Back by popular demand, we have the most comprehensive Forex Vs binary options comparison we have ever posted. Read on to find out exactly how these two rival forms of trading stack up against each other.
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Binary Options Vs. Forex |
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| Binary Options | Forex | |
| Bonuses | Most Binary Options brokers regularly offer bonuses in the form of matching deposits made by clients. These often involve trade volume requirements, meaning that the amount gifted as a bonus needs to be traded a number of times before the client is able to withdraw the funds. What this means, is that by the time trade volume requirements are met, more often than not, the bonus has been lost, as well as the initial deposit. | Forex brokers also offer bonuses but this is a practice that is dying out as the industry matures and moves away from the market making model. In online Forex an unofficial rule of thumb has developed whereby brokers offering bonuses are normally eschewed by more experienced traders. The type of trader that normally gets sucked in by bonuses is the newbie who doesn’t have a solid grasp of how to trade and is easily impressed with offers of free money. A new generation of non-market maker brokers are emerging that only profit from the commissions they charge their clients. These brokers do not benefit from lost account balances and so do not offer bonuses. |
| Payouts | Binary Options brokers claim to offer high payouts, they often advertise payouts that range between 65 and 95%. However without offering leverage their clients have to risk a great deal of capital in order to make big gains. A lot of the promotional material put out by binary options brokers mentions the fact that you make the same whether your trade is 1 or 1000 pips in-the-money. While what they seem to be intending to convey by this is that you only have to be very slightly right to be payed out, it follows that the type of gains you can make when every pip counts are in fact far greater than a standard payout regardless of the price at expiration. When you break it down the claims to high percentage payouts are just clever marketing, what a binary option ends up offering is less than a roulette table wager on black or red. | Forex brokers do not list payouts because the type of trading they offer sees clients benefit in a dynamic way, depending on how much a currency pair’s price has moved from the price it was at when the position was opened. It would make no sense to attach a percentage to the payouts that a Forex trader can make because they are potentially infinite depending on how much a currency pair moves. When you also factor in that Forex traders are able to leverage their capital by up to 500 times, it is plain to see that a Forex trader stands to make a great deal more per trade, while risking a lot less than a binary trader. Forex traders only lose money when the price goes the other way, binary traders have to put their money up in order to enter a trade so any slight movement below the strike price at the time of expiration will cause them to loose everything that they invested in the position. |
| Spreads | Binary options brokers do not have spreads. A spread is the difference between the price you can buy a currency pair at, and the price you can sell it at. Since binary options do not involve buying or selling, just betting on whether the price will be higher or lower within a set time there is no spread. However many traders have reported that the price feeds on certain binary options brokers’ platforms are inconsistent and not in line with current market prices. Many suspect that while there is no spread in binary options, the prices offered change as and when it suits the broker, depending on how exposed they are to their traders positions. Ultimately binary brokers are not offering their clients the ability to actually buy or sell anything, this is why there is no spread and no need for one. Its absence should not be misconstrued as an advantage. | Spreads do of course exist in Forex. Banks have spreads, so do the market makers that retail Forex brokers get their own liquidity from. The spread is basically a type of commission a broker earns for offering up their liquidity pool to clients, making Sell prices slightly lower and Buy prices slightly higher than the price they receive from their own liquidity providers. Binary options marketers have painted these spreads out as some kind of scam that tips the odds in the favor of the broker. This is not so, the broker earns the spread, this is the commission they charge for allowing you to trade FX and for offering you their liquidity. Look out for brokers who offer ECN platforms. These brokers do not mark up the spread they receive in any way. Usually they will charge you a set commission for opening and closing a position, and since they pool liquidity from a number of providers they offer you the best bid and ask price available to them, even if these two prices should come from two different sources. |
| Leverage | Binary options brokers do not currently offer leveraged trading. In fact they use this as one of their main selling points, the argument being that leverage is dangerous and a way Forex brokers manipulate their traders into ending up owing more than they initially invested. This, however, is not the case. Forex trading, leveraged or not, offers negative balance protection. This means that regardless of how much you leverage your trading you can never lose more than the money you have deposited into your trading account. The absence of leverage in binary options, coupled with the percentage payouts, means that binary traders must risk relatively large amounts in order to make worthwhile profits. | Leverage is a big part of Forex trading and the amounts of leverage that brokers offer is growing all the time. There was a point where 100:1 leverage was the limit available to Forex traders, but now brokers offer up to 500:1. This means that a Forex trader can hold a position that is up to 500 times the amount they have in their trading account. Leverage is, of course, a double edged sword as with the opportunity for larger gains comes the opportunity for larger losses. A Forex trader’s balance, however will never drop below zero because brokers automatically close positions when the amount a trader has put in as deposit to guarantee their position (known as margin) is eaten into by an unprofitable trade. Leverage has allowed savvy traders to get in and out of volatile markets very rapidly taking away handsome profits as they do this. A big advantage of leveraged trading in Forex is that you do not pay fees or interest on the amounts being lent to you. This is because being CFDs (contracts for difference), you are not in effect buying or selling anything, but rather agreeing to do so at some future date. This means you do not borrow anything from your broker, but are just posting a deposit for a future position that is continuously deferred. |
| Simplicity/Control | As far as simplicity and control are concerned it’s something of a mixed bag. Binary options certainly have the simplicity, you can explain how binary options work in a single sentence. However this simplicity does come at a price. You have next to no control of a binary trade due to the fact that you are making a forecast that must come true within a certain window of time. There is little in the way of educated trading that can take place when you wager that an asset will rise or fall within the next 15 minutes (or any other time window). Also with no trades being executed outside of the brokers’ books it throws the price feeds that binary options brokers use into question. | Forex is the polar opposite in this respect. It is incredibly forbidding to start with, cannot be easily explained in a sentence, but gives traders a tremendous degree of control. The success of binary options have largely been based on this fact. Forex seems hard, binary trading is easy. Which is not quite the case. Forex is not in fact as complicated as it seems on the surface, and with a little bit of research at the beginning, most newbies can attain a basic understanding of how it works. The fact that Forex is more regulated, involves real positions that are taken on the real Forex markets and does not involve being shackled to rigid time frames, payout structures and broker price feeds, give Forex a significant advantage over binary options. If you can knuckle down and do a bit of reading that is. |
| Tradable Instruments | Binary options brokers advertise their services as being superior to Forex because they make all four major asset classes (currencies, stocks, commodities and indices) available to their traders. However as no trades actually leave the books of binary brokers it makes little difference whether you are wagering on the price action of gold, EUR/USD or Diesel Jeans. | Forex brokers, contrary to what most people think, actually offer CFDs on more than just currencies. You can trade precious metals, futures, indices and currencies with most brokers, and when it comes to the currencies you are looking at a great deal more to choose from than in the case of binary options. It’s not out of the ordinary to find a Forex broker offering between 50 and 150 currency pairs to choose from. |
| Regulation | Regulation is new to binary options, with many of the more reputable regulators still trying to negotiate their positions regarding this relatively new trading instrument. The US has officially outlawed the trading of retail binary options, and the UK and Japan, two of the larger markets, are still yet to take a position on them | Forex is a more mature industry in this respect. Forex trading has been regulated for years and all of the major jurisdictions have regulations in place to govern the trading of foreign exchange. The US has also outlawed the trading of CFDs for smaller investors, but US traders can still trade spot Forex through certain other avenues. |
| Affiliates | Binary options brokers have done a tremendous job marketing themselves, in many ways their internet marketing and affiliate departments are among the strongest in the trading industry as a whole. It is certainly a tough time for affiliates in the binary options industry. Brokers are extremely demanding, and very conservative with where they place their cash. The practice of paid advertising for banner campaigns and the like is almost unheard of today, with most brokers preferring to offer their partners CPA (cost per acquisition) arrangements, rather than up front advertising fees. Recently there have been some accusations made by affiliates who claim that they are not receiving accurate metrics from their binary options brokers, in other words they are sending them more traffic than they are being paid for. This is an on-going struggle in the industry with an increasingly vocal affiliate community showing signs of discontent. | Forex brokers tend to have bigger budgets and a looser grip on the purse strings as far as advertising is concerned. They seem to be more keen on plastering their names everywhere and getting their brands instantly reconsigned, rather than ringing every penny out of their affiliate buck. They are also a great deal more flexible in the kinds of arrangements they are prepared to accept. Obviously there is a great deal more competition in this industry and a prospective affiliate needs to take this into account before they invest their time and money into developing a website. Generally though, if you have a good idea, have worked to capture a valuable niche and have good content to boot, it shouldn’t be too hard to get a broker to take a chance on you. |
