Today we will focus on trying to respond to a very frequently asked question in the world of trading: What is the difference between binary options and Forex? In the following article, you will find answers to questions such as: What are binary options? How do binary options work? Can you win in binary options? In addition, I will also share my opinion about what is better and more profitable, Forex, or binary options.
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About 10 years ago, most broker companies specializing in stock markets, suddenly, with a single voice, began to proclaim in every corner a new super service, “binary option”. At that time, very few investors could understand what it was, but the thirst for instant profit made this tool very attractive. In those days, no one had a similar offer, because it was, in fact, a home casino, but with constant access and a wallet with an initial minimum. Now enough time has passed and the consumer began to understand that the binary option is not such a brilliant instrument and that it most often leads not to instant gains, but to instant loss. To give your own opinion of this instrument, you need to understand what it is.
What is a Binary Option?
So what exactly is a binary option? If we want to answer this particular question, we have to look at its structure. The name is made up of two words: binary and option. The word “binary” is derived from the concept of “binary model”, a model that has only two variants of an event, or is “yes” or “no”. This model is one of the main ones of the instrument, or win or lose, there are no other options. Now the word is “option”. Everything is much deeper here, this concept is taken as a derivative of the real stock option. A “stock option” is a derivative financial instrument, which is based on the rule of future performance of the contract in the event that a pre-established condition is met.
Therefore, by putting these two concepts together, we get an instrument that works according to the rules of the stock exchange contract and has only two options for the event. In other words, by concluding such a contract, you have either won or lost.
Let’s look at the working mechanism of the binary option based on the most popular parameter of the contract, “high/low” This type of contract means that you have chosen the target price level and the direction of the agreement. For example, we think the EUR/USD currency pair will fall in the next 5 minutes. We select the level from which the calculation will be performed and put the option down. Therefore, if the price in 5 minutes is lower than this level, we will get a benefit, and if it is higher, we will get a loss. We chose the bet size, for example, $50 and go!
The position of our option will look like this, as shown in the chart above. All that is red below is our benefit and all that is up is loss. The main feature that distinguishes such a contract will be the fact that we do not care how many points the price will be higher or lower: our gains or losses are always fixed.
Therefore, it passed 2 minutes after the conclusion of the options contract, and during this time the price was below our reference level. Therefore, the time of our choice is over, we obtained a profit equal to 80-85% of our bet.
Three minutes later, our option was executed, as time has expired (expiration occurred). But unfortunately, the price shot up at the last minute and went above our benchmark, which caused us a loss in the size of our $50 bet. It’s as simple as that. Of course, there are still many different variations in the binary option, but we will talk about them directly compared to the Forex market.
What Is the Main Difference Between Binary Options and Forex?
The comparison of these two types of trading will occur in a number of the most important parameters:
Variety of Contract Types
In Forex there is only one type of contract. No, of course, you can trade with currency pairs, CFDs, commodities, or securities, but these are only variants of the same type of contract: CFD price difference contract (Contract For Difference). You bought a currency pair and its price has increased, you will get the difference between the sales price and the subsequent purchase price.
There are several types of contracts in binary options: this is the most common “high/ low” that we have already seen, is the “touch option”, where you should wait for it to reach a certain level, the “range option”, where you should specify a target price range, and the “ladder option” of higher performance.
Value of Potential Benefit
In Forex, your performance is not limited. Of course, you can limit it to placing fixed orders, but if you’re talking about a simple managed deal, you can generate your profits until you close it yourself at the price you’re interested in. It’s not uncommon for you to make a deal, and literally within a few minutes, the price flies to a lot of points, giving you a much higher profit than you expected.
When trading with binary options, your earnings are always limited by the type of contract selected. And, most importantly, your win can never be greater than your bet. If you put $100, you’ll get, at best, $90. In case you lose, you lose all $100. Yes, there are different options for all contract types, however, in any case, the success ratio will always tend to loss. But distributors of these options are always in profit.
An example of how binary options work cleverly:
-We place a bet, for example on the pair AUD/USD of $1000, at the time of clicking the button “buy” or “sell” instantly the balance deducts the $1000 from the bet.
-If I get the bet right, then I’ll see that the “profit was $1710”, actually it was $710 ($1000, as we remember, was deducted at the time of opening the bet and when I got it right, it came back).
-If I do not get the bet right, then I will see that the “profit was $0”, but the $1000 I have already lost, and in case I fail these funds will be lost.
-It looks great, and in fact, the loss of the same option is always more beneficial.
-In Forex, with the same agreement and the equivalent price movement up or down, the profit/loss will also be the same.
Possibility of Margin Trading
In Forex margin trading has reached perhaps the highest level of development. Forex brokers provide leverage in almost any range, from 1 to 2 to 1 to 1000, and even more. We agree, such a large amount of credit money can provide us almost unlimited opportunities for profit, which is sometimes 1000 times more than our invested capital.
In binary options, there is no such concept as margin trading. Everything is limited only to the notion of bets. If you have $100, then only with this $100 can you trade. This is an absolute disadvantage in modern trading realities.
Easy to Make Deals
Forex is considered the simplest and most modernized trading system among all foreign exchange markets. The transaction system refers to a process that goes from the analysis to the moment your order is placed on the market. There are several trading platforms, some with extended functionality, however, to understand them is not difficult.
In binary options, the settlement system is even easier than in Forex. Essentially, the entire trading agreement is reduced to the choice of a financial instrument, such as an option, run time, and clicking the “buy” or “sell” button. Let us not talk about the effectiveness of such an operation, but about the possibilities that are 50/50.
Duration of Stay in the Agreement
In Forex all contracts are indefinite, and therefore do not have a term of treatment (expiration). This means that when we enter the agreement we can wait the time until the price is not where it was waiting. Yes, there are commissions that can do a lot of damage, but it is no longer in this area.
In binary options all contracts are fixed-term. All options have a very limited lifespan, so, “wait for the storm” as in Forex, will not succeed. This type of contract completely excludes the investment component, leaving us only pure speculation.
Minimum Start-Up Capital
On Forex, this limit is almost erased, and you can start trading, even if you only have $10. But you must understand that the less your initial investment, the more leverage you need to take from your broker, and this increases risks many times over. In binary options, the minimum initial capital is even $1. Then your income will be equal to the minimum. Perhaps, for a person who just wants to get acquainted with these contracts, this is enough.
If we listen to all the questions I’ve told you before, we can make a small summary:
Forex: This is a stock market where, as in the stock market, as in other financial markets, there are laws of supply and demand. Agreements are made at different intervals of time, however, statistics show that transactions at long intervals of time are the most effective and most often yield profits. Forex pays a lot of attention to technical and fundamental analysis. There are a large number of different active transaction management systems, allowing you to benefit even from completely desperate transactions. Competent use of margin trading can increase your investment capital many times, allowing you to make a much greater profit. Of course, success on Forex requires market analysis, trading strategy, expertise, and the use of informational materials. This market cannot be conquered by leaps and bounds. If we want a Forex trader to achieve greed in every trade, you need to train and gain experience.
Binary Options: The binary options market is an over-the-counter market (OTC-market), or rather, it is not a market at all, as binary options brokers are liquidity providers, market makers, and in general, everything they want. In most cases, the quote is only a projection and has nothing to do with the actual price of the asset. And when we talk about “turbo options”, brokers simply draw the quote that is profitable for them in front of the group of their players. In fact, a binary options broker is a bookmaker that spreads what you want to your customers.
The high commission for a profitable transaction makes the popular 50/50 stock ratio absolutely unprofitable, as it will never earn as much as it invested. The benefits of the same option will always be less than a loss. In general, a binary option is a pure casino or addictive gambling that has nothing to do with real trading in the financial markets. Options are a game according to the owner’s rules. You can check the demo account of any binary options broker.
In this article, I have expressed my opinion only, which is supported by the practical experience of developing and implementing various stock exchange contracts. I really like the “real binary option” model, which I consider the best of all stock contracts, but it has nothing to do with the “binary option”. With which instrument to work, the choice is yours. I just want to wish you lots of luck and lots of benefits!