Which is More Profitable Forex Trading or Binary Options

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Which is More Profitable: Forex Trading or Binary Options?

Binary options trading is often compared and contrasted to forex trading. This is because in the investment world, they are often the two types of trading that are more easily put side by side. It has been established that while there are similarities, there are more differences apparent.

Also, they each have their own strengths and weaknesses. This makes it quite difficult to outright determine whether or not one form of trading is ‘superior’ to the other. How about in terms of profit, nonetheless. Which is more profitable, forex trading or binary options. Let’s break it down here:

1. Initial Investment

When it comes to initial costs, it would appear that binary options trading has the upper hand. This is because there are no fees, commissions, or other charges being levied against the trader. All that binary options traders have to be concerned with is their initial deposit into their account.

While the minimum amounts vary from broker to broker, they are often quite competitive, averaging significantly low amounts. The broker does not require any fees, and simply gains from the trader losing out on a trade. Therefore, there are no hidden charges to contend with.

While forex trading may appear to hold similar benefits to binary options, this is not always the case. This is because of the multiple ways that forex traders can pay their brokers, each with their own advantages and disadvantages. Also, there are plenty of other charges that can crop up for the traders later on as well.

2. Forex VS Binary Options During Trades

This is a trickier topic to compare and that is due to the nature of these types of trading. At a glance, it would appear that forex is capable of generating a larger profit. This is because there is no deadline when it comes to forex trades. It can go on for months on end, if the trader wills it.

Forex vs Binary Options related articles:

This gives the trader the opportunity to wait for their most favorable price, getting as large a profit as possible. With binary options, on the other hand, the trade time is set. Once the trade expires, you will either have made a profit or lost all of your money.

That being said, most binary options brokers offer incredibly high payout rates. Due to this, as long as the trader manages a win ratio of greater than 50 percent, it is not to difficult to break even or make a profit.

The Final Verdict

It is almost impossible to say with conviction which type of trading is more profitable. It depends on a number of factors, including the trader. You must then take experience, capital, brokers, and strategies into account. Therefore, it can be difficult to get clear idea of the overall picture regarding profit. It is more a case of ensuring that you choose the type of trading that is most complementary to you. You will also need to exercise good judgment and caution as well in both of these endeavors.

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There is no clear answer to which is more profitable: forex trading or binary options. however, you are now aware with the benefits as well as the disadvantages of each of these trading forms.

The Profitability Factor

Simply put, the profitability factor of a trade is the ratio of how much money can be made versus how much money is lost in that trade. Even though this concept is used to basically describe trading systems, we will adapt this a little to compare the profit factor in the binary options market versus other conventional markets such as the forex market.

When deciding on what financial market to invest in, the profitability factor is definitely one of the key points that must be taken into consideration. After all, the whole essence of investing in the financial markets is to make money, and the more money that can be made from an investment, the better. For instance, if you could put $1200 in one market and make $300, but if there is another market that can take $800 to make $300, the latter would obviously be more profitable because an increase in the invested amount would deliver more returns assuming the same level of profitability is achieved.

This is where the appeal of the binary options market lies. Using some of the trade types such as the Call/Put options with short expiry times that start at 60 seconds or 15 minutes, it is possible to achieve a level of compounded returns that gives this market a higher probability factor than the other financial markets. Let us take the forex market and the binary options market as markets that can be compared on the basis of the profitability factor.

Theoretically, can someone with $500 in the forex market make $5,000? In theory, he can do this if he is able to make 250 pips from 2 trades, staking all his money in the trades. But in practice, we know that this is not possible. There are leverage and margin requirements to consider, and staking all your money in one or two trades in order to hit it big is not going to work in the forex market. Generally, it is accepted that traders must not risk more than at most 5% of their accounts in the market at any one time, so a trader with $500 in the forex market is going to need at least 50 to 100 profitable trades to make $5,000 out of his money. This is surely going to take quite some time to achieve, as the profits in forex are purely a function of how many pips the trader can achieve in a trade. If the trader makes only one pip in his favour, all he goes home with is the financial equivalent of one pip.

Now let us examine the case of a trader with $500, seeking to make $5,000 in the binary options market. One key point to consider is that profitability in the binary options market is not a function of how many pips the asset has moved in the trader’s favour. Unlike in the forex market where a pip in a mini-lot trade is equivalent to $1, a pip in the binary options market in the trader’s favour is equivalent to the entire payout for that trade. Consider this. A trader looking for a quick scalp, stakes $100 in a trade in the forex market, and makes five pips profit. He goes home with $105 (profit + capital). Another trader stakes $100 in the binary options market for a trade with a payout of 80%. The asset ends the trade with one pip in his favour, and he walks away with a payout of $180 (profit + capital), $75 more than the forex trader. By the time 10 of such trades have been taken on an intraday basis, the forex scalper goes home with just $25 profit while the binary options trader would have gone home with $800 profit. This is a profitability factor of X32 in favour of the binary options trader for every day both traders are in the market, assuming profit-making frequency remains constant. With such astounding figures, we really wonder why retail traders are flocking to the forex market in droves when they really ought to be trading the binary options market.

Another point we can use to illustrate the profitability factor in the binary options market is the fact that a trade like the Call/Put trade can be concluded in as quick as 15 minutes. Unless you are a master scalper, it is hard to make any real money in forex in just 15 minutes, unless you are probably trading the news. Trading the news is not a piece of cake and many more will lose money than make money on it, so a forex trader cannot really count on that as a source of making money in 15 minutes in the market. But for binary options traders, this is how the market is structured. You can actually trade 15-minute trades several times a day on several different assets for great results.

It’s clear, therefore, that the profitability factor of the binary options market outstrips that of the forex market by a mile. Not only is this the case, but a trader with little money in the forex market will find it really hard to get going because the same effort required to trade a $500 account is the same required to trade a $10,000 account. In contrast, a binary options trader can take the little money that he has and make it go a long way.

Binary options traders must be adequately prepared to wring out maximum profitability from the binary options market by setting themselves in position to receive proper training and by using an assemblage of tools that will make their job worthwhile, check out our binary options blogs by professional traders to learn what to do.

Trading Forex with Binary Options

Binary options are an alternative way to play the foreign currency (forex) market for traders. Although they are a relatively expensive way to trade forex compared with the leveraged spot forex trading offered by a growing number of brokers, the fact that the maximum potential loss is capped and known in advance is a major advantage of binary options.

Defining Binary Options

Binary options have two outcomes: They settle either at a pre-determined value (generally $100) or at $0. This settlement value depends on whether the price of the asset underlying the binary option is trading above or below the strike price by expiration.

Binary options can be used to speculate on the outcomes of various situations: Will the S&P 500 rise above a certain level by tomorrow or next week? Will this week’s jobless claims be higher than the market expects? Or will the euro or yen decline against the U.S. dollar today?

For example, say gold is trading at $1,195 per troy ounce currently and you are confident that it will be trading above $1,200 later that day. Assume you can buy a binary option on gold trading at or above $1,200 by that day’s close, and this option is trading at $57 (bid)/$60 (offer). You buy the option at $60. If gold closes at or above $1,200, as you had expected, your payout will be $100, which means that your gross gain (before commissions) is $40 or 66.7%. On the other hand, if gold closes below $1,200, you would lose your $60 investment, for a 100% loss.

Binary Option Buyers and Sellers

For the buyer of a binary option, the cost is the price at which the option is trading. For the seller of a binary option, the cost is the difference between 100 and the option price and 100.

From the buyer’s perspective, the price of a binary option can be regarded as the probability that the trade will be successful. Therefore, the higher the binary option price, the greater the perceived probability of the asset price rising above the strike. From the seller’s perspective, the probability is 100 minus the option price.

All binary option contracts are fully collateralized, which means that both sides of a specific contract – the buyer and seller – have to put up capital for their side of the trade. So if a contract is trading at 35, the buyer pays $35, and the seller pays $65 ($100 – $35). This is the maximum risk of the buyer and seller and equals $100 in all cases.

Thus the risk-reward profile for the buyer and seller in this instance can be stated as follows:

Buyer

  • Maximum risk = $35
  • Maximum reward = $65 ($100 – $35)

Seller

  • Maximum risk = $65
  • Maximum reward = $35 ($100 – $65)

Forex Markets

Binary options in forex are available from exchanges such as Nadex, which offers them on the most popular pairs such as USD-CAD, EUR-USD, and USD-JPY, as well as on a number of other widely-traded currency pairs. These options are offered with expirations ranging from intraday to daily and weekly. The tick size on spot forex binaries from Nadex is 1, and the tick value is $1.

The intraday forex binary options offered by Nadex expire hourly, while the daily ones expire at certain set times throughout the day. The weekly binary options expire at 3 P.M. on Friday.

For forex contracts, Nadex calculates the expiration value by taking the midpoint prices of the last 25 trades in the forex market, eliminates the highest five and lowest five prices, and then takes the arithmetic average of the remaining 15 prices.

Examples of Binary Options in Forex

Let’s use the EUR-USD currency pair to demonstrate how binary options can be used to trade forex. We use a weekly option that will expire at 3 P.M. on Friday, or four days from now (or Monday). Assume the current exchange rate is EUR 1 = USD 1.2440.

Consider the following scenarios:

1. You believe the euro is unlikely to weaken by Friday and should stay above 1.2425. The binary option EUR/USD>1.2425 is quoted at 49.00/55.00. You buy 10 contracts for a total of $550 (excluding commissions). At 3 P.M. on Friday, the euro is trading at USD 1.2450. Your binary option settles at 100, giving you a payout of $1,000. Your gross gain (before taking commissions into account) is $450, or approximately 82%. However, if the euro had closed below 1.2425, you would lose your entire $550 investment, for a 100% loss.

2. You are bearish on the euro and believe it could decline by Friday, say to USD 1.2375. The binary option EUR/USD>1.2375 is quoted at 60.00/66.00. Since you are bearish on the euro, you would sell this option. Your initial cost to sell each binary option contract is, therefore, $40 ($100 – $60). Assume you sell 10 contracts, and receive a total of $400. At 3 P.M. on Friday, let’s say the euro is trading at 1.2400.

Since the euro closed above the strike price of $1.2375 by expiration, you would lose the full $400 or 100% of your investment. What if the euro had closed below 1.2375, as you had expected? In that case, the contract would settle at $100, and you would receive a total of $1,000 for your 10 contracts, for a gain of $600 or 150%.

Additional Basic Strategies

You do not have to wait until contract expiration to realize a gain on your binary option contract. For instance, let’s say by Thursday the euro is trading in the spot market at 1.2455, but you are concerned about the possibility of a decline in the currency if U.S. economic data to be released on Friday are very positive. In this case, your binary option contract (EUR/USD>1.2425), which was quoted at 49.00/55.00 at the time of your purchase, is now at 75/80. Therefore, you could sell the 10 option contracts you had purchased at $55 each, for $75, and book a total profit of $200 (or 36%).

You can also put on a combination trade for lower risk/lower reward. Let’s consider the USD/JPY binary option to illustrate. Assume your view is that volatility in the yen – trading at 118.50 to the dollar – could increase significantly, and it could trade above 119.75 or decline below 117.25 by Friday. You, therefore, buy 10 binary option contracts (USD/JPY>119.75, trading at 29.50/35.50) and also sell 10 binary option contracts (USD/JPY>117.25, trading at 66.50/72.00). Therefore, you pay $35.50 to buy the USD/JPY>119.75 contracts, and $33.50 (i.e., $100 – $66.50) to sell the USD/JPY>117.25 contracts. Your total cost would be $690 ($355 + $335).

Three possible scenarios arise by option expiration at 3 P.M. on Friday:

  1. The yen is trading above 119.75. In this case, the USD/JPY>119.75 contract has a payout of $100, while the USD/JPY>117.25 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  2. The yen is trading below 117.25.In this case, the USD/JPY>117.25 contract has a payout of $100, while the USD/JPY>119.75 contract expires worthless. Your total payout is $1,000, for a gain of $310 (or about 45%).
  3. The yen is trading between 117.25 and 119.75: In this case, both contracts expire worthlessly and you lose the full $690 investment.

The Bottom Line

Binary options are a useful tool as part of a comprehensive forex trading strategy but have a couple of drawbacks in that the upside is limited even if the asset price spikes up, and a binary option is a derivative product with a finite lifespan (time to expiration).

However, binary options have a number of advantages that make them especially useful in the volatile world of forex. For starters, the risk is limited (even if the asset prices spikes up), the collateral required is quite low, and they can be used even in flat markets that are not volatile. These advantages make forex binary options worthy of consideration for the experienced currency trader.

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