in the future. Some traders stay in long term carry trades for years! You are in control.
Binary options trades have set expiry times. When the time on a trade expires, it will close automatically, and you will be either in or out of the money. Some brokers offer longer-term trades that run for days or weeks, but the majority offer trades that expire within the same day.
Some brokers, but not others, will give you additional tools to control the length of time you are in a trade. “Rollover” is a feature which allows you to extend your trade beyond the original expiry time. You could use this to ride out a winning trade or to wait for a losing trade to turn around. “Early closure” is the equivalent of using a “stop loss” or “take profit” order in FX. It allows you to exit the trade before the expiry time is over and either cut your losses or retain your profits before a trade turns against you.
Traders who use these tools when they are offered have a much better chance at becoming successful than those who ignore them. They do have their limitations however. Brokers will often require you to increase your investment risk to rollover, and they may also make you wait a certain amount of time before you use the early closure feature.
Which Is Better? Binary Options or FX?
Hopefully you can draw your own conclusions from this, because only you can decide what is best for you to trade. I have tried to clarify some points which traders may find confusing, and also to provide my own opinions—but you may not share them. Each type of trading has its own advantages and disadvantages, and which you consider to be which depends a lot on your own trading style and goals.