Binary options are derivatives that give options traders the possibility to make profits from price fluctuations in the forex market. Due to its high level of returns and ease of accessibility, it is most common amongst new traders. Binary option trading is used on instruments with high-low or fixed return options like forex, stocks, commodities, and indices. They have a stated period of expiration and strike price in addition to the fact that traders don’t take ownership of the instruments being traded.
Forex trading has been in practice long before binary option gained popularity among retail traders. The forex market is known to be the largest financial market in the globe with an average traded volume of over 5 trillion dollars. The following will discuss the differences between a binary option and forex trading.
Forex trading involves trading currency pairs where forex traders exchange one currency for another in other to maximize profits from the difference in exchange rate between both currencies. This means that trading forex is based on a trader’s ability to speculate on the increase or decrease in value of a currency. In binary option trading, traders only speculate on the price movement of an asset. Unlike in forex trading where traders are limited to the trade of only currency pairs. Binary option trading has to with the trade of a wide number of instruments which includes commodities, precious metals, indices, stocks, forex, and equities.
In other to trade currencies in the forex market, traders have to identify and subscribe with a broker then open a trading account with deposit payments. Trading forex has to do with understanding market trends in combination with working with good trading experts. Forex traders have to gain sufficient knowledge on basic terms like spreads, contracts, bid/ask price, how to use risk management tools, leverages and most especially how to carry out market analysis. Some of these terms might turn out to be very complicated for beginners and can cause them to lose a lot of money. Unlike forex trading, binary option trading conveys simplicity. It doesn’t require any form of market expertise or the basic understanding of technical analysis. Traders can comfortably open trading accounts with any binary option platform with a little minimum deposit and place trades with 3 or 4 easy steps which involve choosing the asset, setting expiration time and strike price then place an order.
SOCIAL TRADING AND LEVERAGES
Forex trading brokers provide leverages for traders which gives them the ability to trade a larger position with just a small deposit in the account. Traders can trade with leverage as high as 1:200. This gives them the possibility to take advantage of opportunities in the market, trade larger volumes even without sufficient balance in their trading accounts. However, social trading supports are limited to forex traders since not all trading platforms include the feature. Unlike forex trading, binary option trading doesn’t include leverages but traders have opportunities to participate in social trading where new traders can copy the trading strategies of more experienced ones.
When trading forex, traders can’t fully estimate how much profit they can procure from a single trade position. They only have the opportunity to set stop loss or limit order in other to get a certain percentage of profits from a trade. However, in binary option trading, traders know the number of profits that can be generated since making profits depends on the amount invested in a particular trade.
In conclusion, trading forex or binary options have separate advantages and disadvantages. The choice of a trading category should be based on a traders experience and market understanding.