By Yael Warman

With the tightening in international financial trading regulations, the tide is turning for Binary Options Trading. Many traders who prefer Binary Options may be forced to consider other forms of trading as their brokerages may no longer be able to service them. Others may just want to explore their trading skill and temperament to see if they are perhaps better suited to Forex. In this article we explore what the differences are between trading these two financial instruments, helping you to determine whether you would be more suited to one over the other.

Similarities

Let’s begin with the similarities between Forex and Binary options:

• They are often based on currency pair trading, so the underlying instrument being traded can be identical.

• They can both be traded online and generally have the flexibility to be traded at any time, as long as the underlying asset market is open.

• You can begin trading in either market with just a relatively small amount of money. Often trades are made with just $100 or $200, but sometimes even less than that.

• Both are traded on short time frames, although Forex does have scope for a longer time frame.

• In both situations money is made or lost based on which way the asset moves.

Differences

Despite these similarities, the differences are significant and underscore a different trading approach altogether.

• In Binary options the risk and profit potential is stipulated from the outset of the trade, so that if you place a bet of $10 on a trade and the binary options broker pays out 80% to winning trades, you know from the outset that you will either lose $10 or make a profit of $8. A lot of traders are attracted to this aspect. Conversely, Forex trading does not necessarily have defined end points, and a trade can continue as long as you have equity to keep it going. This means that your return is not limited to a certain preordained profit or loss scenario.
• The risk and reward profiles for each trading instrument is also different. In Forex you can determine the amount of return for each position by use of stop losses and take profits. For example, a trader is able to place a trade with a stop loss order that will expose him to a limited $100 loss and at the same time put in a profit target of $200. The trade then stays open until one of the orders is hit, be it a $100 loss or a $200 profit. In Binary options trading, your risk is almost always more than your reward. Binary options brokerages will only pay out 60% to 80% on a win, but if you lose, you forfeit the full 100% of the money that you placed on your trade.

• The decision making process varies between the two trading methods. In Forex, you need to determine your entry point and exit point as the primary elements of your trading. In binary options, whether the option will hit the points in a certain timeframe is also a factor. Because of this, certain types of trading styles that are not in tune with timeframes are not ideal for binary options.

Take away message

Both markets offer significant profit potential and it’s your individual trading style and temperament that will determine which one is right for you. Binary Options is preferred by traders who just like to keep things simple- you know your risk, your potential profit and how long the trade will last. Forex is preferred by those who like the variability and varying potential based on their decisions when to buy and sell. To help you determine which one you may be more suited to, try a demo account of each and see which one performs best and matches your trading profile.

About the Author:

Yael Warman is a creative writer with a strong background in marketing and advertising. Yael has been a writer for over 10 years and has worked for clients in various industries as well as her own companies and is currently the Content Manager at Leverate.