Trading is not something less than an art form. Therefore, we can say that it is the art of getting rich. Unfortunately, however, people often try ways that do not bear fruitful results in making money. And they end up bearing losses instead of earning profits. It is a fact that financial growth is important for a dignified life.
The best way to increase your wealth is by starting to invest. It is because, while doing that, we can multiply our assets and expect profits. Trading and investing are relatable terms in the world of finance. However, the primary difference is in the time duration for both processes. Trading generally means buying and selling financial commodities over a short period. Whereas investing refers to buying and holding stocks for a longer period until they grow.
We can see visible growth in online methods in the past few years regarding trading. Since 2008 Binary Options have taken over the conventional trading forms in popularity and profit returns. The popularity it has shown is phenomenal and is only increasing. Therefore, it is one of those trading forms which are in current trend. However, traders can always look into other forms of trading such as the stock exchange, forex trading, hard assets, etc.
We can say that there are numerous market competitors in the game. And one of the toughest competitions that binary options trading faces is forex trading. Before comparing the two, we must know that binary options are nothing but a financial instrument that offers two outcomes. They end in either giving the trader a fixed monetary reward or end in nothing at all.
Therefore, we can say that it works on a yes or no basis in other terms. So, once you begin your trading journey, it should be a part of the plan to know which method can earn you more profit. In addition, drawing a comparison between various trading styles can be useful in the long run.
Comparing forex trading with Binary Options can yield a better insight to the trader. It will allow traders to understand the basic differences. By doing so, they can find ways to enjoy more profits.
What does Forex trading signify?
Firstly, the term forex is a blend of terms foreign and exchange. Therefore, forex trading is essentially the process of trading in a forex market. The forex market is currently one of the most liquid markets globally. Forex is also unique because individual investors can compete with large hedge funds and banks. All a trader or investor needs to do is to set up the right account.
It is an actively traded market with a huge volume of more than 5 trillion dollars. The importance of Forex is diverse as well. It is the process of exchanging currencies for multiple reasons:
- Currencies form the lifeblood of an economy. So, the smooth flow of currency is key to a stable economy.
- It ensures a better economic structure.
- It is also important to ensure better international relations among nations.
Changing one currency to another is essential in various economic processes. Usually, its main function is to support activities like commerce and trading. But, it also helps in tourism.
It is where the role of foreign exchange comes into play. It acts as the marketplace for all the currency exchange dealings. We can estimate the scale at which it functions with the daily transaction amount. The Bank of International Settlements reports that the daily trading volume at Forex crossed 6.6 trillion dollars in 2019. It is one of the major reasons Forex is among the world’s most active and liquid markets.
The basic Forex trading concept
With the help of the basic forex trading concepts, we can have a distinct idea that makes it different from Binary. A clear understanding of the basic concepts is necessary for any trading method. Therefore, the following concepts will help outline forex trading.
- Exchange Rates
Understanding the concept of the exchange rate is fairly simple. It is nothing but the value of one nation’s currency compared to another. The exchange rates can fall into two categories. First, they can either be fixed or free-floating in nature. But, usually, the exchange rates are free-floating.
The free-floating exchange rates are the ones that get directly affected by the forex market. It can rise or fall according to the forex market changes. It is the rate that depends on supply and demand. The free-floating exchange rates are dependent on other macro-economic factors as well. On the other hand, a fixed exchange rate is recognized to another currency’s value.
When we dig deeper into the concept, the exchange rates can have a spot rate or a cash value. Also, the exchange rates can have a forward value. The forward value is estimated based on the anticipations of the currency to rise or fall versus the spot rate.
When we talk about the forward rates, we must know that it is subject to fluctuation. The values may fluctuate because of changes in the expectations. These changes affect the future interest rates of one country versus another. Moreover, the exchange rates don’t remain the same for all the countries.
It can change from one nation to another. But, interestingly, it doesn’t need to stay the same for the same country also. Some countries limit their exchanges within their borders. At the same time, others may offer an offshore and onshore rate.
- Currency Pairs
The concept of a currency pair is not complex. As the name hints, it signifies two different currencies. But, in a currency pair, the value of one currency is stated against the other. To simplify, we can call the first part the base currency and the latter quoted currency.
The use of currency pairs is that they help in comparing one currency with another. Therefore, traders must not ignore it in forex trading. Forex is a game of different currencies and understanding currency pairs helps tremendously in comparing them. It compares one value with the other, which means the base currency is compared to the quoted currency.
The basic need of currency pairs is to indicate how much quote currency is needed to purchase one-unit base currency. Furthermore, to understand how it functions, the base currency is bought when an order is placed, and the quoted currency is sold.
- Forex Trading Account
Setting up the right account might become the difference between winning or losing a forex trade. This market involves trading world currencies, which happens to be the most liquid one. So, the right trading account will always make your job easier.
Since there are various types of accounts, forex traders must choose the account according to suitability. In addition, it should complement their skills and knowledge.
Firstly, comes the standard account. It is the most common one in current usage. Traders can get standard lots up to $100,000 worth of currency in it. The next is the mini account that targets beginner users. It offers a mini lot worth up to $10,000. Lastly, there is the managed account which is meant for professionals.
Top Forex brokers
The top brokers can help in rewarding forex trading. With the list of the top names, choosing the ideal broker can become handy. Some of the best names in the forex game are:
- TD Ameritrade FX – It is rated as the best broker in the desktop platform. However, it is available in the U.S.A only.
- Forex.com – This broker claims to be an outstanding all-round offering for all forex traders
- XTB – It is a great research and education forex broker. It can help you guide the game better, especially for the new traders.
- City Index – It is also an excellent name for an all-around offering.
- Swissquote – It is one of the most trusted brokers. It also provides one of the best banking services. The traders can reap its benefits in that domain also.
- CMC Markets– It also serves as a reliable broker
How is Forex different from other markets?
The feat that it is the largest exchange market in the world itself calls for a unique feature of Forex. Consequently, the entire equity market’s transactions cannot match with it. Moreover, the major difference appears as the trading assets are compared to the stock market. In the Forex, unlike other marketplaces, trading of currencies takes place. Furthermore, since no equities are involved, this market is free from numerous technical parameters. As a result, it is free from all microeconomic aspects that influence other markets.
Lastly, unlike stocks, the currencies can depreciate over time but cannot come to a zero value. Therefore, it makes the forex market different as the traders can hold on to currencies for long without fearing a total wipe-out.
Binary Options vs. Forex
Binary Options is a two outcome trading form. In Binary, a trader can invest in whether the commodity or asset. In addition, it functions to predict whether it will increase in value over a fixed time or decrease. In binary options, the trader sees the value of earning upfront. Therefore, we can say that traders can precisely know their profit.
Moreover, they can know the reward amount if the prediction goes correct. But, if the trader loses the trade, they lose all the investment. It is because, in binary options, the prediction revolves around only two options. They can only predict if the price goes up or not instead of estimating how much it might go up.
In Binary Options, traders earn a fixed payout according to the win or lose outcome only, as mentioned before. But when we compare it with Forex, it requires the traders to guess the price movements of a currency pair. They can take a short or long position accordingly as well. The key difference which arises in Forex is the use of currency pairs.
When a comparison arises between the two, it is inevitable not to mention their reach. The Forex is a global platform that already holds the title of the largest market. Therefore, the binary market to overpower that position is unlikely.
The forex market stays open 24 hours, which is rare in a trading market. It helps the investors gain a larger time slot than the Binary. But, it is subject to the fact that it functions only five days a week. Whereas a binary market is usually open for asset trading hours, the scenario changes for both markets if a trader chooses to go with over-the-counter. Over-the-counter trading gives an additional opportunity to trade even after the standard trading hours.
Traders across the world less prefer weekend trading. But, it is always available for functionality. That makes the 24/5 time structure an effective one. It helps the traders to go through the market situations during the entire week and structure their strategies on weekends. Or else traders can always choose to go with OTC.
There is a key difference in the costs when we put forex trading against binary options. These costs may occur to the trader additional to the investments. For example, the forex trading accounts may require you to pay commission. Or, in other words, the broker spread. On the contrary, in Binary, there are no costs that arise additionally. A trader must ensure to pay the factored amount in the final payout. And that would be all for the additional costs.
While dealing in Forex, the risks are another thing to be cautious about, as losses can go high and unpredictable. Sometimes, it may act as a blind valley without a map if a trader is ignorant. Moreover, in Forex, the trade error possesses a higher chance. On the other hand, the margin for such errors and risks is lower in a binary market. Also, the losses are capped at the initial investments in Binary Options.
Basic comparisons
- Risk and Reward Structure
In Binary trading, the trader can expect to know the rewards beforehand. Hence, it is an attractive feature of binary trading. Knowing the loss is capped allows the traders to enter the trade with an insight. They only need to wait till the expiry of the option. While the potential gains are higher in the Forex, capping of loss is not available.
A trader can expect to earn between 65% to 85% of the initial investment from the successful Binary trades. In contrast, successful forex trades show immense potential. The profits can peak up to 200%, a huge return ratio.
When we outline the risk and reward aspects, it is clear that the risk and rewards are higher than Binary in forex trading. In Forex merely, predicting the rise or fall is not enough. Traders have to estimate how high or low it can go also.
- Volatility
Market volatility is the term given for the fluctuations. Of course, any trading market inherits this feature. But, a comparison of volatility can help understand which market is more prone to risks. For example, the variability is visibly more in forex trading.
Volatility is nothing but the measure of an asset’s value change over a period.
In forex trading, more risks are offered to the traders. Mostly, it is because of the unknown profit. Moreover, predicting precisely the amount of price that goes up or down is naturally not a task for the unskilled. However, the surprising volatility is less likely to affect the case of Binary Options.
In Binary, the primary demand is to predict correctly when the option reaches expiry. Therefore, the investments are not affected. However, Forex is bound to get affected and requires the traders to have a risk management strategy, unlike in Binary, where it is safer.
- Period
The time duration describes a key difference in both markets. In the Binary Options, the traders are bound to select the time limit. The limit defines when the option shall reach its expiry. So, once the trade commences, the trader loses all control over the time limit. When the time limit ends, the trade automatically closes. In comparison, the users can hold on to the trades for long durations in forex trading. It can last even up to months.
Moreover, unlike Binary, the traders can open and close according to their choice during the trades. Therefore, in forex trading, more flexibility regarding the timeline is offered. However, it also comes with its disadvantages, along with the convenience.
- Leverage
The term leverage signifies the use of borrowed funds. It is only a process in which the trader uses the borrowed funds to increase their trading position. Leverage helps go beyond the position achieved from the cash balance. Therefore, leverage can be vital in enhancing the profit potential in any market.
Although the traders must be careful in approaching it to reduce the chances of any loss, the leverage is available in forex trading. It can range from 50 to 500 times the initial investment. And that paves the way for such traders to earn more profits. At the same time, the Binary market lacks the feature of leverage.
- Margin
A margin is a tool that allows traders to increase their investment capital. So, by using margin, they can increase the profits further if it is on the winning side. It is available in forex trading but is absent for Binary traders.
Which is better?
Coming to a straight answer which sidelines one of the two trading methods would be unfair. Both of these markets are different in functioning. Therefore, it is relative to arrive at a verdict. It rightfully depends on the traders and their needs. Depending on the objectives of a trader, we can say which can act as a better trading marketplace.
By far, it is evident, forex trading is more volatile and offers greater risks than Binary. In that, the trader is allowed to assume on several financial markets. Binary trading offers an explicit product instead of Forex. It offers a clear idea of the costs and the risks from the start.
Is Binary Options trading better? Why?
It depends entirely on the trader’s requirements. When there is a need for a financial option with a lower risk ratio and clear costs and rewards, Binary is surely the better way to trade. On the contrary, if the trader is skilled in forex trading and seeks more returns knowing the volatility and the risks, then forex trading might be ideal.
Moreover, if a trader is unsure to start in either of the markets, then a demo account can greatly help. Overall, we can say that Binary Options lead Forex to be a simpler method. Moreover, facilitating exposure to limitless markets is an added benefit.
Pros and cons
The Forex is, without a doubt, the largest in the trading domain. It means the exposure is surreal. Moreover, the forex market is not centralized. That makes it a better marketplace for more opportunities similar to OTC Binary trading. However, Binary Options are regulated by authorized authorities from the EU, such as the FCA, CySEC, etc.
More market volatility gives the scope for better returns, but on the contrary, it increases the chances of loss. As a result, Forex offers more volatility and higher returns, whereas Binary Options benefit from less volatility but as high returns.
From the control point of view, Binary traders have less control over the trades than Forex. But the advantage is that there is a fixed limit of entry and exit. The presence and absence of such control is both an advantage and sometimes a disadvantage.
How can traders benefit more from Binary Options than Forex?
With the help of certain addition to the trading methods, a Binary trader can benefit more than a forex trader. By incorporating these steps, winning trades in Binary Options is more likely.
- Technical Analysis
It is the method of studying the market changes with the use of market indicators. Since Binary trading is a technical game, having a better understanding of technical analysis is fruitful.
- Strategies
Using strategies means a significant reduction in the risks. If traders use the right strategies at the right time, they will benefit more and increase profitability.
- Brokers
The service of a regulated broker is essential for both Forex and binary trading. But in Binary, they are much more needed than Forex, where the trading can occur directly. With the help of reliable brokers, the chances of scams get reduced, and the traders can also benefit from added features.
Conclusion
Forex trading and Binary trading both are profitable ways to trade. It is only a matter of opportunity, which makes the difference. Both of these methods come with their set of benefits and risks. The investment goals and the level of knowledge and skills determine which is better. Although, being a better way to trade is situational. Therefore, with the help of a deeper understanding of both the market places traders can choose to go with the one that best suits them.
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