Difference between binary options and Forex
Today I will answer one of the most frequently asked questions in the world of trading: what is the difference between Forex and binary options ? In my article you will find detailed answers to the questions «What are binary options?», «How do binary options work?», and «Can I make money on binary options?» I will also share my opinion on which of those is better and more profitable.
New option for instant profit
About 10 years ago, most brokerage companies specializing in exchange markets suddenly started promoting a new «super service» - binary options. At that time, few people understood what they were, but the thirst for instant profit made this tool very attractive. It was an exclusive offer for that time, because it was basically a pocket casino, but with constant online access and a low starting amount. Enough time has passed now for the consumers to start realizing that binary options is not such a brilliant tool, and that you lose more often than win. In order to assess this tool, you need to understand what it is.
What is a binary option?
So what is a binary option? To answer this question, let's look at its structure. The name itself consists of two words - binary and option. The word binary is a derivative of the concept of “binary model” - a model that has only two options for the occurrence of an event: either “yes” or “no”. This model is one of the foundations of the tool: you either win or lose, there are no other options. The word option however derives from real stock options. Stock option is a derivative financial instrument, which is based on the rule that the contract is executed in the future in case some pre-agreed condition is fulfilled.
By combining these two concepts we get a tool that works according to the rules of the stock contract and has only two options for the occurrence of the event. In other words, if you conclude such a contract, you either win or lose.
Let us consider the operation of binary options based on the most popular contract parameter - Higher/Lower. This type of contract means that you choose the target price level and direction of the trade. For example, you believe that the EUR/USD currency pair will decline over the next 5 minutes. You select the reference level and buy a put option. Therefore, if the price is below this level in 5 minutes, you make a profit, and if higher - you lose. All you need to do is choose a bet size, for example, $50, and you are ready to go.
Our option position will look like in the chart above. Everything below the red line is our profit, and everything above is loss. The main distinguishing feature of such a contract is the fact that it does not matter how many points the price goes up or down - our profit or loss is always fixed.
So, 2 minutes passed after the conclusion of the option contract, and during this time the price went below our reference level. Therefore, if our option expired now, we would receive a profit of 80-85% of the bet.
Another three minutes later, our option has expired. But alas, the price soared at the very last moment and went above our reference point, thereby bringing us a loss in the amount of our $50 bet. It is quite simple.
Of course, there are many variations of binary options, but we will talk about them more when comparing them with the Forex market.
What is the difference between Forex trading and binary options?
We will compare these two types of trading based on the most important parameters:
1) Range of contract types
There is only one type of contract on Forex. Of course, you can trade in currency pairs, CFDs, commodities, or securities, but all these are just variants of the same type of contract - a contract for difference (CFD). If you buy a currency pair and its price increases, you will receive the difference between the purchase price and the subsequent sale price.
There are several types of contracts on binary options: the most populat Higher/Lower that we have already examined, One-Touch option where you need to wait until a certain level is reached, Range option where you need to specify the target price range, and the most profitable Ladder option.
2) Amount of potential profit
On Forex, your profitability is unlimited. Of course, you can limit it by placing orders, but if we talk about a simple directional position, it can generate profit until you close it yourself at the price level of your choosing. Quite often you open a position, and in just a few minutes the price rushes a lot of points, bringing you much more profit than you expected.
When trading binary options, your profit is always limited by the type of contract selected. And, most importantly, your profit can never be greater than your bet. If you bet $100, you will get $90 in the best case. If you lose, you lose all $100. Of course, there are options for other types of contracts, but in any case, the proportion of success will always aim for unprofitability. However, the dealers of these options are always in profit.
Example of the sly operation of binary options:
I’ll make a bet, for example, in the AUD/USD at $1,000. The moment I click the “buy” or “sell” button, the bid amount - $1,000 - will immediately be deducted from my balance.
- If I guess the bet right, I’ll see that “the profit is $1,710”, while in fact it is only $710 (as we remember, $1,000 were deducted from me when I made the bet was opened and returned when I won).
- If I guess the bet wrong, I’ll see that “the profit was $0”, but I already lost $1,000, and in the case of loss, these funds will not be returned to me.
It looks fine, but in fact the loss is always greater than profit in the same option.
On Forex, with the same position and equivalent price movement up or down, profit/loss will also be the same.
3) Margin trading opportunity
On Forex, margin trading has perhaps reached the highest degree of development. Forex brokers give you leverage in almost any range, from 1:2 to 1:1000, and even more. Of course, such a colossal amount of credit capital provides us with virtually unlimited opportunities for profit, which sometimes is 1,000 times higher than our invested capital.
There is no such thing as margin trading in binary options, only bets. If you have $100, then you can only make operations with these $100. This is definitely a disadvantage in the modern trading.
4) Easy conclusion of trades
It is universally agreed that Forex has the simplest and most modern trade conclusion system among all exchange markets. A trade conclusion system is defined as the process from the analysis to the moment your order is placed on the market. There are various trading platforms, some with advanced functionality, however, mastering them is not that difficult.
In binary options, the trade conclusion system is even simpler than on Forex. In essence, the whole trade comes down to choosing a trading instrument, option type, execution time and pressing the “buy” or “sell” button. We will not talk about the effectiveness of this operation, but the chances are about 50/50.
5) Duration of the trade
On Forex, all contracts are unlimited in time, and therefore, they do not have expiration. This means that when you enter into a position, you can wait out the period when the price is not where you expected it to be. Yes, there are commissions that can harm your deposit, but this is another topic.
In binary options, all contracts have expiration time. All types of options have a limited lifespan, so you cannot “wait out the storm” like on Forex. This type of contract completely eliminated the investment component, leaving only pure speculation.
6) Minimum starting capital
On Forex, this line is almost erased now, and you can start trading even with only $10. But you should understand that the smaller your initial investment, the greater leverage you need from your broker, and this increases the risks greatly.
In binary options, the minimum starting capital can be even $1. But in this case, your income will be just as low. Perhaps this can be quite enough for someone who wants to just get acquainted with these contracts,.
Conclusion
Taking into account the above, we can conclude the following:
Forex trading
This is a market in which, like on the stock market, laws of supply and demand apply. Trades are concluded at various time intervals, however, as statistics show, trades over long time periods are most effective and more often profitable. On Forex, much attention is paid to technical and fundamental analysis. There are a huge number of different systems for managing active positions, which allows you to profit even from completely hopeless trades. The proper use of margin trading can greatly increase your investment capital, which will allow you to get much more profit. Naturally, success on Forex requires market analysis, a trading strategy, experience and use of informational materials. This market cannot be conquered abruptly. In order for a Forex trader to start earning from each trade, they need to undergo training and gain experience.
Binary options
The binary options market is an OTC market, or rather, it is not a market at all, since binary options brokers are simultaneously liquidity providers, market makers, and in fact anyone else they wish to be. In most cases, the quote is just a projection and has nothing to do with the real price of the asset. And in the case of turbo options, brokers simply invent the quote that is profitable for them against the pool of their players. In reality, a binary options broker is a bookmaker that broadcasts whatever it wants to its customers. A high commission for a profitable trade makes the popular 50/50 exchange ratio completely unprofitable, since you will never earn as much as you invested. The profit on the same option will always be less than the loss. In general, binary options are a casino or an addictive game that has nothing to do with real trading on the financial markets. Options are a game played according to the rules of the owner. You can test this on a demo account of any binary options broker.
In this article, I have provided my personal opinion, which is supported by practical experience in the development and implementation of various exchange contracts. I really like the model of “real exchange options”, which I consider to be the best of all exchange contracts, only it has nothing to do with binary options. In the end, choosing the market is entirely up to you. I can just wish you good luck.
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Price chart of EURUSD in real time mode
The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteFinance. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.
