Before acting in the financial markets, it is important to know how the currency markets work. In this post, we explain what Binary options and the Forex market consist of; how they are similar, and how they differ. Since, as traders, it is important to know the markets’ characteristics before deciding to trade.
Binary options are high-risk financial products, where the trader speculates on the movement of different assets (such as currencies, indices, stocks …).
You could compare binary options to gambling. That is, the trader makes a prediction about the price of the future asset, if it rises or falls, during a set period of time. Once this time is up, you will know if your forecast is correct and you could earn around 70-90% return on the initial capital, or if, on the contrary, you have not been correct, you could lose 100% of the money invested. Therefore, the variables to take into account are the chosen price (exercise price or strike price), the time (or term for its prediction), and the type of asset.
Binary options are divided into two broad categories: European Options (can only be exercised on or after expiration, and never before) and American Options (can be exercised before and during expiration). There are also different types of binary options. Some of the most common are: High / Low binary options, 60-second binary options (CALL-PUT), Touch / No Touch / Double one Touch binary options, and Limit or Range binary options, among others.
As for the Forex market, the contracts for the purchase and sale of assets are executed at the moment, and the trader pays the price that is established in the market at that exact moment. Beforehand, the trader carries out an analysis and study of the market, and the asset, and decides when to close the operation.
As in binaries, there are different types of orders to operate in these buy-sell contracts. The most frequent are: market order, limit order, Stop Loss orders, Entry Stop orders, follow-up Stop orders, and take profit orders, among others.
Currently, both markets can be accessed and traded online, and they also allow you to start investing with small amounts. However, there are a number of differences that must be taken into account. Broadly speaking, these are:
Investment time or term:
In binary options: trades have an expiration period.
In Forex: the operations are open indefinitely until the trader decides when to close them.
In binary options: margin is not available.
In Forex: the margin is determined by the broker (this margin will allow you to increase your investment capital in order to obtain a greater profit).
Calculation of profits and losses:
In binary options: they are calculated as a fixed percentage of the invested capital, only the final price being relevant. When a trade is opened, the trader already knows how much he can win or lose.
In Forex: they are calculated by the number of pips, which are obtained by subtracting the price paid when closing the operation minus the final price. Then, the value of each pip is multiplied by the number of pips obtained to arrive at the profit or loss of the operation. Therefore, profits or losses are variable.
In binary options: the loss can be 100% of the investment.
In Forex: the loss is more variable, since it depends on the management of the trader.
Finally, as always, our recommendation: study and train well in all these concepts and start operating in a moderate and planned way, investing small amounts until you feel safe.