InvestingTips360’s staff has been asked by our loyal audience on the differences between foreign exchange and binary options. We asked a professional binary expert to go on board and help us iron out the differences.
What are binary options?
Binary options trading is very a popular form of trading because of its easy to understand set-up. Basically, they allow a trader to make a CALL or PUT option based on the potential future price of an asset. The real difference between, binary and more traditional vanilla options is the time to expiration. Binary platforms generally offer timeframes of between 60 seconds to 5 minutes.
Many platforms allow a trader to place a CALL or PUT on foreign currency pairs. Because of this some novice traders might confuse binary options with forex, but they are not the same.
What is FOREX?
Forex or the foreign exchange market is a worldwide market for exchanging currencies. It includes all acts of buying, selling or exchanging currencies. Many forex transactions take place as “spot trades”. Spot trades deliver the trade immediately. In spot trades the the seller or buyer is selling or buying the foreign currency, not exercisable rights. Generally, when you trade in the foreign exchange market, you do not sole buy an option on the foreign currency in question. There is an immediate sale or purchase of the currency. The foreign exchange market is extremely popular with people interested in diversifying their investment portfolio.
As the internet penetrates into almost every household, the presence of internet trading platforms for both FOREX and binary options continues to grow. Here are a couple of things to keep in mind when deciding which one to add to your investment strategy. Read more about forex here.
Binary Options or FOREX, who wins?
Deciding which market is best for your is not easy. Both FOREX and binary options offer you different ways to help diversify your trading portfolio. The most important thing is to decide which conforms better to your overall investment goals. Below is a description of key differences that will help clarify which options is better for your needs.
How long until the trade expires:
With binary options, a trader will hold his position until the option expires. When you trade with binary options you and the platform agree on a transaction time, which can be away from 60 seconds to 5 minutes. Each platform offers something a bit different. You can check out binary option reviews here.
With FOREX, a trader can hold his or her position until he or she believes it is beneficial to move the currency. Generally, when a trader purchases a set amount of that specific currency is now belongs to him or her, and the trader can now decide how long to hold on to it.
FOREX traders are able to close their position at any time during the day. In fact, the foreign exchange market is of the few that operates 24 hours days (except weekends). Binary option traders don’t have this option. This allow FOREX traders to take advantage of world events as they happen, and not wait for markets to open up in New York, London etc. Furthermore, the commitment to a short expiration time frame can put pressure on a trade. While, holding a currency until it is the right to move the pair has a wealth of benefits. Because of this, many of the more advanced, the binary platforms are offering different features that you give a trader more flexibility over the time frame. Never-the-less, if the short time frame wrenches your stomach, you might prefer FOREX.
What is the risk/return ratio?
With binary options, a trader will have a good idea of what the potential return vs. the potential risk is. The return on your trade depend on the type of option you chose. The losses are limited to the amount of money you used to purchase the option.
With FOREX, the potential winnings or losses are unknown when you enter a trade. The return of a foreign currency trade are not fixed in advance. You will earn more as long as the price of the currency continues to go up. However, there is not a limit on how much you can lose.
With FOREX trading, the potential returns on losses on your investment are not known in advance. A trader is able to limit potential losses with a stop order, but this also risky as you take the chance of not taking advantage of a currency rally. However, with FOREX you are more in control of your destiny as a trader. You have the freedom to buy or sell as you please. Binary traders will know before hand how much they can expect to win, which is an advantage for novice traders. However, you are much more limited in your ability to play the market. Your trading destiney is squeezed into the expiration time frames offered by the binary platforms.