HomeForex Trading vs Binary Options – Basics & Risks

Forex Trading vs Binary Options – Basics & Risks

FOREX

BINARY OPTIONS

What’s available for trading? Currencies, traded in pairs: EUR/USD, GBP/USD, EUR/CHF, GBP/JPY, AUD/USD and many other. You can trade currencies as well as variety of other instruments: stocks, indices, commodities etc.
How to trade? You trade by finding a trend and then buying or selling a currency pair.
(For example: if you believe that EUR/USD pair is going to rise, because your market analysis shows that EUR is getting stronger comparing to USD, you’ll be looking to Buy EUR/USD with the expectation that the trend will go up and you make profits).
You trade by placing bets. You place bets for the currency (or any other instrument) to be above or below the current price level within a certain time limit.
(For example: you can bet that the price for EUR/USD will be above 1.3000 in 15 minutes time. You then wait 15 minutes, and if you’re right – you win, if you’re wrong – you lose.)
How to make money? The currency pair must eventually trend (move) in your direction.
(E.g. if you placed a Buy order for EUR/USD: in order for you to profit EUR/USD must go up.
If you placed a Sell order for EUR/USD: in order for you to profit EUR/USD must go down).
The currency pair (or other instrument) must reach the targeted price or surpass it AND it should happen within the time limit of your bet.
How to lose money? The currency pair must move against you.
(E.g. if you bought EUR/USD, in order for you to lose EUR/USD must go down.
If you sold EUR/USD, in order for you to lose, EUR/USD must go up).
The currency pair (or other instrument) must either not reach the targeted price OR fail to do so withing the required time limit OR both.
What’s required to hold a trade? You must have enough capital on your account at all times. That is because when a trend temporarily moves against you, you should be able to keep your trade running without interruptions by showing enough capital in your account to offset temporary dips. Nothing else. As soon as you entered a trade there is no additional requirements for maintaining a sufficient capital.
How long can you hold to a trade? As long as you want to. Your trade closes when your Bet expires. You will choose the time of expiration in advance: from 1 minute, 15 minutes, 1 hour, 1 day to 1 week.

Forex vs Binary Options – 2. Risks & Money management

FOREX

BINARY OPTIONS

Risk : Reward ratio You can control risk : reward ratio and adjust it. Traders are able to choose lower risks with lower returns or higher risks with higher returns. You cannot control risk : reward ratio. The ratio is always preset, with risks being always high. Higher risks allow to achieve higher profits faster, but they also make you lose everything faster.
Trade control You can control the amount of profits/losses you make by closing trades sooner or leaving them open for a longer than initially intended period of time. You cannot control a trade or terminate it in order to gain more profit or avoid losses. A trade has its predetermined expiration date & time, which you select when you open a trade (could be anywhere from 1 minute to 1day, week or month).
Time limits and contract expiry Your trading contract has no time limits & no expiration. You can keep a trade open as long as you like and close it at any time. Time limits apply. Your contract is valid only during a certain fixed time limit: 1 min, 15 min, 1 hour, day, week etc. Once the expiry date/time has come, your contract has no further value, it expires. Upon expiry you’re either “in-the-money” – gained profit, or “out-of-the money” – lost money.
Money management Money management knowledge and good trading skills are essential in order to properly manage trades at all times, anticipate profit potentials and calculate losses. Your profit amount $ and loss amount $ are known in advance for each trade and are always fixed. You can project your profits/losses instantly.
Profit potential Each trade has an unlimited profit potential, since it can be left open for a long as a trader decides to. Each trade has a fixed profit amount, regardless further market moves.
Loss potential Risks of sustaining larger losses are higher. Stop orders and trailing stops are designed to limit and control risks. Yet, there is no guarantee that stops will be executed each time without additional slippage. You don’t need to worry about the stops or extra losses. It’s either hit or miss: “in the money” – you win a bet, “out-of-the-money” – you lose a bet.
Trading cost Extra cost includes Forex spreads, or spreads + commissions. No extra cost. As a rule, there are no spreads and no commissions.
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