Forex Versus Forex Binary Options
Forex is the Godzilla of global financial markets, and a market that is open practically round the clock. With its huge volumes and near-perfect price discovery, the forex market has something for everyone – choose your product (from a huge range of currencies), your trade time frame (from minutes to months), your trading capital (use leverage to trade even with small amounts of seed capital, a risky proposition though) and time to trade (practically anytime). Pick a broker from any number available online. A technological revolution of sorts over the past few years has brought this huge market to the doorsteps of the retail investor/trader.
The bulk of trading in the forex markets is accounted for in the ‘spot market.’ Many small investors start forex trading here. Yet, some features of spot trading really work to the disadvantage of the average trader.
Leverage and Risk
Chief among these is the ability to handle leverage. Some countries have implemented restrictions on leverages but in many countries the regulations are quite relaxed. Brokers can offer you leverage that could be as much as 500:1 to encourage you to sign up and trade with them. This leverage is a double-edged sword, and can generate substantial profits, but also trash your trading capital to zero in the matter of a few trades.
Another tricky point is the ability to handle losses and book profits. Trades can quickly turn ugly and it is therefore de rigueur to have a stop loss in place for every trade. But how do you calculate a judicious stop loss? It takes study and experience to quantify this, and by the time an average trader gets the hang of it, his losses could add up to a serious amount. Besides, it is not necessary that a stop loss can protect you for a pre-determined amount every time. In times of high volatility, the stop loss could hit for a price much worse than contemplated.
Small traders also lack the ability to properly assess the risk-reward ratio for a proposed trade. In many cases they assume far more risk than the possible reward, and as result, in the long run, due to the numbers game, they end up losing more often than winning, and therefore retire hurt from the game.
Wait. The objective of this article is not to discourage you, rather to show you an alternative way to trade this huge market with – you guessed it, binary options!
Binary options in forex
Now that you are armed with the basics of binary options as discussed in previous articles, you know already that the risk-reward ratio is pretty much fixed – you know the pay-off (if the trade went right) and the loss (if it bombed). That means you can’t be stuck with a loss bigger than you bargained for.
Also, you have the advantage to customize your stake amount according to the trade setup of the currency. The stake amount can be as low as $10, but if you are very sure, you can bet higher amounts.
Since no fees or commissions are applicable, it is also quite cheap to trade binaries in forex. Also, no carry costs are involved. Of course, do understand that the underlying pair is trading at a spread, and your win or loss will reflect the impact of that spread.
Another advantage is that of timing – since the forex markets are open nearly throughout the week you can set apart a time for trading options according to a convenient schedule. Again, unlike a forex spot trade, you do not have to be present to actually close out a trade – the binary option will expire by itself even though you may be driving to work on the highway.
You can also use different kinds of binary options depending upon your trading style, the type of pair you intend to trade and the current environment. The Call or Put option is the simple one in which you pick Call if you are bullish and a Put if you are bearish on the currency. If you are trigger-happy and like to see instant results there is a 60-Second option that expires on the minute but works the same way as the Call/Put. A high roller will perhaps like to trade the One Touch binary option – this is a high risk-high return option and its buyer is required to predict whether the currency price will touch the pre-determined price level any time during the life of the option. More conservative traders can also trade the In/Out binary option in which the trader is required to select a boundary within which the option must expire. Here the upper strike price will define the upper boundary of the option while the lower strike price will define the lower boundary.
One disadvantage is the fairly rudimentary charting facility normally available with a typical binary forex platform. You can easily counteract this, if you are a serious technical trader, by availing of the charting facility from a forex broker. Trade the binary platform, but view/analyse the forex broker’s charts. That way you have the best of both worlds.