What is the Difference Between Binary Options and Forex Trading?

The most common underlying asset is currency pairs, but you can also trade cryptocurrencies, commodities, stocks, and indices. You can think of Binary Options as a derivative contract of the underlying asset with fixed risks and rewards.

With binary options, you don’t own the underlying asset. Instead, you are simply placing a bet in the direction that the asset’s price will move. If you predict correctly, you will make a profit. If you don’t, you will lose your investment.

Also, with binary options, you only need to predict the direction of the price, not the magnitude. The magnitude of an asset’s price movement is the length of price waves relative to the price average.

For example, an asset with a small magnitude will have shorter price waves and be less volatile than one with a large magnitude. So when you’re placing your binary options trades, you only need to predict if the asset’s price will go up or down. You don’t need to worry about the length of the price waves.

For example, let’s say that you think the EUR/USD currency pair will go up in value. You would place a “call” option and specify the amount you want to invest as well as the price strike. If the EUR/USD goes up by even one pip, you will make a profit. If it doesn’t, you will lose your investment.

This makes binary options much easier to trade than Forex because you don’t need to concern yourself with things like pips and leverage. Another advantage of binary options is that they have a fixed expiry date. At the end of the trading time frame, your trade will automatically close, and you will either make a profit or lose on your investment.

There’s no need to worry about holding your position overnight or over the weekend like you do with forex trading. So those are the basics of binary options. Now let’s look at forex trading and see how it differs.

For example, if a company in the United States wanted to buy goods from a company in Europe, it would need to trade US dollars for Euros. The same goes for individuals who travel from one country to another.

Over time, this evolved into what we now know as forex trading. Investors and traders realized that there was profit in buying and selling currencies. While the volatility of national currencies might seem minuscule to us, savvy investors know how to make a profit by using leverage and the volume of the global market to their advantage.

Today, forex trading is a global, decentralized market where people can trade currencies from anywhere in the world. The currency market is open 24 hours a day, five days a week, and boasts of being the world’s largest financial market with a daily trading volume of over $6.6 trillion.

Unlike binary options, which is more like trading derivative contracts, when you trade forex, you own the underlying currency pairs and can hold them for as long as you want. There is no expiry date like there is with binary options. Plus, you get access to leverage with forex trading, and this can magnify your potential profits (or losses).

Types of Forex Markets

There are three main types of forex markets:

The spot market

This is the market where currencies are traded at their current market price. For example, if you want to buy EUR/USD, you will buy Euros and sell US dollars at the current market price.

The forward market

This is a market where you can buy and sell currencies at a predetermined price for delivery in the future. For instance, a company looking to buy goods from Europe in three months may agree to buy Euros at the current market price and then deliver them in three months.

This trade allows the company to establish a fixed price for their goods or services even if the market price of Euros fluctuates at the time of delivery. However, it’s worth noting that forward forex markets are over-the-counter (OTC) trades, meaning they are unregulated and not traded on an exchange.

The futures market

Futures contracts are standardized agreements to buy or sell a currency at a predetermined price in the future. Unlike forwards, these contracts are traded on regulated commodities exchanges and are, therefore, more transparent. Because of this, they usually involve large institutional investors rather than individual traders.

Futures forex contracts are regulated and standardized so that each contract represents a specific amount of the underlying currency. For example, one EUR/USD futures contract may represent 100,000 Euros.

What’s the Difference Between Binary Options and Forex Trading?

The main difference between the two can be highlighted based on the following aspects:

Expiry Dates

In binary options trading, when you open a trade, you know in advance how long it will last. This is not the case with forex trading, where your trade can last for days, weeks, or even months. For instance, I can place a trade to buy EUR/USD and hold it for a week, month, or even a year. With binary options, however, I know that the trade will last for only a few minutes or hours.

Leverage

In forex trading, you can use leverage to control more money than what you have in your account. Leverage is a loan the broker gives you to maintain a more considerable amount of capital. For instance, if I have $1,000 in my account and I want to trade $100,000 worth of currency, I can use leverage and only put down $1,000 as a margin.

In this case, my broker will loan me the remaining $99,000 to enable me to trade the more significant amount. With more capital, I can make a trade and earn more profit than I would with my original $1,000.

However, this also means that my potential losses are much higher since I use borrowed money. Binary options trading does not offer leverage as forex trading does, which is why many people prefer binary options to forex — with binary options, you can’t lose more than your trade amount.

Stop Losses and Take Profits

In forex trading, you can set a stop-loss order so your trade will automatically close once the price reaches a certain level. This is not possible with binary options trading, where your only exit strategy is to sell your contract before it expires.

Another difference between forex and binary options trading is that you can set your own take-profit orders with forex, meaning you can decide how much profit you want to make on a trade before entering it. With binary options, however, your potential profit or loss is known in advance, since the contract only lasts for a specific period.

Volatility

Another critical difference between forex and binary options trading has to do with the underlying markets themselves. For instance, trading the EUR/USD currency pair is much different than trading company stocks. The foreign exchange market is highly volatile, with prices moving quickly up and down. This can make forex trading very risky, especially for new traders.

The stock market is also volatile, but not to the same extent as the forex market. Company stocks tend to move slowly and steadily, so predicting their price movements is easier. This makes binary options trading a much safer and less risky way to trade company stocks.

Access

As mentioned, the global currency market is decentralized and spans all time zones. This means that it’s open 24 hours a day, five days a week. The forex market is also much larger and more liquid than the binary options market. This is because there are more currency pairs to trade, and someone is always willing to buy or sell currencies.

This is not the case with binary options trading. There are only a few major currency pits to trade, meaning the market is much smaller and not as liquid. There are often periods when there is very little activity in the market. This can make it difficult to find trading opportunities, especially for new traders.

Cost

The cost of trading forex is usually complex and sophisticated. Fees are measured in pips. A pip is the smallest unit of price movement for a currency pair and is typically equal to 0.0001 for most currency pairs.

For example, if the EUR/USD moves from 1.2050 to 1.2051, that is one pip of movement. The online brokerage company will then charge a commission on the spread of each trade, which is usually a percentage of the total value of the trade.

The cost of trading binary options is much simpler. You only have to pay the premium for your option contract, and there are no other fees. The premium is the price you pay to buy the option contract. It is estimated by considering factors such as the underlying asset’s current price, the time until expiration, and volatility.

Sometimes, the trader only has to pay a fee on their final payout. Some brokers offer even lower fees. However, binary options offer traders a clear picture of the costs and expenses of each trade.

Profitability

Forex trading can be very profitable, but it also comes with higher inherent risk. The possibility of losing all your investments is real, and you must be prepared for it. On the other hand, binary options trading is much less complex, and the profit potential is known in advance since the contract only lasts for a specific period.

Binary options vs Forex: Which is better?

This is a difficult question since it depends on your trading style and goals. If you are looking for quick and profitable trades, then binary options trading might be better for you. If you are looking for more long-term and steady profits, then Forex trading might be the better choice. Again, it comes down to your trading style and goals.

What are some of the best forex trading brokers in the world?

There are many great forex brokers to choose from. Some of the most popular include XM, eToro, FXCM, and Oanda. Need another broker reviews, check vantage Fx.

What are the best binary options brokers worldwide?

There are many great binary options brokers to choose from. Some of the most popular include IQ Option, Binomo, and HighLow. Check out our reviews of the best binary options brokers to compare reputable brokers.

Conclusion

Binary options trading and forex trading are both trendy ways to trade the financial markets, but as I’ve outlined, they have several important distinctions. Be sure to understand the key differences before you decide which one is right for you because it’s you who has to manage everything and survive throughout the game. Always remember what Charles Darwin said:

“It is not the strongest or the most intelligent who will survive but those who can best manage change.”