When trading in forex, one often looks for quicker, safer and simpler ways of earning money. There is immense money making potential, but a sensible understanding of the risks, rewards, price fluctuations and accuracy of speculations are some of the prerequisites of this trade. Many people want to know more about binary options vs. forex trade; whether binary options are a great alternative to common forex trade or not; in what ways it is different, what are the risks involved etc. First of all, it would be worth to mention that binary options are different than normal forex trade in terms of payouts, fees and risks and further to mention it has an entire different liquidity structure and investment process. Binary options are great alternatives as far as hedging and speculating are concerned, but only when the trader has a comprehensive knowledge of the two potential outcomes.
Binary Options vs. Forex Trade - Basics
Often classified as "exotic options", binary options are comparatively simpler to understand and functionally easier to use. Other than trading in foreign exchange, binary options can be also be exercised in stocks, indices and commodities. It is often termed as FRO or fixed return option because it has a fixed expiry time and a fixed strike price. If a trader speculates correctly about the direction the market will move in the scheduled time period, and the price of the instrument at the expiry time is on the correct side of the strike price, the trader is paid a fixed amount despite of how much the instrument has moved. On the other hand if a trader speculates wrongly about the direction the market ends up at the expiration time, he/she loses a part or all of the investment.
How to earn in a binary trade
The most basic thing to know when delving into binary options vs. forex trade is that in ordinary trading the amount of profit or loss is not known beforehand, conversely in binary options the payout, the expiry time, the strike price and the risk involved are all pre-decided and disclosed at the commencement of the trade. A trader who speculates that the market will end on the upper side of the strike price exercises a "Call" option, on the other hand if the trader speculates that the market will end below the strike price at the expiry time, he/she exercises a "Put" option.
The trader will make money with a Call option if at the expiry time the price of the instrument finishes above the strike price. The trader will make money with a Put option if at the expiry time the price of the instrument finishes below the strike price. A Call that is in money is likely to end up in money for a shorter expiration time. Despite of how much money it is into, the trader is paid a fixed payout locked at the time of commencement of the trade. Depending on what they have entered, different traders earn different payouts for their respective trades.
Binary Options vs. Forex Trade, Another Difference
Since all the factors are pre-defined in a binary trade, the investor is not required to poke all the time into the market fluctuations watching the volatility going around once the trade is made. The moment a deal gets final, the trader is generally not allowed to cash out or exit before the expiration time concludes.
Example of a Binary Trade
A trader, who is closely watching the market, predicts that it is going to end on the upper side, but he/she is not sure by how much. The trader watches that S&P 500 index is currently trading at 1150 and finds a broker that offers the same strike price at the end of the day. The trader decides to buy a "Call" option that has an offer of 80% payout if the option expires above 1150 and loss of 85% of the investment in case the option expires below 1150.
As binary options are available with all sorts of time frames from few minutes to months and can be bought with all sorts of strike prices, a trader has no difficulty to find a binary option as per his/her requirement and capacity. Investment amounts and general terms and conditions may vary from broker to broker; as a smart investor you should go through all the relevant details before staking your worth in the forex trade.
This article was provided by Thebinaryoptionsbroker.com, a review site of the best binary options broker.