Binary Options vs Forex

What are the binary options?

Binary options is a contract in which the trader selects his prediction about the future price of a particular instrument in a given market called the underlying asset . This prediction may be the same, more or less at a price chosen by the trader, known as exercise price or strike price. Next to the prediction, the trader chooses a time horizon, a term for its prediction. After this deadline, not before or after, you will see if the prediction that the trader made is correct or not. In case the trader is successful he will win and he will lose.

If the trader is correct it is said that he has closed In The Money and will be paid the benefit offered by the broker. Otherwise it is said that the trader has closed Out Of Money and loses all of his investment. The most frequently offered benefits are around 70% and losses are usually not of the total but around 90%, although this depends on the specific offer of each broker.

In the trading options and normal trading, profits and losses are calculated based on the difference between the closing price and the entry price. In binary options there are only two options: either you win everything or you lose everything, hence its name.

The difference between Forex and binary options

The currency market and binary options share a common basic component: business decisions are based on future price prediction (see What is Forex?). In both cases there is analysis and speculation. The main differences from a practical point of view are the way in which the benefit of an operation is calculated and the duration time.

The forex market is a spot market , a market in which the buy-sell contracts are executed at the moment and the trader pays the market price at that time. In binary options the trader does not pay "a price" for the asset, he invests speculating on the direction of the price.

In relation to the previous point we reach the biggest practical difference: the way we calculate the profit and loss of an operation . In the forex market, being a spot market, when you buy and sell you pay the market price. Profits and losses are calculated by subtracting the price paid at the close of the transaction less the opening price; You get the number of pips. The value of each pip is multiplied by the number of pips obtained and the profit or loss of the operation is reached (learn more in the pip and batch and in how to calculate the value of a pip).

In contrast, in binary options, profit and loss are calculated as a fixed percentage of the amount invested. Of the final price we only care if it is greater or less than the exercise price, not its exact value. In other words, opening a binary option already knows how much you can earn and how much you can lose no matter how far the market comes. The possible amount of gain or loss will remain constant and is known from the time of purchase of the option.

Another very important difference is that in the forex market you can have the trades open indefinitely while the binary options have an expiration date set in advance and that, in general, is very short term and can not be executed before or After this date.

If we look at what is described in these paragraphs, the potential profit in the spot forex market is virtually unlimited while in binary options it is limited from the outset to a fixed percentage. As the price moves in our favor, the profit in forex increases, in the binary options the final profit is fixed and known in advance.

• We decided to open a 1 lot lot in the EUR / USD at price 1.3300. After 24 hours the EUR / USD has reached 1.3400. We have obtained 100 pips of profit, at 10 USD each pip, it makes a total of 1000 USD of profit. If the price had gone against, for example up to 1.3250, we would have lost 500 USD.
• At the same time we bought a call option for 250 USD since we believe the price will go up in 24 hours to 1.3400 or more. If after 24 hours the price has reached 1.3400 or more, we will get the amount invested (250 USD) plus 70% (may vary depending on the broker), that is, 425 USD (benefit of 175 USD plus 250 USD invested) . If, after 24 hours, the EUR / USD price is below 1.3400 we will lose 250 USD (some brokers will return 10% in out of money options , in this case we would lose 225 USD and we would have 25 USD).

You also have to take into account the risk associated with each type of trading . In forex you can manage your money and operations in a much more flexible way through monetary management and risk management (see Definition of monetary management and the article Introduction to monetary management) and operate in accordance with these principles. Thus, net positive results can be obtained even with a ratio of winning trades below 50% (see the series Risk: Forex Profit ). In binary options, with a typical 70% benefit in In The Money and 90% loss in Out Of Money options, you need at least a 56.25% hit ratio to end in breakeven losses).

I hope you have been more or less clear about the differences between the two, if not, ask, I will be happy to respond as far as I can. And I ask you: do you attract trading with binary options? More than the forex market? why?