Binary Options vs. Forex Trading: Understanding the Difference

Trading A Stock Versus Trading Stock Options - Part One provided by: Many traders think of a position in stock options as a stock substitute that has a higher leverage and less required capital.

In both types of markets, users are speculating on which direction an asset moves in. In other words, once the trader has lost a certain amount, the trade automatically closes. Because options contracts implement leverage, traders are able to profit from much smaller moves when using an options contract than in a traditional retail forex trade.

Forex Versus Indexes

First, let’s define each market. When trading options you are trading contracts that can control both the upside and downside movement in a stock, ETF, or Index product. Using a call option will give you control of the upside movement in a stock, while a put option will .

So, for every call or put option purchased, there is always someone else selling it. When individuals sell options, they effectively create a security that didn't exist before. This is known as writing an option and explains one of the main sources of options, since neither the associated company nor the options exchange issues options.

When you write a call, you may be obligated to sell shares at the strike price any time before the expiration date. When you write a put, you may be obligated to buy shares at the strike price any time before expiration. Trading stocks can be compared to gambling in a casino, where you are betting against the house, so if all the customers have an incredible string of luck, they could all win.

But trading options is more like betting on horses at the racetrack. There they use parimutuel betting, whereby each person bets against all the other people there.

The track simply takes a small cut for providing the facilities. So, trading options, like the horse track, is a zero-sum game. The option buyer's gain is the option seller's loss and vice versa: The buyer of an option cannot lose more than the initial premium paid for the contract, no matter what happens to the underlying security.

So, the risk to the buyer is never more than the amount paid for the option. The profit potential, on the other hand, is theoretically unlimited. In return for the premium received from the buyer, the seller of an option assumes the risk of having to deliver if a call option or taking delivery if a put option of the shares of the stock.

Unless that option is covered by another option or a position in the underlying stock, the seller's loss can be open-ended, meaning the seller can lose much more than the original premium received. You should be aware that there are two basic styles of options: Similarly, the potential reward may also be fixed beforehand.

The trader can decide that he wants the trade to close once it has reached a certain profit value. The maximum loss in forex would be all the money on your trading account. Binary trades operate on specific timelines. The trader has no control over when a trade begins or ends once a trade has started. Before a binary options trade begins, users must select when the order expires.

Each option has a start time and an end time. At the expiry time, the trade automatically closes. Some brokers allow you to close early but you will exit your option at a percentage of the expected return. Not all brokers offer this option. Similarly, some brokers allow traders to delay the expiry time to the next expiry time. In forex trading, users can take trades lasting from one second to many months, since they can open and close the trade whenever they feel like it.

This flexibility has both advantages and disadvantages. Forex also has a tool called margins. Each broker determines the maximum margin. Margins allow traders to increase their investment capital so that they can make a larger profit if the trade is a winning one. Margin is not a tool available for binary options.

There are five types of binary options you can trade. There are many different types of orders in forex. However, there are more advanced types such as limit, stop, OCTO one cancels the other , trailing stop, and hedge orders, among others. Forex trading and binary trading are quite different and it is important to understand these differences in order to become a successful trader. This article is accurate, but I like Forex in that you are given a greater flexibility in controlling the trade.

One important thing to note isd that you DO NOT want to take the bonus that a lot of these platforms offer, you will lose because they require a certain amount of trades in order to be able to withdraw profits. Never trade binary options with an OTC broker. Blue chips, on the other hand, are stocks from well-established and financially sound companies.

This is a measure of short-term price fluctuations. While some traders, particularly short-term and day traders, rely on volatility in order to profit from quick price swings in the market, other traders are more comfortable with less volatile and less risky investments. As such, many short-term traders are attracted to the forex markets, while buy-and-hold investors may prefer the stability offered by blue chips.

A second consideration is leverage. In the United States, investors generally have access to 2: The forex market offers a substantially higher leverage of up to Is all this leverage a good thing? Yet another consideration in choosing a trading instrument is the time period that each is traded.

Trading sessions for stocks are limited to exchange hours, generally 9: The forex market, on the other hand, remains active round-the-clock from 5 P. EST Sunday, through 5 P. The flexibility to trade during U. Stock market indexes are a combination of similar stocks, which can be used as a benchmark for a particular portfolio or the broad market.