Are you looking for Forex or binary options in your investment? 7 things you need to know before investing
It is crucial to understand the differences between binary options trading and Forex in order to be a successful investor. These financial instruments are easy to understand if you recognize seven key differences.
Research shows that 25% of traders struggle to differentiate between Forex (some prominent Forex brokers include OctaFX and AvaTrade) and binary options. Only 14% believe they are the exact same. They share many of the same indicators and charts. These two financial instruments, however, are totally different.
What is Forex?
Forex is the world’s largest and most liquid currency market. Forex is used by major financial institutions, banks and investment management firms to trade and exchange currencies. Anybody who travels to another country on vacation can participate in the exchange by purchasing the currency of that country.
Every day, currency rates change. It is easy to see this by looking at the screens in currency exchange offices. If a currency’s price rises tomorrow, it can be sold and made a profit. Forex traders are able to do exactly that, but with more sophisticated tools. They track the price movements in real-time.
Binary options are a completely different process.
What is the working principle of binary options?
Many talk about binary options trading. but, binary options can be used as a gambling tool by most people. In a roulette, there are only two possible outcomes. That’s why the name is so simple: The price changing over a set period of time. If one wagers 100 dollars on the EUR/USD price going up within the next five minutes, and it does, one will receive the 100 dollars bet plus up to 98% premium. That’s 198 dollars in total. If it falls, however, you will lose 100% of your money.
Below are the differences between these financial instruments. These differences can be used by investors to determine if they are dealing directly with a Forex broker, or a provider of binary options when investing online.
Forex allows investors to open trades on currency pairs, and they can keep them as long as necessary. The price of the currency pair may drop below the initial level, but then rebound after a while. They will still profit from the trade. They will likely still make a profit, even if the market falls.
Binary options can be very volatile. If the price falls and doesn’t recover in time for the expiration date, then the users of binary options will lose all their money.
2. Profits and Losses
Forex is transparent in that the mechanisms behind profits and losses are transparent. It’s almost like buying physical currency, then selling it the next day for a profit.
Binary options make it difficult to understand how profits and losses are calculated. Another example is betting. Binary options users get betting odds that are dependent on the expiration time and the instrument of their option. There may also be other unknown parameters. These odds usually represent less than 80% the amount of money that users have bet. But, if they lose, they lose 100%.
3. Risk management
Forex traders have the ability to manage their positions while they are open. You can manage your risks by placing stop-loss or take-profit orders. These orders will close the trade when the price reaches a specified level of profit.
Binary options do not allow you to close the bet before it expires. If one closes the bet before it expires, one will lose the entire bet.
4. Margin trading
Leverage allows traders to open positions that have volumes much higher than their initial investment capital. This lowers the barrier of entry to the Forex market. Binary options do not offer margin trading.
5. Types of orders
Forex traders have the ability to place up to 10 orders in MetaTrader platforms. They can adjust their strategies and enter or exit the market at a specific time. Binary options users only have two types of orders. They can only bid on the price changing or rising.
Although the Forex market is regulated and many forex brokers have licences from financial authorities around the globe, binary options are illegal in many other countries, including India.
7. Conflict of interests
Forex brokers usually send trades from clients to the interbank markets, where they can be executed. Forex brokers do not make a profit on the clients’ losses. It is actually interested in their success, as that can often mean they will trade more and make more trading fees.
Binary options providers don’t send trades overseas. What are they making a profit from? They make money from losing bets of their clients, much like a betting company. These providers make money from losing bets and are not subject to regulation. They do not allow trades to be executed on the wider market. This creates a conflict of interests, which is not desirable for financial cooperation.
Binary options are not safer because you know the risks and rewards of each trade before you make your decision. Investors can be more at risk because of the fixed expiration date, the profit/loss system, and the inability to vary order types or risk management techniques.
Binary options providers are well aware of the risks associated with their products and many include Forex trading. These brokers can pose a risk to traders’ capital. Such ‘binary-options-and-forex’ companies undermine the credibility of the Forex industry as a whole by bringing the two completely different financial instruments together, with one of them can share characteristics of a gambling activity.
Exness, OctaFX and XM are forex-only brokers. They should be considered intermediaries between potential buyers and the interbank Foreign Exchange Market.