Forex Binary Options vs. Spot Forex Trading
As Forex trading grows in popularity, it is not uncommon to see an interest in Forex binary options rise as well. Both of these trading strategies can be of use to the Forex trader, providing an opportunity to earn money. It’s important to understand the differences between the two, however, so that you can make the most informed decision possible.
Spot Forex Trading
When most of us think of Forex trading, we think of the spot market. Contracts are bought and sold immediately, and prices are settled based on current prices. Settlement usually takes only two days (or one day in the case of USD/CAD transactions).
The risk involved with spot Forex trading takes place throughout, since you run the risk of losing throughout the time you hold a position. On top of that, you are not sure how much you will lose for sure. It’s possible to lose quite a bit, depending on when you exit a position, and how many pips have been lost. On the other hand, though, you also have the chance to earn more than you expected, since your gains are based on when you decided to exit.
Another advantage to spot Forex trading is that it costs very little. You only have to cover the spread for your cost, and with spreads quite small these days, it’s possible to trade on the spot Forex market for a relatively low price.
When you trade spot Forex, you can close out your position at any time. The advantage to this is that you can exit any time you are ready, as long as you feel as though you have a large enough profit. You can also exit early in order to cut losses if you feel the trend is going against you.
Spot Forex trading comes with the advantage of flexibility, but the disadvantage of the possibility of bigger losses. You need to be able to competently when to enter and when to exit a position, and you need a certain amount of discipline. Plus, you need to be willing to monitor the changes in the market. You have the potential to earn a lot more, but it takes a great deal of practice and persistence to become competent in spot Forex trading, since the smallest changes can make a big difference in your profit or loss.
Forex Binary Options
Trading Forex binary options simplifies the process a little bit. The main characteristic of a binary option is that there are only two options: You are paid off with the fixed amount of an asset, or you receive nothing at all. With the binary Forex option, you buy a contract that carries your thoughts on whether or not a currency pair will reach a certain strike price by a certain time.
So, if you think that EUR/USD will be at or above 1.2550 at 3 p.m., you will buy a call option. If you think that pair will be at or below 1.2550, you buy a put option. If you are right, you reap the benefits; if you are wrong, you lose what you paid for the contract.
Your profit or loss is determined by how many options you buy, and whether you are right in your assessment of the strike price at a certain time. If you buy 20 options at $30 each, your upfront premium is $600. However, you might receive $100 per option if you are right about where the strike price is at 3 p.m. In that case, you would receive $2,000. Subtract the $600 premium, and your net profit is $1,400.
As you can see, the risk when you trade Forex binary options is known. That is one of the biggest advantages of binary options: You know exactly how much you stand to lose. Your risk is limited to the premium price of the contract (on the flip side, your reward is limited as well).
Another thing to keep in mind is that binary options don’t allow you to leave the position early. You’re stuck until the expiration. If the trend is going against you, you’ve already paid your premium, and you can’t cut your losses. If things are going your way, though, you can’t keep holding on to the contract to run profits; you have to buy another contract.
Binary options are simpler to trade than spot Forex, and they require less dedicated time. With the right strategy, you can use Forex binary options to great effect with less practice than mastering spot Forex trading.