Binary options vs forex
Published on July 15, 2015
Binary Options or Forex?
The advantages of binary options.
Binary Option’s main advantage over Trading Forex is the defined and limited loss that you can incur on any trade. When you buy a Binary Option you know at the start, what your maximum loss will be. It is defined by the cost of the option itself. You may also define your loss trading Forex by adding a Stop Loss order to your position, but two things can then come into play;
A volatile break in price against you where you were planning to stop your losses after, for example, 30 pips, but you end up being stopped after more than 30, due to market volatility.
The temptation to move your Stop Loss as the market gets close because you feel the momentum is not going to last. In the end this could cause you to lose much more than you had initially thought of risking in the trade.
In other words it can take away the need for disciplined risk management. Often traders end up trading emotionally which can eventually be disastrous. With Binary Options your maximum loss is always fixed and there are no risks of losing more.
This is also connected to the concept of volatility, with a Binary Option it doesn’t really matter how the market moves as long as it ends up i n the money at expiry, whereas having a Forex position can often see you take a loss due to the high volatility of the market – to then see the price move back in your favour.
Speed of Trading
Binary Options allow for very short expiry times. Expiries of just a few minutes are available, in fact even as little as a sixty second expiry. In forex it is very rare that the market will move enough for you to close your position in a few minutes let alone in just sixty seconds. Given that payouts for Binary Options range from 75% to 90% you can buy an option for let’s say, £200 and receive a gain of between £150 and £180 after only a few minutes.
Distance to Target
With Forex trading you enter a position with the aim of the price level reaching a certain target which will inevitably be far away from the current price. Binary Options allow for the target price, the strike, to be a t the money . creating higher chances of the Option being in the money at expiry. With the forex target price potentially far away from the current market price, a larger price move is required in order to profit to the same degree.
In Forex if the current market price for EUR/USD is 1.1200 you enter the trade with the idea of the market going up or down, let’s say 20 pips, whereas in Binary Options the strike price will be the current market price 1.1200 and your option has to be above or below that price even by only 1 pip for you to cash in.
The Advantages of Forex
The biggest drawback when trading Binary Options is your required win rate . In Forex trading if you are applying risk/reward ratios correctly then your individual profits should usually be higher than your losses. This is because you should be entering each trade with a Target profit that is higher than the Stop Loss, for example 35 pips against 25. This means that even if you are right only 50% of the time you should be making some money, as your winning trades will earn more than your losing trades.
This concept doesn’t work for Binary options and it’s easy to see why. With payouts of around 75-90%, traders must win more than 50% of their trades in order to be profitable. With each individual trade, more funds are being risked, than will be won in the event of the option finishing in the money. In this scenario you have to be getting it right more than 50% of the time to return a profit overall.
Also, with binary trading there is no real secondary market. Once you have bought an option, you may want to exit that position before the expiry – you may be trying to minimise your loss or maximise your profit if you think the market is changing. Therefore you may find yourself looking to sell the option you bought. To do that you only have the choice of selling it at the price the broker, where you bought the option, displays to you. While you could have various accounts with different Binary Option brokers and compare the prices of the option you want to buy before actually buying it, once you are in the trade, if you want to unwind it, that is close the trade before its actual expiry . you have no choice but to do so at the price the broker displays. In Forex of course the market is priced freely at any given moment and you know you will get the fair market price to exit your trade and not the broker’s price.
To sum up the binary options vs Forex debate;
Which trading choice is the best i. e. most profitable market to trade in? Binary options or Forex? This depends greatly on your own level of commitment in terms of hours a day in front of a screen and discipline in risk management. With Binary Options you may not need to be in front of a screen for many hours a day to follow the markets on a constant basis as may be necessary when trading Forex. You can take your position and wait for the outcome resting assured that your maximum liability is the cost of the option. You won’t have to worry about maintaining your stop loss, it’s fixed at the price you paid for the option and can’t be changed. One thing that is common to both markets is the analysis needed to make a trading decision. Whichever market you are going to trade in you will always be looking at Fundamentals and/or Technical Analysis . For both markets you will need to hone your analysis skills and create a profitable trading plan or strategy.