Risk and profitability always go hand in hand. It is well known that the higher the profit we expect, the higher the risk traders will take. And on this, we will base this article, on the differences in profitability between Forex and Binary Options to determine which investment has more risk.
What is behind these businesses? What are binary options? What is their operation? Why do you hear so much about binary options in currencies? How are binary options different from Forex? Is there a kinship?
What Are Binary Options?
Binary options are a financial derivative that works on underlying assets such as currencies, or commodities… where the potential gain is fixed because it is determined at the time of the purchase of the investment.
To put it more clearly, binary options create a contract in which you as a trader choose a trend as a forecast of the future price on an asset. This forecast can be in three ways: equal, less, or greater than the price chosen by the trader at the time of the investment.
This price is called the strike price. You as a trader are also obliged to choose a maturity date of the investment, so that when that term ends check if the forecast that was made of the price is successful or not.
This is how you work on binary options, with predictions of asset price trends and with a fixed profit value that is set at the time of the investment and with a maturity date to check the result.
How Do Binary Options Work?
The first way is to bet if when the binary option reaches the end of the maturity date its price will be above or below the exercise price, that is, an upward or downward prediction.
The second way to make predictions is to focus on the trader pointing to a price cap that will be reached at least once before the expiration date. These binary options are called One touch.
The third way to make these predictions. A price range is sought that predicts that the value of the underlying asset will remain when it reaches its maturity date. We call these predictions Boundary or Zone.
There is a denomination to be taken into account with regard to increases or decreases, or price increases and decreases. The options called Call are those that claim to be winners potentially linked to the increases of the underlying asset.
If what we do is to predict in reverse, thinking that the trader’s profit will be determined by a drop in quotation values, then we will call it opinions put.
What Are the Differences Between the Two?
Starting, we must make it clear that a market like Forex moves in spot type, which is a market where all the contracts that are executed to buy and sell are carried out at that time and the investor has to make the payment of the market price which at that time reflects the value of the asset. However, this is not at all what happens in Binary Actions. Binary options are not tied to the market value of the assets, this is an advantage.
In binary investments, there is a lower and more controlled risk by the simple fact that you are not buying an asset and paying a price for it. What you’re doing is investing in a prediction in which you determine the direction the price of that underlying asset is going to take in a given time frame with a maturity date.
Binary shares do not acquire assets, they are contracts in which the trend of such assets is determined. These contracts never influence the quotations on the underlying asset. The binary options market does not suffer the comings and goings of the stock market, because for traders it is like a blackboard on which valuations are scored and on which predictions are made up or down.
When we speak then of binary options on currencies, we are not acting on the value of those currencies or affecting their behavior. What we are doing is assessing whether the price of these currencies will tend to rise or fall in their market. So we call binary shares on currencies because we’re working on that underlying, which in this case is currencies. It is noteworthy that there is a very important distinction between binary options and Forex.
We talk about how we value profit calculation or a failed operation. As we said before, the Forex market is a spot market, so when you buy or sell you will do it at the price that marks the market at that moment.
We will then calculate the profits and losses by subtracting the price we paid at the time of closing the transaction from the price we paid at the opening. This is how we get the number of pips. What we do is multiply the value of the pips by the number of pips obtained and thus we reach the end of the profit or loss of this completed operation.
On the other hand, if we talk now about binary investments, the profit or loss result is measured as a fixed percentage value of the capital you have invested. That percentage amount of profit or loss is constant and you will always know it to make your trade. This difference is fundamental to keep in mind because this marks a very serious gap between Forex and Binary options.
While Forex will keep an eye on how the asset market evolves, with binary options you just have to see if the trend is up or down. We talked before the maturity dates of binary transactions. In Forex this maturity period does not exist because what is intended is that your capital is the longer the better in the asset market. While with binary options everything is clearer and more transparent because there is always a time when you know that your investment will end and you will see the results.
“In addition, binary options move in much shorter periods than Forex. This allows you to better control risks and increase profitability in less time.”
While in Forex you will be working with possible results of 50% positive at most, in binary options the positive net result will always be higher than 70%, depending on the type of option and its maturity date.
In binary options, we are making much more accurate investments, with less risk than Forex, with simpler and faster results so we can make decisions before, and with minimal positive results that usually far exceed the best possible result with Forex. However, to date, many countries have banned investment in binary options. Regulators appeal to the complexity of these financial products and their lack of transparency.
For some time, trading binary options has led to large losses for investors, especially among retailers who had less experience in the markets, and who saw their investment being lost beyond repair. The lack of information and transparency on investment vehicles has led to a high percentage of investors who have already lost all of their investment.
But we think that it is not the product itself that is to blame for this, but rather the lack of preparation of certain investors who do not have enough knowledge and who have treated this investment as a mere game of chance.