Let's talk about the difference between Binary Options and Forex trading. There are some similarities, yet there are more differences between the two financial instruments. When you look at Binary Options from the trading perspective, you can look at them as a simplified way of trading Forex. This is not a bad quality, Binary Options are very suitable to traders who prefer a “lighter” approach to trading. To find out to which camp of traders you belong to, read further and decide for yourself.
Don't make the mistake of considering Binary Options not serious, or a “Trading for Dummies” type of operation. This type of mindset is what eventually leads to an emptied account, and a broken heart. It is important to treat any type of trading with a serious approach, and copious amounts of research. Luckily, Binary Options are not a hard instrument to learn, especially with a Forex background. For the purpose of this discussion, I am talking about the High/Low Binary Option type (pure speculation on price movement).
What you don't have to worry about with Binary Option?
- Psychological weakness. Many factors of psychology are removed from Binary Options. The most prevalent ones are impulsivity and greed. When these two qualities are combined they manifest in the following: premature closing of positions, and holding on to positions until the breaking point of a stop-out.
- Losing more than you invest in a single position. Binary Options are a fixed risk and fixed return instrument. There is no leverage (credit from the broker), there are no margins. If you invest a certain amount into a position, then that amount is the maximum you can lose. This in contrast to Forex, where due to leverage provided by your broker, you can lose more than you invested (your “Used Margin”) in a single position.
- Price movement. This might be paradoxical, since Binary Options are all about speculating on price movement vs the strike price. However, with Binary Options you are merely speculating on whether the price of an asset will be higher or lower than the strike price in an “x” amount of time. This means that even a 0.1 pip difference (in the case of 5 decimal pricing) decides the result.
What you do have to worry about with Binary Options
- Psychological weakness. Yes, dear reader, I did say that this was something that you didn't have to worry about. However, as some psychological factors are removed, others are enhanced. The most prevalent “enhanced” psychological weakness in Binary Options is compulsive gambling. During trading this manifests into the inability to stop trading until your balance is empty. Your balance will become empty no matter how many “wins” you have in a row, because you are unable to stop. This weakness can be present in Forex as well, but it rears its ugly head in Binary Options.
- Choosing the right broker. While this isn't part of the trading process, it's a crucial step to begin the trading process. My suggestion is to choose a broker who also offers a Forex solution to traders for the following reasons:
a. Pricing. You need to know where the pricing is coming from and if the broker has a solution where you can compare pricing then it will give you a clear advantage in pricing disputes (which should be rare with a Forex broker).
b. Brand. An established and successful Forex broker brings a lot more confidence than an established Binary broker. This is for a few reasons. The biggest one being the established standards of delivering Forex to retail traders. This is due to stricter regulation surrounding Forex even in previously unregulated markets. Binary options are still a long way from being a truly regulated instrument, despite what marketers have to say. Binary option brokers still have a ways to go to clean up the industry of the negative reputation it has received as a result of malpractice of some questionable participants. Rely on self-regulation, dear reader, for the time being.
This is not to say you should not go with a broker specializing on Binary Options, but to go with one you need to do a lot more due diligence on your part. If you are a Forex trader whose broker does not offer Binary Options, make sure to ask them why that is.
In conclusion, I would like to say that Binary Options are an excellent tool to supplement your Forex Trading or even as a separate investment. Just keep in mind that they are a tool, the result depends on the user and the “manufacturer”.
