Difference Between Binary Options and Forex Trading : Complete Guide

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There are many methods of trading within the financial market. These techniques of wealth creation are continuously increasing in number, but overtime, two of them have remained at the top of the pile. Binary Options and Forex trading are unarguably the two biggest methods of trading in the financial sector. There are tens of millions of traders involved in both Binary Options and Forex trades, but what really differentiates these two trading methods? Binary Options vs Forex trading has been an age long argument that hasn’t been quelled. In this article, we will reveal the fundamental and technical differences between these two ways of wealth creation. We will demystify their complexities and reveal all there is to know about each one of them. Their individual benefits will be analyzed, and their subdivisions or types will be meticulously scrutinized.

Binary Options and Forex Trading

After reading this article, you will be armed with more than enough information to properly discern which of these two trading methods is the best one for you.

What Are Binary Options?

Binary Options is a fast rising method of trading that involves taking trade positions on fluctuations in the prices of assets. Binary Options have been around for a while, and people have been jumping on them because of their many advantages. With Binary Options, you do not need to own any of the assets you are trading on, and you can hold positions for seconds or minutes. Binary, meaning two, implies that your trades can only go two ways. You can either gain a fixed gain or fixed loss, thus the name of this trading method. Binary Options allow you trade different financial instruments across multiple global financial markets. This is one of the several reasons why people have been flocking to Binary Options trading.

Trading binary Options is very easy, and anyone with no prior knowledge of the financial market can learn this method if trading in minutes. Basically, Binary Options involves you trading on the volatility of the prices of assets. You can decide to take a position of the price of an asset going up or coming down, depending on your analysis of such asset. You also have to specify the time duration during which your position on this asset will last. After doing this, your broker will tell you how much you stand to gain if your trade position turns out right and how much you stand to lose if your trade position is wrong. Although you typically stand to lose all your capital if your trade position does not come out right, some brokers can decide to give you a percentage of your capital back to encourage you to trade more. This is basically what Binary Options trading entails, and as you can see, it is easy for all and sundry to grasp. Trading Binary Options is a wealth creation venture with a very low barrier to entry.

See Also: Difference Between Trading And Investing

Types of Binary Options

There are several ways of trading Binary Options, each one with its own peculiarity. When Binary Options began some years ago, there was only one type of trade called Call/Put or High/Low or Up/Down, all indicating that the trades can only go in two possible directions. However, there have been newer styles and methods of trading overtime, and more are bound to come up. We will proceed to extensively review the different types of binary trading that are available.

1) High/Low:

As earlier stated, this is the most basic form of trading Binary Options. This trade simply involves taking a trading position on whether the price of an asset, which might be a stock, commodity, currency, or index, will be higher or lower than its current price after a certain time.

If you believe the price will be higher than it is currently, you call a High, or Call, or Put. However, if you believe it will be lower, you call a Low, or Down, or Put. The time duration of this trade position can vary, and can be customized by the trader using the “Option Builder”, although they typically last between some minutes and several hours. If you are correct about your trade position, and the asset is trading at your indicated level, then you win your trade. If not, you lose your trade.

2) Boundary/Range:

This type of trade basically involves you taking a trade position that the price of an asset will stay within a range, bounded by two trigger points, over a period of time. This trade is particularly useful as it allows traders profit from flat markets – when the price of an asset is stable. If the price of the asset stays within your specified range over the period of time specified, then you win your trade, if not the trade is lost.

3) Long Term:

This is a type of trade synonymous to High/Low trades, except that they last for days or weeks, or even months. This trade type is almost always targeted at newbies, because it involves less risk, and it works on data that is often more reliable than short term trades.

4) 60 Seconds / Short Term:

This trade type is fast becoming the most popular way of trading Binary Options. This type of trade is quite similar to the High/Low trade, except for the fact that the time duration is 60 seconds. Some brokers have also been allowing other short term trades, typically lasting up to 2 or 3 minutes. Traders have to be careful when delving into this type of trade, otherwise their capital can be gone in such a short period of time.

5) One Touch / No Touch:

This type of trade also involves taking a position on the price of an asset, albeit quite differently. In this type of trade, you take a position on whether the price of an asset will reach a trigger point before an expiry time. The further away the trigger point is, the more risky the trade is, and the more profit you stand to gain. If the price of the asset reaches or touches the trigger point at any time before the expiry time, then you win your trade, if not the trade is lost. This type of trade is one of the most risky types of Binary Options, hence it usually results in payouts of up to 300% or more.

6) Pairs:

Pair trades are relatively new in the Binary Options world. They allow you trade the relative price fluctuations of two assets simultaneously. For instance, you can decide to take a position of Google’s stocks outperforming Apple’s stocks over a period of time, or the other way round.

7) Ladder:

This is one of the most advanced types of trade available to Binary Options traders. This trade allows you break down the fluctuations in the price of an asset over certain periods of time, thereby earning you partial profits or losses. This type of trade is mostly for advanced traders who have ample experience trading Binary Options.

What is Forex Trading?

Forex Trading is a technique of wealth generation in the financial market that involves prediction of the changes in the strengths of various currencies over a period of time. It also involves trading currencies and buying or selling one against another. The aim of Forex traders is to profit from the fluctuations in the exchange rate between currencies over a period of time. Forex, which stands for Foreign Exchange Market, is the most traded market in the world. Every day, over 5 trillion worth of currencies are traded globally, revealing its high dynamic state and equally high liquidity.

The modus operandi of forex trading is quite simple. Forex is usually quoted in pairs, so basically yo are comparing one currency against another. For example, you can pick the Pound Sterling versus the US dollar (GBP/USD). The first currency – GBP – is known as the base, and is the one you think will go up or down against the second currency – USD – which is the quote.

Forex traders can predict the future direction of the market by either taking a long (buy) or short (sell) position, depending on whether or not the trader thinks the currency’s value will go up or down. Basically, the price fluctuations of Forex is triggered by currencies depreciating (weakening) or appreciating (strengthening) in value.

Methods of Forex Trading

There are several ways of trading Forex, and we will proceed to analyze and review these types of forex trading. It is very important to understand the many types of Forex trading, so you know which one works for you. These are the ways by which Forex can be traded.

1) Limit Orders:

This is an order to buy or sell a currency pair only when certain pre-specified conditions are satisfied. This is a manner of mitigating risk and increasing profit, and this method of trading forex is very commonly used to create orders that will be executed when an exchange rate hits a particular level.

2) Take-Profit Orders:

This type of order is used to secure profits during a particular trade. Traders can lock in profits by closing an open order when the exchange rate hits a particular level, thereby securing their profit at that level.

3) Stop-Loss Orders:

This is very similar to the take-profit orders, except that it is used to stop losses when the exchange rate reaches a particular level. This is another very important way to mitigate risk, as all open positions will be closed when the exchange rate moves against you and reaches a level you must have specified.

4) Trailing Stop Orders:

This method of trading Forex is used to restrict losses and avoid margin closeouts. The trailing stop orders closes all open positions if the market moves in an unfavorable position by a specified distance. It is a very important way of mitigating risk and losses in Forex trading.

Differences between Binary Options and Forex Trading

We now know and understand the basic things about Binary Options and Forex Trading, but what is the difference between forex and binary options? What essentially distinguishes one from the other? Here, we will explain all there is to know about Binary Options vs Forex trading.

1) Profit/Loss/Risk:

When trading Binary Options, you are aware of the exact amount you stand to gain or lose, even before you start your trade. Binary Options allows traders a forehand knowledge of the risk of whatever trade they are making. This is different in Forex trading, as trades are not aware of the exact amount they stand to gain or lose.

2) Closing a Trade Position:

When trading Binary Options, traders cannot close their trade positions until the expiry time initially agreed on the trade. However, Forex trading allows traders close their trade positions via several methods. The several types of market orders, which we have described earlier, is one such way of closing trade positions in Forex trading.

3) Traders Error:

There is less probability of trader’s error in Binary Options, as trades can only go in two ways – up or down. However, newbies, and even experienced traders tend to make errors whilst trading forex, because of its more complex nature.

4) Range of Assets to trade:

Most retail forex brokers limit forex trading to just pairs of currencies, hence limiting the range of assets that traders can profit from. However, Binary Options allow traders profit from a wide range of assets, such as stocks, indices, currencies, etc. This unlimited choices of financial instruments is one of the many advantages of Binary Options.

Conclusion

It is worthy of note that this is not a scuffle between Forex trading and Binary Options trading. It is very important for potential traders to understand the basic and technical difference between binary options and forex, so as to discern which one favors them. With that being said, this article has properly dissected the complexities involved in both trading techniques, as well as thoroughly reviewed their differences. Deciding on which one suits you should not be a problem, given the arsenal of knowledge that this article has provided you.