Forex Binary options are an increasingly popular type of investment that can lead to decent profits in the short term and down the road. Compared to other market-based forms of investments, Binary Forex options keep risks low while offering decent returns.To truly comprehend how these options work, it is important to understand how the Forex (currency) market and Binary Options work individually.The Forex market revolves around the fluctuations of currency markets around the world, whereas binary options focus on predictions whether the value of an asset such as stocks, currency, and commodities will reach a certain mark.
As explained earlier, Forex trading involves speculating on currency prices around the world. Buying when low, selling while high like any other investment. Since daily currency fluctuations around the world are typically small, Forex markets aren’t particularly volatile, minimizing risk for investors. Of course, due to the slow rate at which currency markets move, profits margins are typically small, meaning investors need to rely on large amounts of leverage to maximize the profits generated from price movements.
The basic concept behind binary options is quite simple. Investors make a bet on whether the price of a particular asset will reach a certain point known as a “strike price.” If the guess is right, the investor receives a percentage of the value of the asset – which is determined before the trade is placed.Unlike Forex, Binary Options have only two possible outcomes, meaning the guess is either right or wrong, hence the reason why the term “binary” is used. When trading, investors can place a “Call Option,” which means a rise in value is anticipated, or a “Put Option,” which means a decrease is predicted.Another important characteristic of Binary Options that attracts investors is the fact they can be based on virtually any asset that is traded on the market, giving every investor the opportunity to focus on their areas of expertise.
How big are the profit margins for Forex investors?
As noted earlier, daily fluctuations regarding currency markets, which Forex trading is based on, are typically small, so the value of price movements tend to be low. However, with the proper amount of leverage, that value obtained from price movements can be significantly increased. Of course, the higher the leverage, the riskier the investment becomes.Developing countries which lack proper functioning governments tend to experience periods of large currency fluctuations from time to time, thus creating opportunities in the Forex market for savvy investors to make decent returns without an enormous amount of leverage. It really comes down to how knowledgeable the individual investor is about global currency markets.
How big are the profits margins for Binary Options traders?
Given the fact the basic premise behind binary options trading is an investor speculating whether the value of a certain asset will reach a particular point, margins don’t affect the returns. The return for each particular trade is fixed before the transaction begins, and investors don’t get anything extra added on, regardless of the final value of the asset.Therefore, the only thing that matters is if the value of the asset traded on meets the “strike price.” Any increased value of the strike price won’t bring higher profits.
Payouts and Losses in Forex
One of the most attractive characteristics of the Forex market, compared to Binary Options, is the fact there isn’t a cap on how much profit an investor can make on any given trade. Obviously opportunities for making profits typically come with risks, so there are also no limits on potential losses when dealing with currency markets around the world, another characteristic that differentiates Binary Options from Forex trading.Fortunately, investors do have the option of using limit or stop orders to protect their profits and limit their losses.
Payouts and Losses in Binary Options
Payouts are predetermined by brokers prior to trades, meaning investors know exactly how much they stand to gain or lose (if the prediction turns out to be wrong). Return margins vary depending on the options traded, but they can be substantially high, up to 400 percent in some cases. However, the typical return on investment is usually in the 70-80 percent range. As for losses, the investor only losses the amount paid to buy the contract. No more, no less, regardless of how far off the prediction is at the expiry time.
Closing Forex trades
Since Forex trades are based on currency markets; investors can buy and sell as they please during market hours. These makes it easier for traders to capitalize on developing trends since trades can be made in real time once the broker has been contacted.
Closing Binary options
The closing time of Binary Option trades – unlike Forex trading – is predetermined before the transaction is made. The “expiry time” on a binary option can be as short as an hour or as long as a couple of years. The expiry time automatically closes the trade, so there is no need to chase down brokers.However, depending on the particular broker, investors sometimes have the option of closing their trade earlier by forfeiting a portion of the return. Likewise, investors can also increase the expiry time of a binary option, by increasing their initial investment by a predetermined percentage. That’s another reason why Binary Options are considered to be a lot less risky than trading in the Forex market.
Orders types in Forex
When it comes to investing in currency markets, the basic type of orders are market buy and sell orders. For more knowledgeable investors, there are other types of orders including: Hedge, OTC (over the counter), SPOT (single payment option trading), Limit, and Trailing Stop orders.
Order types in Binary Options
There are about a handful of different types of binary options available to investors such as: Option Builders, High/Low, Boundary Options, Toucho-Touch Options, and 60 Seconds options. Obviously, all the different types of options can be applied to virtually any asset that is traded in the market.
Trade size in Forex
The size of a Forex trade can vary from micro lots (1000 units of a currency) to millions of units. It comes down to each individual broker to determine the maximum amount for each trade. Of course, given the fact daily price fluctuations in currency markets tend to be on the small side, a decent amount of leverage makes things a lot easier, which is why the maximum trades allowed in Forex orders are quite large.
Trade size in Binary Options
When it comes to trades involving binary options, brokers get to determine what the minimum and maximum trade amounts are. That minimum can be as low as $5, while the maximum can be as high as $10,000. Obviously, this makes binary options very attractive to novice traders, especially when compared to Forex trading since risk is easily minimized. Why you factor in the fact that some types of options can be purchased for as low as $5, while paying out as a high $100, it becomes even more obvious why Binary options – rather than Forex – are the preferred choice of beginner investors.
Trading costs in Forex
When making Forex trades, there are typically commissions, spreads and rollovers involved. Given the fact daily price movements can be relatively small when playing currency markets, all extra fees should be carefully considered prior to trades since the profit margins are already limited. Even with a large amount of leverage, these fees can easily add up, cutting into already limited profits.
Trading costs in Binary Options
Unlike Forex transactions, there are no spreads, rollovers, or commissions here. It is simply a matter of being right with your prediction and receiving the agreed percentage, or failing and losing the investment.
Binary Forex Options(BOF) vs Spot Forex trading: Why Binary Forex Options are better
To understand why the above statement is true, it is important to know what Binary Forex Options are. Well, these are a type of option where every contract bought pays out $100. The price of these contracts can vary from as low as $5 to $25, meaning a pretty decent return on the initial investment if your prediction turns out to be true.Obviously, Binary Forex Options are quite different from Spot Forex trades where investors look to make profits off the daily fluctuations of global markets.So, why are Binary Forex Options better that Spot Forex?
- It all comes down to the risk involved. In the case of Forex Binary Options, investors stand to gain a lot more than their initial risk, while in the case of Spot Forex, traders typically only make as much as they’re willing to risk. That makes Binary Forex Options the better alternative, since the reward to risk ratio is a lot greater.
- Another characteristic of Forex Binary Options that make them a better alternative to Spot Forex trading is the fact that it is a lot easier to hedge these types of trades due to the high reward to risk ratio. For example, an investor can buy opposing sides of a Binary Forex Option for $20, and still net a healthy profit of $60.
- There are no commissions and rollovers associated with BOF’s, and spreads are typically limited. The same can’t be said about Spot Forex trades.
- With the use of stop orders, there is also no need to constantly watch the market when dealing with Binary Forex transactions since the entire process can be automated. However, savvy investors often keep an eye out on market regardless since there is the option of closing out the trade early.
How to trade Forex Binary Options
The high reward to risk ratio of Forex Binary Options gives investors several viable trading strategies. Some prefer to deal with weekly expiry times; several prefer daily contracts, while others stick with hourly contracts.Binary Forex Options can also be used as alternatives for stops, allowing traders to minimize risks during market reversals.
Mastering Binary Options
If you plan on becoming a Forex Binary options trading pro, you will need to start by opening up a trading account. Then, you are ready to test the waters. Obviously, the more you know about markets and stocks, the better your chances of netting a decent profit. As with any other form of investment, learning should be a never-ending process as market are continually evolving.For those who are determined to become Binary Forex Options experts, here are a few pointers that should get you pointed in the right direction:
- Practice good risk management habits: Since you always know exactly how much you stand to gain or lose when dealing with Binary Options and Forex Trades, managing potential losses should be relatively easy. As with all investments, spread your risk, and learn the tiny differences between winners and losers.
- Stay informed: Serious investors typically spend a decent amount of time monitoring global markets in the world for things related to Binary Options/Forex trading. Those who plan to become Forex Binary Options pros would be wise to follow suit.
- Learn and practice various trading strategies: Some trading strategies are more efficient than others, but you typically have to try many strategies out before you find the one that’s perfect for you. An important key to understanding markets around the world, especially when it comes to Binary Options and Forex trading is having lots of experience with the many investment strategies and techniques.
- Stay focused: As with many other forms of investments, it’s the little things like having a positive attitude, work ethic, and perseverance that often make the difference.
These are just a few simple tips that anyone interested in exploring and profiting from Binary Forex Options would be wise to follow. So go ahead, open an account with an online brokerage firm like Bank of Trade and explore the amazing world of options.