Author : , Date : 17 October, 2016

Understanding the Difference between Binary Options and Forex Trading

Forex trading and binary options trading are in the focus of investors nowadays. A lot of people are interested in these exciting businesses, but if you are a beginner, first you need to understand the difference between them.

What is Forex Trading?
The foreign exchange market (that is usually referred to as Forex market) is a global market for the trading of currencies. The largest trading centers can be found in London, New York, Zurich, Frankfurt, Hong Kong, Tokyo and Singapore. Originally, foreign exchange served the needs of foreign trade, imports and exports. Now there is a high volume of speculative positions with no underlying goods or services. Forex traders speculate on the exchange rate of a currency.

What is Options Trading?
When you trade options, you do not buy or sell the asset itself, you just get the right to buy or sell it at a pre-determined price, on a specified date, no matter how much the actual price is on that day. The asset itself is called “underlying asset”.
Options are offered for currencies as well, so you can obtain the right to buy a certain quantity of a currency on a pre-set date at a specified price. In this case, the underlying asset is the related currency.
Binary options trading is a special type of options trading, here you need to decide whether the price of the underlying asset will go up or down during a fixed period of time. The binary system means that there are only two options, 1 or 0, ie up or down.

Binary contracts have fixed risks and fixed rewards. If your prediction is wrong, you lose the money you risked, if your prediction is right, you receive a return.

The differences between binary options and Forex
In binary trading, you only guess whether the price will fall or rise over a period of time. The risk and the profit are fixed. Forex trading means higher variability and more risk. You have to find out how high or low the exchange rate goes, not only in which direction. So, risk and profit are unknown.
There are no limits to how much you can earn or lose in Forex, therefore you need to use tools like stop loss and take profit levels. In case of stop loss, the trade is automatically closed when you have lost a pre-determined amount, so you cannot lose more. If you set a take profit level, the trade is closed when it has reached a certain profit. All these are unnecessary in binary trading.
Binary contracts however have pre-set timelines, a start time and an expiry time. There is no expiry in Forex, trades may last from one second to many months, you can close the trade whenever you want it.
Forex also has margins that allow traders to trade with higher amounts than their investment capital. Using margins, you can make a higher profit, but you can lose more money. Margin is not available in binary trading.

As you can see, these trading methods are quite different. Each trader should choose the one that suits better his personal. We suggest however, that novice traders should try binary options – certainly demo trading first – as it is easier to learn and its risks are limited.

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