Binary Options vs Forex Trading
When it comes to financial instruments, it doesn’t get any bigger than the forex market. Not only that, the market is open more than any other in the world. That’s right; 24 hours a day, 6 days a week. Unlike commodities, there is no single exchange that forex is traded on. In other words, they trade in a number of different countries over the counter (OTC). For many people who have ‘day jobs’, trading forex is one of the few choices if they decide to trade. Incidentally, currency trading is done for speculative purposes.
But why do I stress speculation? There are several reasons.
Retail forex trading can be a dirty game. For example, retail forex brokers don’t charge a commission, they make money from the bid/ask spread. With that said, if you are a buyer of a currency pair that means they are the seller. The forex broker has information on all the traders that trade with them. If they know a trader is good, they hedge or copy their trades. If they know a trader is bad, they won’t hedge against them. Not only that, but some forex brokers sell their ‘order flow’ to other trading firms. Imagine if you knew the trades that unsuccessful traders were making…wouldn’t it make sense to take the other side of their trades? In fact, in my opinion, this is some of the best information a trading firm can buy. They often say, find someone who is successful and copy them…in this case, find someone who is bad and do the opposite.
Don’t get confused. This is not a reason for you to not trade F – just some behind the scenes info you normally don’t hear.
FX trading offers incredible leverage. For example, to trade $100,000 worth of currency, with a margin of 2%, a trader will need to deposit $2,000 into their margin account. With that type of leverage, the trader is getting 50 to 1. Depending on how you size your position, you don’t have a lot of margin for error. On the flip side, the returns with that kind of leverage could be incredible. Because the leverage is so high, FX brokers watch trader accounts very closely…if they see a trader getting close to their account getting zero, they will close them out so they don’t get a margin call. As you can see, trading on margin (being levered up) is a double edged sword.
In respect to trading binary options, there is no leverage or margin required. A trader with a small account can feel secure because they know how much they are risking. The binary option trader knows how much they can make and lose on every single trade. The FX trader has higher profit potential… and can potentially lose their entire account on one trade. However, FX trading affords greater flexibility to the trader. If a trader doesn’t like their position, they can always close it out. The binary options trader is making a bet on a specific outcome for a specific time period. In most cases, they are going to win a fixed amount and lose a fixed amount. They don’t have the same flexibility to close out their position. In addition, the FX trader has the ability to set stops on their orders to protect their account against a large draw-down. There is no expiration period in FX trading…a binary options trade is a time sensitive product.
Which should you trade? To be honest, many of skills needed to be a successful FX trader apply to binary options trading. Most FX traders focus on economic data and technical analysis. For those new to trading, starting off with binary options is a great introduction into FX trading. Eventually, you’d like to trade bigger size and have more trading flexibility. Getting your feet wet with binary options is a great way for someone new to learn the FX market.
