How Does Binary Options Trading Compare To FOREX Trading?
In my previous blog post, I explained why I only trade binary options of FOREX, rather than stocks, indexes, or commodities.
But what you may be wondering is why I trade FOREX binary options instead of just FOREX directly.
So, I will show you how binary options compares to FOREX in all the most important ways when it comes to trading.
In case you’re a newbie (we all once were), let’s start with the basics.
FOREX: FOREX traders speculate on the constantly changing value of one currency compared to another (known as a “currency pair”). If the currency pair moves in the same direction as your trade, you will make a profit. For example, if the current price of USD/JPY (US dollar versus Japanese yen) is 116.9550, it means that one dollar is currently worth 116.9550 yen. If you think the price of USD/JPY will increase in the future, you would buy at least one lot of USD/JPY and wait until the price of the currency pair increases to the level where you want to exit the trade to lock in your profit. If the price goes down instead, you would also want to sell in order to cut your losses quickly.
Binary Options: When trading binary options, you only need to predict whether or not the price of an asset (such as a FOREX currency pair) will go up or down from its current price over a certain period of time. If, for example, the current price of the USD/JPY pair is 116.9550 and you expect the price to decline over the next 15 minutes, you would place an order to buy a “call” binary option with 15-minute expiration. If your prediction is correct, the broker pays you a profit of approximately 80% (the payout levels vary slightly from broker to broker).
Payouts and Losses
FOREX: Because traders can sell a FOREX position anytime they see fit, there is theoretically no maximum amount of profit that can be earned on a currency trade. To help maximize profits, FOREX traders utilize techniques such as setting trailing stop orders (to lock in gains when a position reverses) and limit orders (to automatically sell whenever a target price has been reached). Losing trades in Forex can be managed in a similar fashion. Although the maximum profits are technically unlimited with FOREX, the negative is that the maximum loss on a FOREX trade could be all the money in your trading account (which is why FOREX traders should always set stop losses immediately after entering trades).
Binary Options: What many traders love about binary options trading is they know exactly what the amount of the payout will be on a winning trade, as well as how much will be lost if the trade goes the wrong way by the time of expiration. If, for example, you risked $100 on a 15-minute binary options trade, a broker with an 80% winning payout means you will make a profit of $80 if your trade moves in the right direction. On the other hand, you would lose $100 if the trade goes the wrong way. However, some brokers offer partial rebates on losing trades, which helps reduce the amount of your losses on losing trades.
Margin is the ability to borrow money from your broker, as a percentage of your account balance, in order to increase the amount of exposure you may have in the market. With a winning trade, margin can greatly increase the amount of your profits. But of course, losses will be correspondingly larger as well.
FOREX: Not only can margin be used for trading FOREX, but most traders actually utilize a dangerously high percentage of margin with their brokers, sometimes as much as 1 to 200, or even 1 to 500! While having such huge margin can enable you to quickly increase your trading profits on winning trades, massive margin percentages also make it very easy to wipe out an entire account balance with just a handful of losing trades.
Binary Options: Keeping it clean and simple, margin is not used with binary options trading. Nevertheless, binary option traders can still make a large return on initial risk capital because of the 75% to 85% payouts that the best brokers offer their clients. The great thing about no margin is that you never need to worry about getting a margin call.
Closing a position
FOREX: Since there is no fixed time limit that you may remain in a FOREX trade, you decide when it’s time to close the position. With the FOREX market open 24 hours per day (other than weekends), you may close the position anytime the market is open and the broker is required to accept and execute your order.
Binary Options: Before placing any binary options trade, the first thing you must do is choose the expiration period. Most popular expiration periods are: 1 minute, 5 minutes, 15 minutes, and 60 minutes. Our mobile app exclusively sends subscribers both 5 and 15-minute trade signals (click here to subscribe now). At the time of expiration, your trade will automatically be closed and you will immediately know if you have made or lost money on the trade. Some brokers allow you to delay or “rollover” your expiration time, but this is not recommended because brokers often require additional investment capital to do so (usually around 30% more).
FOREX: In FOREX, one standard “lot” is equal to 100,000 units of the base currency, but many brokers enable trades of just 1,000 units, which is known as a “micro lot.” On the flip side, the maximum amount of each trade is determined by the individual broker, and can be as much as 100 standard lots or $10,000,000.
Binary Options: Each binary option broker sets the exact minimum and maximum trade size for its clients. A minimum trade amount of $10 tends to be the norm, while the maximum capital per trade is usually $1,000 to $5,000. Most of the brokers our subscribers trade with have a $10 minimum trade. By the way, did you know that you can receive our live binary option trade signals for FREE by simply opening a new account with one of our affiliated brokers? Read the details of how it works.
FOREX: Unlike traditional stock trading, there are often no commissions when trading FOREX. However, there is a cost associated with paying the spread (the difference between the bid and ask price). The wider the spread, the more entering and exiting the trade will cost you.
Binary Options: Put simply, there are no commissions or spreads to worry about when trading binary options. The cost of the trade is simply equal to the exact amount of the trade.
The winner? Binary Options!
While it is obviously a matter of opinion, the detailed comparison above shows why binary options have become so popular in recent years, and is quickly on its way to surpassing the popularity of the well-established FOREX market. As I have mentioned in other blog posts, I used to be a FOREX trader, but quickly switched to binary options when I discovered all the benefits. Now, I am pleased to share my fine-tuned algorithm for picking live 5 and 15-minute trade signals with subscribers of Binary Signal App.