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The Differences Between Binary And Forex

If you are new to the world of trading you may be feeling slightly bamboozled by all the terminology and the options open to you. There are many ways to trade but two very popular methods are Forex and binary options. When you look more closely at what is involved in these types of investing it really isn't as complicated as it might seem.

Forex is currently the largest trading market in the world and is the based on the movement of currencies. It is commonly known as Forex or FX and stands for Foreign Exchange. Quite simply you have to correctly trade on the one currency strengthening whilst another weakens.

Another popular method is binary trading. This differs greatly from Forex in that you can invest in many more assets including things like commodities, stocks and currency. Options are a more recent entry and have only become popular in the last few years.

In this guide we examine the difference between these two types of trading, including:

  • The payouts and losses you can expect and the difference in the two online methods
  • Which type of trading is better suited to you and which one might be more profitable
  • The pros and cons of both types of investing, what to look out for and how to succeed

Trading Payouts And Losses

There is one main difference between the payout and losses of binary options vs Forex trades and that is knowing how much you stand to win or lose on the result of your trade. With Forex you don't know the maximum profit you can make on a trade. By the same token you don't know how much you could lose on a single trade and you could in fact lose of all the money in your investing account.

With binary trading you know exactly what you stand to win or lose with every trade. The way to manage this when it comes to Forex is to put a limit/stop on the trade so that you don't go past a certain level. For that reason many traders prefer binary vs Forex as the risk is less and the amounts more manageable.

The Costs of Each Method

With binary options trading you simply open an account, make your deposit and trade a certain amount each time on the call or put of an asset. There are no commissions or costs and any money that the broker gets is already calculated when working out the stated up front payouts of each trade. You know from the start how much you stand to win or lose and there are no hidden extras.

With Forex it is different. There are spreads and commissions involved which vary from broker to broker. The trader basically pays a small commission for each trade. The commissions are not always a clear cut amount and are often added into the spread, the spread is the difference between the currency pair buy and sell price. This involves more of a risk in that the spread could be huge or tiny. You just don't know.

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Which Trading Type Suits You

The format you choose is dependent on your preferences. You may be less of a risk taker and like to know up front what the outcome will be or you may be comfortable with Forex trading and the risks associated. You may be an experienced hand that likes to trade both. One of the major factors to consider, apart from the investment factor, is whether you will find it enjoyable and comfortable to trade and which one suits your style.

If you prefer the choice when it comes to assets then binary options definitely gives you this. If you prefer to trade in currencies then Forex could be the ideal option for you although you can trade currencies with options trading too. How much work are you willing to put in? Well, trading Forex is more complicated with the trader needing to put in more work and research.

The Final Pros And Cons

In binary trading there is still the option to get a percentage of the money invested back with an unsuccessful trade. With a Forex trade you lose it all on an unsuccessful outcome. There are also options to rollover binary trades to give the asset a chance to recover if it's not doing as well as anticipated.

When it comes to basic investing itself and the ease of use then again binary trading comes out as the easier way. All you need to do is choose the asset, choose how much to invest, select the time of expiry and press the button to trade. It isn't as simple in Forex and the process is more involved and complicated, you really need a solid strategy or signals. In fact, for a beginner, binary is the simpler of the two.

The cost to trade varies between the two types and where options trading already ticks many boxes, for those entering the investment market, it is no different when it comes to cost of entry. You can sign up to a broker and invest as little as $10 dollars to start, there are some platforms where it costs nothing to open an account which is ideal for the beginner looking to dip their toe. It isn't as easy to open a Forex account and a much bigger deposit is needed to open one.

Whilst there are benefits to both types it is clear to see that for the beginner or trader who isn't looking to invest thousands of pounds then binary options is the less risky, more accessible option. It is no surprise that it continues to experience such growth in popularity.

Binary Options Vs. Forex

Binary options trading has long existed over-the-counter, only experiencing a massive growth spurt in the last few years.

Now, approximately 90 companies (including those who white label their products) offer some sort of binary options trading service.

So okay, it’s a growing industry… But why should you involve yourself in it?

There are many advantages and disadvantages to both binary options and spot forex.

Max Risk

One of the great things about binary options trading is that you always know the exact maximum gain or loss in advance.

The trader controls the premium at risk to enter the binary option trade, and that is the only amount that can absolutely be lost.

Most binary option brokers even allow you to cut your max loss by “folding” your trades ahead of expiration after certain types of trade conditions have been met.

In contrast, with spot forex, even with a stop loss order set, you cannot be 100% certain that you will lose only the pre-calculated amount that you risked.

While improbable, there’s always the chance that certain issues may affect your final max risk like slippage, lack of liquidity to execute a stop order at the desired price, a broker’s trading platform goes down, etc.

Trade Management Flexibility and Maximizing Reward

Aside from High/Low options, many of the binary option plays are only available at certain times of the day or week, and most times the strike prices are set by the broker.

With spot forex, you are able to enter limit orders for any price or execute a market order at any time during open market hours.

In terms of exiting open trades, some binary options brokers allow you to close options trades early, but usually only after a predetermined amount of time has pass after the option trade has opened and before it closes.

And as mentioned before, the value that is returned to the trader is based on whether the market is in-the-money or out-of-the-money and of course, with a piece going to the broker.

In spot forex, you can close your trade at any time (except on weekends with most brokers). Even if it’s one second into the trade, you can get out and book profits or reduce losses.

Finally, if you think there’s going to be a long trend and you want to maximize your profit on it by holding it as long as possible, you can do so in the spot market using scaling in and trailing stop techniques.

With a binary option, the expiration date and cap on profits limits you; you’re out of the trade as soon as you close or the option expires.

Depending on your risk and trade management preferences, either trading instrument can be good or bad depending on how much time you want to spend in front of your trading platform, how active you want to be, or what you expect the market may do.

Transaction Costs

In binary options trading, there are no additional transaction costs other than what is normally factored into the final payout.

In spot forex, the transaction cost comes in the form of a spread, a commission, or both. We’ve already discussed this in a previous chapter, but feel free to revisit the lesson and read up on it again.

Trade Choices

Another great thing about binary options trading is that you aren’t limited to just currency pairs like with most retail forex brokers.

While currency pairs are the most common assets you can trade, with some binary options brokers, you may also have the opportunity to trade your ideas on a limited number of individual stocks, stock indices, and even commodities.

Volatility Risk

Surprise volatility is not usually an issue in binary options trading. Any trade you take can weather the volatility caused by certain events.

The max risk is still set, but so is the max reward.

In spot forex, however, sharp swings can affect the value of a position greatly and very quickly, which makes the additional task of setting up proper risk management processes very important.

Trader Error

The margin for error when entering a trade is very small in binary options trading.

This is due to the fact there are only two actions to take with binary options: open and close.

There are no limit orders to keep track of, or to close or adjust. In spot forex, an inattentive trader may forget to place exit and/or adjustment orders, potentially creating a loss greater than he/she intends.

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In the EU, financial products are offered by Binary Investments (Europe) Ltd., Mompalao Building, Suite 2, Tower Road, Msida MSD1825, Malta, licensed and regulated as a Category 3 Investment Services provider by the Malta Financial Services Authority (licence no. IS/70156).

In the Isle of Man and the UK, Volatility Indices are offered by Binary (IOM) Ltd., First Floor, Millennium House, Victoria Road, Douglas, IM2 4RW, Isle of Man, British Isles; licensed and regulated respectively by (1) the Gambling Supervision Commission in the Isle of Man (current licence issued on 31 August 2017) and by (2) the Gambling Commission in the UK (licence reference no: 39172).

In the rest of the EU, Volatility Indices are offered by Binary (Europe) Ltd., Mompalao Building, Suite 2, Tower Road, Msida MSD1825, Malta; licensed and regulated by (1) the Malta Gaming Authority in Malta (licence no. MGA/B2C/102/2000 issued on 01 August 2018), for UK clients by (2) the UK Gambling Commission (licence reference no: 39495), and for Irish clients by (3) the Revenue Commissioners in Ireland (Remote Bookmaker's Licence no. 1010285 issued on 1 July 2017). View complete Regulatory Information.

Binary.com is an award-winning online trading provider that helps its clients to trade on financial markets through binary options and CFDs. Trading binary options and CFDs on Volatility Indices is classified as a gambling activity. Remember that gambling can be addictive – please play responsibly. Learn more about Responsible Trading. Some products are not available in all countries. This website’s services are not made available in certain countries such as the USA, Canada, Costa Rica, Hong Kong, or to persons under age 18.

Trading binary options may not be suitable for everyone, so please ensure that you fully understand the risks involved. Your losses can exceed your initial deposit and you do not own or have any interest in the underlying asset.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. Between 74-89% of retail investor accounts lose money when trading CFDs. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

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