Forex vs. Binary Options

Hamish Raw
1st December, 2012 - Posted by in Binary Options Explained


Forex vs Binary Options: Which is Better?

 Forex vs. Binary OptionsIt would be good to know the answer to the question of whether trading forex is better then trading binary options, and vice versa. This may help some traders who have found themselves in the wrong market to make the readjustment, especially as there are many traders who have lost a lot of money junketing from one financial market to the other.

We will try to review the pros and cons of forex and binary options trading under the following headings:

a)    Risk Element

b)    Ease of Trade

c)     Profitability factor

d)    Ease of market entry

Risk Element

A key element of difference between forex and the binary options market is that of risk. Trading the forex market is more risky than trading the binary options market in a number of ways.

a)    The forex market is a highly leveraged market where risks and returns are magnified. When you have beginners on both sides of the divide, the risk element will certainly have more of an effect than the element of returns. In the binary options market, traders have the option of getting a refund of a portion of their invested capital. Some brokers will return up to 15% the invested amount. In forex, there is no such thing. You lose and you lose all.

b)    There are features in the binary options market that aid in risk control. Some of these are the rollover function (ability to extend the trade to give it time to recover) and the early closure facility (which allows traders to close out profitable trades before maturity).

Ease of Trade

Trades are easier to place in the binary options market. Most times, trades can be placed in a simple four step process which only involves making inputs into dialog boxes:

a)    Choosing the asset

b)    Entering the investment amount

c)     Selecting expiry

d)    Trade execution

The process of order entry is not always that simple in forex. There are stop and limit points to calculate, lot sizes to select, etc. If the trader is using the ECN platforms or some of the more complex platforms other than the MT4, this process is much more complicated. A forex trader needs to be extra careful not to use the wrong kind of order. A binary options trader is basically choosing between two orders, but a forex trader is going to have to decide which of a possible 6 to 8 types of orders will suit  his trade.

Profitability Factor

Due to the nature of the binary options payout structure, it is easier to get a risk:reward ratio that is more favourable to the trader than FX trading. Going on from there, we need to point out that traders investing in the binary options market are shown how much the trade will cost and what they can expect as profits if the trades are successful. In the forex market, it is left entirely to the trader to do all the calculations regarding trade cost and profits to be earned.

In addition, it is easier for traders to open several trades in a day in order to increase their returns. That is because unlike the forex market where the number of pips a trader makes is a huge determinant of profits, the binary options trader does not always need so many pips to profit. Indeed, the 60 second and call/put trades only require one pip in the right direction to profit from the market.

Ease of Market Entry

The binary options market was created with retail traders in mind. As such, nearly all binary options brokers open up the market to those with as little as $100 and allow traders to grow from there with contract sizes as little as $5. Forex brokers offer no such juicy treats. Traders need more money to be able to get into the forex market, and contract sizes are not as low as in the binary options markets (except if you are using micro-lots).

Based on these points listed above, we can see that there are a number of ways in which the binary options market is better than the forex market in terms of what traders can gain from participation. If you have been trading forex and losing money, maybe it is time to do a switch to the binary option market. It is more suited to beginners and those who are not pros in trading. Who knows? This may be where your money needs to be at this time.

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