Understand Trading and You Understand Both
Before we even dive in to the differences, pros, and cons between binary options and Forex, you must first understand that you will find it hard to be consistently profitable on either if you don’t understand trading itself. You may be able to get lucky for a while but the same can be said for the casino. What your goal should be is teach yourself a job for life. Your introduction to reading price action and order flow has been presented in the Forex Basics and Trading Strategies sections of this website. You will need to master that before attempting to trade in either way but for now this lesson may help you understand which type of trader you will become, you may even like both and do a bit of each!
One big difference between the two is that with binary options you will take trades with a fixed return, 70% would be a common example, but the returns do vary from broker to broker and from trade type to trade type (you will learn more about that later). With Forex your returns are not limited in the same way and a healthy risk:reward strategy can be implemented, returns of 200% and higher are a common example with Forex. The next big difference between the two is the fact that with binary options you are required to assign a time duration to your trades. With Forex you need to predict a target area for your trades and it doesn’t really matter if it gets there fast or slow. There are definitely pros and cons to each which we will now address so that you are clear.
From a technical standpoint; if you can trade spotFX profitably then you should also be able to trade binary options profitably, and vice versa. This is why most of the lessons that you will learn from all of the various sections of this website will help you with both styles of trading. Reading price action and order flow is key for both.
Trade Duration
Forex:
Once a trade is open you can exit the trade whenever you see fit. Usually this will be at your take profit or at your stop loss but could also be due to what you are seeing on the charts or major news events. The real point is you have full control and the only real exceptions is on weekends where you can not exit any open trades.
Binary Options:
Before you enter any trade you will have selected the expiry time, this could be 1 minute to 1 hour from entry and is your choice. Once you have committed to an expiry time you are tied in to that trade until the time passes. Some binary options brokers will allow you to exit your trade early but at the price of a lower return than originally agreed. Other will allow you to delay the expiry time at the price of a higher investment. Not all brokers offer each of those options and the binary options broker world is very diverse.
Risk:Reward
Forex:
If you have taken the time to learn and develop a complete trading plan then risk:reward on Forex is completely in your hands. By using a stop loss you can limit your risk on every trade to a percentage of your account and always know your risk. The exception to that would be due to slippage which may drag your stop loss point further away and increase risk, this is just the price you pay for full control. If you were to always target a minimum of 100% return, so that you never risk more than you are trying to gain, and sometimes enjoy returns of 200% or 300% then you can be profitable winning even just 50% of your trades. The real point is that you have control over your risk:reward and can use that to your advantage.
Binary Options:
With binary options you will always know your exact risk before you enter any trade and nothing can change it. Returns however are out of your control and are lower than a sound trading plan on Forex. Your average high/low binary options trade has a return of 65-80% which means you will always risk more than you are trying to gain. There are other types of binary options trade that have much higher returns but they are not the types of trade that we will be using here at ElectroFX.com (They will be discussed in a later lesson though).
Trade size
Forex:
Forex brokers vary in their minimum trade size but the lowest you will find are called micro lots. This is 1,000 units of the base currency and is also known to as a 0.01 lot. On the other end of the scale you will also find a different maximum trade size between Forex brokers. It can go as high as 100 standard lots of the base currency which is 10,000,000 units.
Binary Options:
Binary options brokers also vary in their minimum and maximum trade sizes but the lowest you will find is $1. A more common minimum would be in the $20-25 range though. The highest maximum we have found to date is $100,000 and the next level down we have seen is $50,000.
Leverage and Margin
Forex:
Leverage is something that will vary from broker to broker but a very common example would be 1:200, this means that you could trade a $200,000 trade size using just $1,000 of your account. Without correct management you could find yourself getting a margin call because the value of each point the market moves against you is based on the $200,000. This is easy to avoid and easy to understand with the correct training but it is one part of trading Forex.
Binary Options:
There is no leverage or margin to concern yourself with when it comes to binary options.
Trading costs
Forex:
The costs involved with any Forex trade will always be the spread, and if you hold overnight, the swap/rollover. Depending on your account type and broker you may also be charged you a round trip commission also.
Binary Options:
With binary options there are no spreads, swap/rollover or commissions to think about.
Volatility Risk
Forex:
The market is know to have surprise volatility that occurs both out of nowhere or due to news events. These sharp swings in price can trigger your stop loss and cause a loss from what then goes on to be a winning trade.
Binary Options:
When surprise volatility hits your binary options trade it will not hurt your trade as long as your view was correct when expiry time hits. Only the expiry time can exit your trade.
Human Error
Forex:
There are several potential points of error when trading Forex which makes it the more technical trading style of the two. With the correct training and tools (like provided here at ElectroFX.com) you can minimize the chance of error significantly but you can never eliminate it. Without the right training and tools you may find yourself entering the wrong trade size, forgetting to place a stop loss, or forgetting to place a take profit. Even with the correct tools you may find yourself interfering with a trade or exiting early.
Binary Options:
The chance of you making an error with binary options is very low which is most likely why they have become so popular these past years. You could perhaps enter the wrong amount such as 255 instead of 25, or select the wrong direction but that is about it. If you did make either of those mistakes then the lessons would be learned fast and there are no other real foreseeable errors to make. This is definitely the most user-friendly trading style of the two.
