Forex vs. Binary Options
Binary options industry is relatively new to the trading world and it gained popularity in recent years. Brokers dealing with binary options are advertising the product as being extremely easy to trade and making a profit is simple. This cannot be further from the truth. Trading binary options is even more difficult than trading the Forex market, as there is one component that needs to be considered: time. To put time besides price when making a forecast is everything a trader wishes for. It is one to say where price might go, and it is a totally different thing to say where price is going and when. The time horizon is the one that makes a difference when trading binary options. Not only that traders need to be right on the direction the market is going, but also, they need to be right on the time element. One should wonder why binary options brokers offer up to 90% rate of return on any one trade! If trading would be so easy, everyone would do it! The right answer is that trading is not easy, and perhaps it is the most difficult job in the world. However, it is not impossible to be successful when trading, only that people have wrong expectations, both when it comes to the effort that needs to be put in, as well as to the profit to be made.
Explaining Binary Trading
Binary options trading is based mostly on currency pairs. This means that the underlying product is nothing but a currency pair. So far, trading binary options or Forex is basically the same thing: one needs only to know the direction a currency pair is moving. However, things are not that simple in the case of binary trading. Not only price matters, but time has a crucial role, as explained earlier in this article. There are various expiration dates for a binary option to choose from, but, not surprisingly, brokers are picking the most difficult ones. After all, who’s willing to pay you 90% rate of return on any trade if conditions are so easy to meet? Again, like it is with trading in general, expectations need to be kept real. Before moving forward, there is something that needs to be explained here, as it is the main difference between Forex and binary options trading. On the Forex market, one can both buy or sell a currency pair, but when trading binary options, one can only buy an option. The difference is only from a semantic point of view, though. Choosing the direction is the same thing as trading the Forex market. In the binary options market, an option can only be bought. On the Forex market, one can go short or sell a currency pair. But buying a put option is the same as going short on the Forex market, and buying call options is identical with going long on the Forex market. Only the industries are different.
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Advantages of Binary Options Trading
Unfortunately, there are few things to mention here. The holy grail in trading is to match price and time, and if a trader can do that (this is unlikely as there are few trading theories that allows this, and even the ones that exist are pretty much misunderstood by most people) then there are other products that bear less risk that can be traded. There are some things to be mentioned here, though. But binary options brokers are not always providing the conditions for traders to benefit from them. For example, some binary options brokers offer the possibility to build your own option. In other words, one can choose the underlying product the option is based on, the expiration date, and even the type of the option. This gives a lot of flexibility for the experienced trader and profits can be made. However, this is something that only a few brokers offer, and even the ones that did offer such an option builder, are having second thoughts and are withdrawing this possibility. Matching price and time for a financial product is something extremely difficult to be done, and brokers know that. Therefore, the binary trading industry benefited from advertising the product as being extremely easy to the product from, only for traders to find out that this is not correct.
Disadvantages of Binary Options Trading
The first thing to mention here is the fact that binary options trading platforms are web-based. This is a tremendous disadvantage in the sense that, depending on the Internet connection one has, execution is full of flaws. The explanation for offering such trading platforms is quite simple: it is the cheaper way to solve problems. To develop a platform on its own is an expensive process, and not many brokers can do that. There are a few successful Forex brokers that are offering binary options trading as well, and this should be viewed as only an extension of their business. For the broker, it is clearly a new business opportunity, but for the trader, it is a liability. Brokers limit the binary options trading to only some binary options types, like high/low and boundary, without giving access to one-touch options, for example, on all currency pairs, and on all expiration dates. These are tips and tricks brokers are using to swing chances in their favor. But these are not the major drawdowns of binary options trading. Regulation is missing! In many regions in the world binary options trading is simply forbidden as there is not an authority to regulate the business. There is a thin line between gambling and trading binary options, and no one wants to take responsibility for it in an unregulated environment. This is what a trader should keep in mind as the main difference between the Forex market and the binary options market.
Recommended Further Readings
- Forex Trading – Explaining the Concept
– What is forex trading, generalities about trading the currency market.
- Why Trading Forex?
– Advantages and disadvantages of trading the currency market, what are trader’s expectations and what is a realistic approach to follow
- What is a Forex Broker and Types of Brokerage houses
– Explaining what a Forex broker is and does, how the business should be organized, and how many types of Forex brokers exist.
- Financial Products to Trade
– Different categories of financial products that a Forex Broker is offering for the retail clients, starting with the classical currency pairs, and continuing with commodities, CFD’s, indexes, etc.
- Explaining Commissions in Forex Trading
– Explaining how Forex brokers are making money.
- Forex Brokers Types – ECN or STP?
– What is ECN, STP, how d- brokers deal with client’s orders, advantages, and disadvantages of the tw- types.
- Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries. Berganza, J. C., & Broto, C. (2012). Journal of International Money and finance, 31(2), 428-444.
- “Risks vs Return with Binary Option Trading.” Kiiskinen, Eemi. (2016).