Measured by trading volume, the foreign exchange (forex) market is the biggest asset class in the world. Some estimate the trading volume approaches $4 trillion each day with the majority represented by spot transactions and swaps. The problem for most casual investors interested in forex is that trading currencies – or technically, currency pairs – is complicated. There is a substantial degree of risk, and the amount of capital at stake is seldom clear. This is the reason a lot of people have begun to trade FX binary options as an alternative, completely bypassing the traditional foreign exchange market.
FX binary trading is simplified to a ‘one or the other’ choice. In this example you are choosing ‘up or down’ for the currency pair, EUR/USD. Easy by design.
Our goal on this page is to introduce you to trading currencies through binary options. Although forex trading shares a lot of similarities with FX binary options trading, there are several key differences. You’ll learn about them below.
To fully appreciate these differences, and understand why forex binary trading is preferred by many traders, it’s helpful to be familiar with how currencies are traded in the first place.
Trading Currency Pairs: An Introduction
When someone mentions that he or she trades currencies, or is involved in the forex market, that person is usually referring to trading currency pairs.
For example, the individual might trade the Japanese yen against the U.S dollar, or the Euro against the British pound.
The trade involves buying one currency and selling the other. As the market for both currencies changes their exchange rate with each other, the trade becomes profitable or unprofitable. When you trade currencies against each other, you are required to buy the currency pair. Each pair you buy represents your position in the underlying currencies with respect to that particular trade. You can sell the pair to get out of (i.e. liquidate) your position at any time, assuming there is a buyer.
As you’ll see below, there are several aspects of the traditional forex market that make trading FX binary options far more appealing. Before we get there, however, it’s useful to note the similarities between the two.
How Binary Options Trading Is Similar To Forex Trading
Both clearly involve risk. Each time you execute a trade, there is a degree of uncertainty regarding the movement of the currencies’ exchange rate. Otherwise, everyone would trade FX binary options since profit would be guaranteed.
Both also involve the same basic mechanism: you’re taking a position in the pair’s two underlying currencies – long in one and short in the other.
Both conventional forex trading and forex binary trading require an understanding of the factors that influence rate fluctuations among currencies. Such influences can be political, economic, or based on market perceptions.
Here, the similarities end. We’ll now take a look at the ways in which both forms of currency trading are different from one another.
Binary Options Trading Poses Less Risk Than Forex Trading
Although trading currency pairs through binary options involves risk, doing so via the forex marketplace involve far more.
With forex binary trading, you know upfront how much capital you might lose or profit on each trade. You also know how much you stand to profit. With conventional forex trading, neither is known. Many forex traders have held their positions in losing trades, hoping for a turnaround, only to see their entire capital base erode. That does not happen when trading forex binary options.
Also, many people involved in the forex market use leverage to increase the potential profit they can make on a given trade. The downside to using leverage is that it also increases the potential loss. More than one foreign exchange trader has gone bankrupt by over-leveraging his position in a losing trade. This scenario is infeasible with binary options trading.
More Flexibility In Choosing Asset Classes
In addition to trading currency pairs, you can also trade stocks, indices, and commodities through binary options. Moreover, you’ll have better access to these trades because you’re not required to buy the underlying assets. You’re merely taking a position based on the movement of the asset’s price during a specified time frame.
For example, if you wanted to trade Google stock, you don’t need to risk the capital required to buy shares (currently $600+ per share). You can take a position for as little as $10 at some binary options brokers.
More Choices Among Binary Option Types
Not only do you have access to stocks and other asset types when trading binary options, but there are also different types of instruments you can trade. For example, you can execute up-down, touch/no-touch, high-low, and boundary binary options. These instruments give you different ways to profit on your currency pairs.
Up-down binary options are a simple bet on the direction of the currency pair’s price. Touch/no-touch trades are a forecast of whether the price will “touch” a certain level before the trade expires. High-low binary trading involves a bet on whether the currency pair’s price will end above or below its strike price. Boundary (range) binary options are a prediction regarding whether the price will end inside or outside a given range at the time a trade expires.
Binary Options Trades Expire More Quickly
Another advantage of forex binary trading is that you can be in and out of a position far more quickly than is the case with most forex trades. Recall from earlier that trades in the forex market can be held for long periods of time. This traps your capital, preventing you from putting it to use in other trades.
By contrast, FX binary options come with a predetermined expiry time. Some trades expire within an hour. Others expire within 15 minutes. Still others expire in 60 seconds. The short duration of the trades allows you to execute more of them each day.
Trade FX Binary Options At The Following Binary Brokers
You’ll find that most binary options brokers offer some level of forex binary trading. However, there are many brokers you would do well to avoid. Some mail payouts to their members very slowly, often taking several weeks to do so. Others provide little to no customer support. Still others offer very few currency pairs to trade, severely limiting your choices. The four brokers below have been reviewed and tested, and have shown promise in the areas we consider important.
Markets World – A lot of beginning FX binary options traders like Markets World because they can take positions for as little as $1 (after a $20 minimum deposit). This is also one of the few brokers that takes US traders and offers 60 second binary options. In addition to several currency pairs, you’ll be able to trade a long list of commodities, stocks, and indices. Potential returns on most trades range between 70% and 90%, but a few one-touch options carry returns up to 500%.
Nadex – Also offering $10 binary options trading, Nadex is widely regarded as one of the safest and most trustworthy brokers online. You can execute touch/no-touch options and call-put trades. You can also use their platform to customize your trades. Potential payouts range between 70% and 90%, but again, some instruments carry returns up to 500%. When you visit Nadex, take the time to get accustomed to the trading platform.
IQOption – IQOption gives you access to one of the most impressive lists of asset types we’ve found. You’ll find more stocks and indices available here than at most of their competitors. Although payout percentages for most trades are at the low end of the industry – between 65% and 81% – you’ll receive a 15% refund on trades that expire out of the money. That is a significant advantage that can help you manage your capital. Visit IQOption.com today and register your account. You can do so with a small $10 minimum deposit.
24Option – With impressive payout percentages, some of which climb past 300%, 24Option is one of the most exciting brokers in the binary options space today. You can expect a potential return starting at 75% on most trades, whether stocks or currency pairs. You’ll also have access to several stocks, commodities, and indices, as well as various option types, such as one-touch, range, and high-low instruments. Minimum deposits at 24Option are $250 with minimum trade amounts set at only $24. Visit 24Option.com today to learn more and get started.
It’s important to point out that trading currency pairs profitably, whether through the traditional forex market or binary options, is difficult. If making a profit were easy, everyone would do it. Having said that, when you’re ready to test the waters, start with the four brokers above.