A common question among newcomers to the site who are interested in binary options is how different binary options are to Forex. The simple answer is quite different, but this article should answer all your questions on the subject and allow you to make an informed choice about whether binary options are for you or whether Forex trading is more suitable to your trading goals.
To begin with online Forex and binary options are both derivatives. This means that placing trades with a broker of either type does not involve you physically purchasing an asset, whether this is a currency pair in a Forex trade, or any type of available asset as in the case of binary options. What you are doing is basically speculating on the value of an asset and the broker you go through provides you with the ability to make this speculation.
Regardless of this basic similarity there are several important things that differentiate binary options from Forex trades. The most obvious of which is the fact that you can only trade currencies with Forex. Binary options on the other hand give traders the flexibility of being able to choose between a range of assets including currencies, stocks, commodities and indices. The number of individual assets vary from binary options broker to broker however most have all the major ones so most traders are covered.
Aside from the number of available assets Forex trading is generally perceived as much riskier and having a much steeper learning curve than trading binary options. This is because when you trade Forex you have many more factors to keep track off than when you trade binary options. For instance Forex trading involves a spread. The spread is the different price you are quoted when buying a currency and selling. The spread is either side of the actual price of the currency in question and is tantamount to a commission fee as your currency has to rise to the spread price in order for you to break even and above it for you to make a profit. In addition to this when trading Forex you have to consider the effect of leverage as most traders will end up using it. Leverage is when a broker allows you to place a far larger trade than you ordinarily would have been able to manage with your capital. It is basically an interest free loan that multiplies your investment ability. As long as you have a 10% margin of that leveraged amount in your account then you are able to take advantage of the loan. With Forex it is easy for a trader to lose track and be exposed to a far greater degree of risk than they are comfortable. Especially in cases where leverage is used it becomes very easy to quickly find yourself in a considerable financial hole when your currency pair begins to plummet.
Binary options on the other hand are far safer to trade as you know before agreeing on a trade exactly what you stand to make back over your stake if you win, also the only thing you stand to lose if a trade does not go your way is the money you invested in that position. This is a very attractive feature both for beginners and experienced traders as it means that you can concentrate on diversifying your trading activity rather than tracking each and every trade you make for signs that it is about to wipe you out. Stop losses are how Forex traders do this, they are instructions to liquidate a position once it becomes unprofitable but their flexibility usually leads to traders moving the goal posts and not sticking to a rigid risk management strategy.
Binary options are pretty upfront. What you see is what you get, what you invest is what you stand to lose and as a result of this simplicity traders can spend a lot longer mastering their trading game rather than figuring out how the platform they are using is geared at stacking the odds against them. This is the major reason for the success of binary options and as more and more novices come to the market it is looking increasingly likely that having the option of a streamlined form of trading that places most of the emphasis on understanding and learning to read the market
George Milios is the founder of onlineforextrading.net, the binary options and forex news portal which is dedicated to providing you with all the information you need to successfully trade.