Many traders who are relatively new to this investment arena can often find it difficult to distinguish binary options trading from forex.
That confusion is understandable when you can trade currencies and use a Metatrader 5 platform for both options, so in order to fully appreciate and know your investing options, it helps to gain an insight into the fundamental differences between the two.
Spot the difference
Forex is the biggest financial market in the world and presents a wealth of opportunities for investors to speculate on currency pairs on a 24 hour basis throughout the working week.
An example of a typical forex trade is that you are placing a bet that is speculating whether the value of a chosen currency is either going to rise or fall in value in comparison to another. If you believe that the price of EUR/USD will rise from its current price, you make your purchase and wait for the currency value to increase, so you can close your bet and collect a profit if your prediction is correct.
Binary options trading is different mainly because it is structured around the basic model of a fixed-cash-or-nothing or asset-or-nothing binary option. This means that when you are trading binary options, you are being asked to predict whether a currency pair with either rise or fall in price at a specific point in time.
Another difference to be aware of is in relation to pay outs and losses. With binary options, you will have advance knowledge before making the bet as to how much you are likely to win or lose.
You should check with the broker you have an account with in order to clarify whether they offer a safeguard option that prevents you from losing any more than the amount you have bet.
Forex outcomes are far less defined in comparison and if you do not have the relevant trading experience as a trader, you could end up losing all the capital in your account, although the positive aspect is that the profit you can make is not limited with a forex trade.
It is because of this volatility with forex trading that many regular traders use limits and stop loss orders to keep a greater degree of control.
Closing your position
A binary option trade gives you the flexibility to choose when you want the bet to expire and close out.
You may also be offered a range of pre-defined expiry dates that could be as little as one hour and there are occasions when a broker might offer you early closure, for a percentage of the anticipated return.
With a forex trade, you are in complete control of the duration of your bet and are able to choose when you actually want your position to be closed.
When it comes to binary options, the broker determines the minimum or maximum amount of money that you are allowed to invest in a single trade, whereas in forex you are offered what is referred to as mini, micro or standard lots.
The majority of traders operate with the mini and micro ranges and the standard lot size generally applies to institutional sized accounts who are operating with much larger financial resources.
Also remember to ask your broker about margin and trading costs, so that you can get an accurate comparison between forex and binary option trading.
Abbie Peacock has been investing in stocks for a very long time. She likes to help others new to investing by writing about what she has learned over the years. You can read her illuminating posts on investing and financial websites and blogs.