Know the difference between trading Forex and binary options. The Forex market and binary options market offer two different ways to trade the financial markets. Binary options are options contracts where you must pay a premium every time you take a trade.
The premium and the reward are fixed. Should the trade be unsuccessful, the premium is not returned and is a loss. Trading spot Forex FX is an agreement between two parties to buy one currency against selling another at an agreed price. Quantity and time are variables. Both FX and BO allow you to trade online, and both markets depend on the price movement of currencies. As long as you shop around for the best brokers, you can access the market with a small initial capital.
This means you can increase your capital once confidence increases. Profit is made by speculating on direction of the price. Should you be correct, both offer excellent returns. You can profit from the market moving in both directions, up and down. If you think a market is overvalued you can sell the market and benefit from a market declining. Despite often trading the same underlying products, there are considerable differences when trading binary options compared to FX. The binary system has two inputs, 1 or 0.
Binary options are similar in the fact that there are two options, up or down. If you correctly guess the direction you will profit. In comparison, FX, not only must you guess the direction correctly but you must know how far the market will go in that direction. Binary options have expiry times. Every time you take a trade, you will choose when the trade will end. This can last 60 seconds or 3 months. When you trade FX, you can hold the trade for as long or short as you want.
When trading binary options, you have a pre-determined risk and reward. Once you take the trade, you have already paid the premium risk. Other than the premium, you have nothing at risk.
Likewise, you already know how much you will gain should the trade be successful. If you lose, you lose the premium. When you trade FX, you do not know your risk or reward. You can essentially have your entire account at risk when trading FX. This however, is not guaranteed. If a market moves too quickly, you can encounter slippage or gapping. Slippage means the broker cannot fill you at the predetermined price and so will fill you at the next available price this can be negative if the market is going against you, but also a positive if the market is going with you.
Gapping means that the market does not trade at a certain price. Should this happen, your order will not be executed because the market did not trade at that price. Both instances are rare in the FX market but can happen. Trading binary options, the only cost is the premium you pay. Whereas when trading FX, you can be charged a commission and a spread.
The spread can vary on broker, market and volatility. Consequently, the costs when trading FX are often unknown until you execute the trade.
Trading FX is usually done so on margin. This allows you to only put down a fraction of the actual trade size, thus effectively increasing your investment capital.
This can boost both profits and losses. Binary options cannot use margin as a tool. Volatility is also a risk when trading FX, especially when using a stop-loss. A market can whipsaw, take you out of a trade for a loss and still get to the point you were targeting.
Despite being correct, you have still lost capital. When trading binary options, you are protected from volatility by paying the premium. The market can whipsaw as much as it likes, if it finishes in the direction you predicted in the timeframe, you will profit. Binary options and FX trading are considerably different and it is important to understand the differences when deciding which method you choose to trade with.
Mail will not be published required. Both Forex and binary options allow you to go either long or short. Margin can be used on Forex but not binary options. Leave a Reply Click here to cancel reply. Practice Trading at eToro Now!
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