What are Binary Options?
Forex vs Binary options are financial instruments of the trading market. Trading of the binary options contracts is easy where the trade turns into a yes or no question. Traders have to know whether the market will rise based on a specific price at a particular time. Based on the judgement, traders decide on buying and selling the instrument. If there is a rise, traders buy, and if the value falls, traders sell.
Traders who place an order in binary options speculate in the market instead of purchasing shares of the underlying asset. As a result, the price of binary options contracts lies between $0 to $100.
What is the forex market?
Forex is the most liquid market where currencies of different countries are traded. Forex is the short form for the foreign exchange market; as the name says it all, the market exchanges international currencies. In the forex market, traders purchase and sell the currency pairs to earn profits from the difference. Currencies play a significant role as they have the purchasing power from which goods and services are provided.
Several major currency pairs are traded in the forex market. Some of them are:
Forex market is a decentralised or over-the-counter market, which means it does not have a market place and all the trading is carried out online. The transactions are done through an electronically computerised network. Moreover, the market is traded twenty-four hours a day and five days a week. The market is traded globally and is one of the largest trading businesses.
How Binary Options Work?
Binary options works on three key components; underlying market, strike price and the expiration date and time of the contract. Here, we will understand the functioning of all three.
Underlying market: It is the market that traders choose to trade the binary options contracts.
Strike price: The strike price is a vital part of the binary option contract. It helps to decide on the agreement about placing the trade based on the price.
Expiry date and time: The binary options are traded for about a week with a short duration of five minutes.
The binary option could be speculated on four markets, including:
- Forex market
- Stock Indices
Forex Market Trading
The forex market’s trading directly occurs between the two parties of the forex market via the over-the-counter manner or electronically through brokers. As the market is operated by the networks of banks and has major exchanges to trade. Forex exchanges could be conducted using three types of forex markets:
Spot market: The physical exchange of the currencies occurs during a spot date and time. The spot time is a maximum of two days.
Forward market: The forward contract of forex trade agrees to buy and sell the currency at a specific price settled on a date in the future.
Futures market: In futures contracts, the currency is traded on a set price and a specified date in the future. The futures contract is legally binding, unlike the forward market.
Traders even speculate on the currency prices without buying the currencies. Instead, the traders speculate on the future price movements to predict the forex market for benefitting from it.
Binary Options vs Forex Market
Forex market and binary options are two different ways of trading. The two have various features and trade timings that make them quite attractive for traders to invest in. Forex market is open for trade all through the day for 24 hours, whereas the binary market works on an underlying market; therefore, it could be traded only when the market is open. Here are the comparisons and opportunities that the traders of both the markets could utilise:
Forex market is available for trade 24 hours a day and five days a week. Therefore, the market traders can quickly analyse the market fluctuations and react in comparison to other markets. However, the forex market is not available for trade on weekends.
Binary options, on the other hand, depend on the underlying market for its trading. If the market is open, traders can invest in binary options. Thus, operating during the standard trading hours of the market. Binary options can be even traded on the forex market. So, it is available for 24 by 5.
Additionally, both the markets are online trading platforms.
The trade of binary options requires traders to set an expiry date ranging from one minute to an hour before entering the market. Traders are sometimes asked to leave earlier with low profits or even trade for an extended period of the binary trade order for high returns. However, this depends on the services provided by the brokers.
Forex market trade is controlled by the traders, and it could be exited any time of the trade. Although, an open trade cannot be exited when the market is closed.
The diversity provided by the binary options is more as it has various underlying markets such as stocks, forex, commodities etc. In a forex trade, traders can only invest in limited instruments with major currency pairs.
Leverage is the ratio that furnishes traders with higher market positions with less investments. The leverage ratio provided by the brokers varies in the forex trade; it may go from 50 to 500 times. As a result, forex markets have the ability to open high in the market with less investment.
Whereas binary options do not have any such facility for the traders.
Trading in the market is a risky affair done with any market; without proper understanding and knowledge of the trade, no one can benefit. The above- mentioned points and descriptions of binary options and the forex market have clearly defined what makes these two different. Forex is a natural trading market, whereas binary options are fictive. The time limit for binary options is limited in comparison to the forex market. Forex market offers leverage, and binary options have no such facility. The risk-reward ratio of the two also varies; binary options have a balance as traders can analyse the profit and loss. The forex market, on the other side, is highly risky and volatile.
So, the two have both advantages and disadvantages, and it totally depends upon the trader which one they use for trading. However, traders can use brokers for both options. I would recommend ETFinance and 101investing brokers as they have the best forex and binary options trade services.