New comers in the financial markets are usually faced with the tough choice of they will engage in binary options or forex trading. It is also possible that they’ll consider futures and stock trading as well, but these activities require additional capital. One can always deploy the same chart for forex and binary options trading, but there are variations between the two and it is such variations that appeal to different classes of investors.
Let’s look at some of the things that differentiate binary options from forex trading:
– One key difference is the fixed payout usually found on binary options at the start of the trade i.e. if a binary option has a payout of 75% for winning trades, then it is certain that if you place $20 on a trade, you’ll either lose your $20 or make $15 (and hell yeah, you’ll retain your initial $20 as well).
– Forex trading offers a bit more flexibility. This could be an advantage depending on how trades are initiated by the trader. Stop loss is deployed to manage risk, but prevalent market conditions could hamper the execution of the order at the predetermined price resulting in a larger than anticipated loss. Without a stop loss, then it becomes unknown the risk of a position. Forex trading also deploys a profit target to take profits at a specific price level, but this does not in any way denote that such price levels will be breached.
– The absence of variability in forex trading makes them less alluring to binary options trading. Binary options allows you know your risk and profit potential and when the option expires, you stand to gain the pre-determined amount or lose everything. Forex trading does not spell your eventual risk and profit until positions are exited/closed. Although, this could offer some merit depending on your trading expertise as the fixed profit and risk found on binary options delivers minute or no flexibility at all when tailoring risk in respect to reward.
– The outlines for risk and reward in forex trading and those of binary options are quite opposite. Forex trading allows for the tailoring of your likely reward comparatively to risk. For instance, when you have a trade with stop loss in place and it exposes you to a $50 loss, while the take profit level is set to yield a $150 profit. Such a trade remains active in the market until one of the orders is breached, thus yielding $50 loss or $150 profit.
– Binary options in most cases offers more risk than reward. Typical payouts range from 60% to 85%, but when you lose a trade in most cases you stand to lose 100% of the funds you bet on the trade.
– When trading binary options, you sure require over 50% in payouts to be able to breakeven and/or make some profit. However, forex trading might see you lose more trades than you win, but being able to modify your reward in relation to risk could see you end up still being in the green i.e. in profit.
Trading binary options and forex offers huge potentials for profit. Binary options are easier, as they usually would spell out your risk, duration the trade will last and profit potential. Forex trading is much more flexible and there are a lot more variables to consider i.e. when you enter a trade (open), when you will exit, when a session will end (close) and how best to manage your trades.