Differences between Forex and binary options
First of all, we need to define in a few words what these two terms "Forex" and "Binary Options" mean.
When a trader says that he trades in Forex, it simply means that he is speculating on the value of currencies and trying to predict which currency will rise or fall in value against another in order to make a profit that will cause the currency to rise or fall couples.
To take a very simple example, EUR/USD is currently trading at 1.3150, the trader thinks that the price of this currency pair will rise, so he buys a position, for example, one lot size ($10 per pip). , after a few minutes his prediction turns out to be correct, the price is 1.3168, the trader decides to close his position and thus received a capital gain of 18 pips or $180
When a trader conducts his business with binary options, he also anticipates whether the asset (currency pair, index or other) will rise or fall, as in Forex, but this time before a certain period of time (called the deadline).
For example, still on EUR/USD, the price is at 1.3300, the trader thinks that after an hour (at the end of the current hour) the price will be lower and will be lower than this price, he decides to sell and therefore places put option (the opposite of a call, meaning buy), if at the end of the hour his trade is winning, he wins a fixed amount, predetermined, usually ranging between 70 and 85% of the investment involved, according to various binary options brokers.
By definition, FOREX (foreign currency) is a world limited to the trading of foreign currencies.
Investors can buy and sell currencies (currency pairs) for units of another currency.
Binary options traders typically have a fairly wide range of assets at their disposal, ranging from major currency pairs (the most frequently traded) to the most exotic currency pairs, including stocks, indices, commodities, and metals (gold and silver).
This second type of trading gives traders more flexibility and they have the opportunity to diversify their portfolio by hedging the different assets offered to them by the broker.
Forex traders often seek to maximize their profits by being aggressive in the face of the market, to do this they usually multiply their positions, and some often refer to this style of trading as "pyramid" due to misuse of language (since that word does not exist) . ). Learn more about leverage.
This certainly provides an opportunity to make interesting profits and allows the trader to achieve excellent results, for example, he can quickly double his account, but his influence on the market is very strong, so the trader often takes reckless risks, and the result may end. have disastrous consequences.
On the other hand, there is no leverage in binary options trading, but profits can be as high as approximately 90% per trade and even up to 500% on some binary options options such as One Touch Options or New Generation Cross. binary options, exclusively offered by StockPair, in no case can you lose more than what was invested in the option, we know in advance what we risk losing and what we can earn from the amount of our trade.
In Forex, the maximum margin is determined by each forex broker, for example, each trade made by a trader according to his money management locks 20% of his available margin (his account), after which he can only open 5 trades. maximum at the time.
For high-volume traders, it is best to opt for brokers that offer 400 or 500 leverage, such as eToro or FxPro, using this leverage, among other things, allows you to significantly increase your position size. strongly, so the trader will be able to put a smaller portion of their capital into the trade (equivalent to the same as lower leverage) with the benefit of locking in very little margin and being able to open many more positions at the same time. /p>
In binary options, brokers do not use the principle of margin, it is impossible to get into a margin call, as in Forex.
A trader can, if he wants to invest 20%, 50% or 100% of his account in a trade, but this is at his own risk, we advise to accept an acceptable risk money management, for example 5.% per trade, to limit risk and profit in the long run.
In traditional forex or other trading, there are many orders, the most important of which are market orders (buy and sell).
There are, in particular, types of preliminary orders such as limit order, stop order, trailing stop (trailing stop) or for the most experienced OCO order and many others, of which few retail traders (non-professionals) are used forex brokers.
In regards to investing in binary options, again this system has its fair share of very specific orders, there are several types of binary options, mainly Call/Put or Up/Down, High/Low (targeting high and low points), 60 Seconds (a short binary option with a one minute expiration time), Touch/No Touch (allowing you to target or not target specific areas on the chart), and Option Builder allowing you to customize any of its binary options, something that perhaps, for example, with the broker Banc de Binary or OptionWeb.
More and more forex brokers allow you to trade micro lots i.e. 0.01 lots or 1000 units (10 cents per pip) in addition to mini lots (0.1 lots) and standard lots (1 lot) . Calculating position sizing is more or less difficult for a beginner, it becomes very easy with practice, however you can try your hand at using our online tool to calculate an adequate position sizing for your money management.
Typically, the maximum investment amount is very high, it can often be as high as 100 lots per trade (i.e. $1,000 per pip) for standard accounts, and when the amounts get really high, the trader can then request an accounting institutional trading system that allows you to do this. trade large amounts just like hedge funds or professional traders with large capital.
Fees and commissions
When trading in the Forex market, a trader must pay a spread on each of his trades, this spread is a small amount of money proportional to the size of the trade, which is directly deducted from the base of the position as soon as it is executed by the trader in the market.
A trader can pay a rollover, also called a swap. This is a commission that is deducted or in some cases credited to a trader's account when a trade is left open overnight or for several days.
On the other hand, there are no commissions, spreads, swaps or any other costs associated with opening a position or trading in general on binary options.
In Forex trading, return on investment (ROI) is uncertain and very random as it will depend on the size of the price move up or down depending on the buy or sell.
When a trader works through binary options, the return on investment is determined in advance, usually it is about 75%. This time the profit is fixed and therefore does not depend on the degree of market fluctuation, whether it is only one pip in our direction or two hundred pips at the end of the term, the profit will remain the same, just predicting the correct price direction is enough to become a winner.
Time to master
In addition to the profit and loss stability offered by the binary options system, this type of trading also allows you to control time, one of the main characteristics of which is expiration.
A trader always knows from the very beginning of his investment when the option will expire, he can invest within 60 seconds, when his trading style is similar to that of a scalper, he can choose other short time frames such as 5 , 15, 30 minutes, an hour or a day when he is a day trader, then he can move on to longer timeframes such as a week or a month when he is swing trading.
With Forex investments, this time control is more difficult because there is no deadline that determines the end of the trade, and therefore you must know when to exit the market at the right time, which is not necessarily a simple thing from a graphical and psychological point of view .
Comparison of Forex and binary options
Binary options and Forex are two equal systems, each of which has its own characteristics. The main difference between the two types of investments is that the first one is unmatched in simplicity compared to the other. For binary options, it is very easy to determine the size of the investment, the proportion of risk, the duration of the transaction and the type of option.
Potential profit and loss are known in advance, the trader knows what to expect, everything is much more formalized than in Forex. All these clear and precise parameters usually appeal to beginners as it is a relatively simple and easy to digest way of investing.
To conclude, we can add that binary options brokers are gradually joining forex brokers in terms of regulation.
More and more companies offering to invest in binary options are becoming regulated brokers.
This is for example the case of OptionWeb, which received approval from the financial market regulators, the Banque de France and the FSA, this way of investing in financial markets, which was considered more like a casino system, is gaining confidence, it is now perceived by the regulators as a real investment and, thus becoming more legal and safe.
Among these brokers, OptionWeb was the first binary options broker to receive a license, from that moment binary options are officially identified as a financial instrument in the same way as investments in forex, indices, commodities through CFDs or futures contracts.
The vast majority of binary options brokers are pending regulation, meaning they have made a request to the regulators and that it is being processed, the binary options industry is a very young industry (about 3 years old) that should quickly join the forex industry, which is currently almost fully adjustable.