Despite Binary Options' emerging popularity, a lot of beginners are still having a hard time spotting its differences from the usual forex trading. Here are six basic key features that specifically set them apart from each other.

Despite Binary Options' emerging popularity, a lot of beginners are still having a hard time spotting its differences from the usual forex trading. Seeing how we can trade forex in binary options, and that binary options trading are nowadays provided by forex brokers, it's quite normal to see the confusion. Similarly, both are available for online trading with currency pairs. But what makes them so different?

Before we dig into more detailed aspects, let's discuss about the most essential distinction between them:

In binary options, we don't actually trade an asset, whereas in forex, we do buy or sell a currency when opening a trade. Trading binary options means we only need to analyze the price movement of an asset and predict which direction it will head in a specific time in the future.

Let's say you place a call option for EUR/USD with 1-hour expiry. It means you expect Euro to move up against USD. The 1-hour expiry signifies the maximum duration you give for the price to increase. You will be in-the-money if in one hour, the price rises up and is in the higher position than your entry level. But if the price ends up at the lower position after your one hour expires, than you will be out-of-the-money.

More than that, there are actually 7 other significant aspects that make binary options so different from forex. Here are the key features:

 

Trading Size

Binary Options
Trading size is easily set by the amount of your capital investment. There are no lots, margin, and leverage here. The number of your deposit is the actual size of your capital in binary options. For instance, you make a deposit of 100 USD in a binary options broker. If the condition for minimum investment for each option is 10 USD, then you will have 10 chances to trade.

Forex
Forex has trading size variations that are called lots. The standard one generally equals 100,000 USD (if your base currency is US Dollar). To make spot forex trading more available for beginners or small investors, new types of lots are invented. Today, we have mini lot (10,000 USD), micro lot (1,000 USD), and even nano lot (100 USD or less) in spot forex. They're actually pretty understandable, but can be a bit complex if we include leverage and margin calculation.

 

Order Types

Binary Options
Basically, binary options is all about call and put. You may find only those two option types in some binary brokers. Also named as high/low options, the order types are exclusively meant for predicting price increase (call or high order) or decrease (put or low order). But nowadays, other options have been developed and more brokers begin to use them to attract customers. Order types like touch/no touch and in/out options are starting to get mainstream in advanced binary options brokers.

Forex
Direct order types in forex are also very simple; sell and buy. But spot forex traders are also facilitated with more variations of pending orders (sell stop, buy stop, sell limit, buy limit) to provide them with more choices of executing orders in the right moment.

 

Profit And Loss

Binary Options
Profit and loss amounts are all known even before we hit the order button. In binary options, there is something called payout rate to tell us how much we will gain if our option end up in-the-money. So if you are about to place a call option for EUR/USD, don't be surprised to see a payout rate in your platform. Supposed there is an 81 percent rate for that option, then your profit will be 81 percent of your investment placed for that particular trade.

binary

How about the loss amount then? It's even easier than calculating the potential profit actually. The key is on how big is your investment for an option. If you place a 25 USD investment in the abovementioned call option, then your risk amounts only to 25 USD.

 

Forex
In spot forex, we won't even know if we're going to have profitable or loss position as long as it's still runing, let alone learning about the possible amounts of profit or loss berforehand. Our gains and losses in spot forex orders are fluctuating in line with the price movement. Depends on what type of order you choose (sell or buy), the unpredictable price flux can always be either favorable or a disadvantage for you. Price direction is not the only thing to be concerned about. In fact, how big the price movement is, is also essential to calculate your profit and loss in forex trading. Fortunately, there are stop loss and take profit features that provide you with more control over the size of loss and gain for each of your trade.

 

Trading Fees

Binary Options
There are no spreads or trading comissions. You only lose your capital investment when you are out-of-the-money, or gain back your investment plus profit if your option is a success.

Forex
Buy and sell orders in forex trading can only be executed on the available ask or bide price. Now, the difference between both prices are spread, which is also the forex broker version of trading fees. The spread is automatically charged when you open a new order and denominated in pip. Hence, to calculate how much is your fees for a position, you need to know the value of each pip in your trading position. Apart from spread, commission is another type of trading fees in forex trading. Unlike spread, commission is not always applied. Brokers normally charge you with trading commissions in fixed spread accounts, zero spread accounts, for overnight positions that result in negative swap, or as a replacement for swap interest in Islamic accounts.

 

Position Closing

Binary Options
In binary options we have expiry time to close options. Deciding an expiry time can be a bit tricky as we have to determine it prior to option's placement. At glance, this condition seems to require the ability of predicting the impossible; at what exact time the price will rise or fall, or how long does it take for the price to go higher or lower. The truth is, setting expiry time is not that different from choosing timeframes or deciding what trading term you belong to (short, middle, or long term). If you are an experienced scalper and used to analyze price in small timeframes, then you can easily pick shorter expiry times. In contrast, you can single out longer expiry times if you are a long term trader who like to take time to make analysis in larger timeframe scale.

The scope of binary options expiry times is quite vast, ranging from 60 seconds to monthly terms. Therefore, you don't need to worry about limited choices for position closing. As long as you have proven strategy that comes with certain timeframe and suits your trading term, there is almost nothing to worry about expiry times in binary options.

Forex
Spot forex traders have more freedom when closing a trading position. There is no time limit as we can close positions manually. With stop loss and take profit features, we also have the flexibility of deciding price levels in which we think will be the most reasonable ones to target profit and aim for minimum loss.

 

Trading Platform

Binary Options
Almost all of binary options brokers use web-based platforms. Interestingly, many of them are proprietary and have distinctive styles. Only few of them adopt platform providers service. Among the most popular ones, SpotOption still wins as platform provider with the largest market share amoung binary options users. However, its influence still hasn't reached the level of MetaQuotes' dominance in forex trading. Thus, familiarizing yourself with new binary options platform when you want to try different brokers can be more difficult and take more time.

Forex
When asked about forex trading platform, almost everyone will immediately think about MetaTrader4 (MT4). The MetaQuotes' product can be easily recognized as the one platform known by every forex trader in the world. The majority of forex brokers have it, and it's still the first choice for most traders. The popularity is so overwhelming that even MT5, its own upgraded version, can't beat the universal platform that is MT4. Undeniably, trying out platforms from one broker to another is easier in forex trading. Besides, MT4 tends to have more indicators and totally beats binary options platforms in term of automated trading.

To sum up, here is a comparison table to visualize forex and binary options' differences:

binary option or forex trading comparison table

Both binary options and forex have their pros and cons. Binary options is better for you who like simplicity and to be sure about trading outcomes, while forex is definitely the right one for you who want to benefit from price movement and trade in MT4. But who says you can only pick one side? In fact, trading spot forex and trade forex in binary options at the same time can be an alternative for your hedging strategy. In addition, the number of forex brokers offering binary options as their extra service has also been growing in the recent years. As long as you can comprehend the basic differences of binary options and forex and make use of them well, it's not impossible to find yourself in the best part of both worlds.