This makes the currency market highly volatile and forex trading unpredictable. Binary options — With binary options, the trader establishes the profit and loss upfront. This means trades are less affected by market volatility. There is also less risk involved, as losses are capped at the original investment.
Profitability Forex trading — Due to market volatility, profits can be high. Forex trading can also be leveraged. This means you can borrow capital beyond your initial investment to increase your position size up to times , leading to larger returns but also greater losses. Binary options — Binary options are generally not as profitable, but they do involve less risk.
Leveraged investing is not possible with binary options. Fees Forex trading — When forex trading, fees usually come in the form of spreads and commissions set by the online brokerage company. These vary from competitive and transparent to complex and significant. Binary options — Costs are typically factored into the final payout when binary options trading.
Of course, some brokers offer lower fees than others, but traders usually have a clearer picture as to what those costs will be before entering the trade. Control Forex trading — Flexibility to enter, amend or exit an order can be attractive to currency traders. However, this also means there may be a high margin for error if trades are not monitored properly.
Binary options — There is some level of control with binary options trading. Profits and losses are pre-determined and the trader chooses the expiry. This means there is a lower margin for trader error. A binary option is an all-or-nothing bet that expires either in the money or worthless — only two outcomes are possible.
Binary options in Forex are over-the-counter and usually are not traded on an exchange. Binary options are usually European style, meaning they can be exercised or rather will be exercised on your behalf only on the expiration date, although some brokers will allow you to close the position early. Also, some brokers will allow you to rollover the trade, but often only if you increase the stake.
One benefit of binary options is that you know exactly in advance what you maximum gain and loss will be, whereas in regular Forex trading, you know that trade-off only if you have set a stop and target that gets filled precisely as you order. Margin is not used in binary options and so you will never get a margin call.
Binary options brokers do not, on the whole, charge a commission or spread although Nadex does — see below — they make their profits from the preponderance of options that expire out of the money. This tells you immediately that binary options is betting and not trading.
A Forex trader with genuine forecasting capability can trade profitably with greater efficiency. Binary options may be useful as an alternative or supplement to a stop, or a method to scale in to a position before committing fully to it. You buy a call option when the price is 1. If you believe the price will fall, you could buy a put. Several other fancier types of binary options are available in Forex, too, including a second version for which programmers have devised automated programs.
The euro closes at 1. You have the choice of a one-touch call that specifies the EUR will rise to touch 1. The selling point for one-touch options is that it literally takes one touch to go in-the-money. Using Binary Options to Hedge and Other Applications A useful way to apply binary options is to devise what is really a straddle out of an underlying position in the currency plus a binary option in the opposite direction.
Say, you are short the GBP in the spot market at a support level you consider will get broken to the downside.
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