Trade forex vs binary options trading? Let’s see which type has best ratio of reward to risk.
If you’re just thinking to start trading financial markets online, then hopefully this article will give you good pointers.
Trade Forex vs Binary Options Trading
To get answer that best suits you, you have to understand what type of a trader are you.
Try answering following questions.
- Do you like taking big risks?
- Do you like few big winners more than small but steady profitable trades?
- Are you into trading markets with max leverage like 200x and higher?
- Do you trade without stop loss because you know market will eventually go in your direction?
- Is day trading and constant action of scalping for few pips/ticks what excites you?
If you answered to most of above 5 questions with YES, then you’re a born forex trader. In this case you’ll want to trade mainly with forex spot broker giving you up to 500x leverage.
Now if you’re more cautious trader or person that not like to take big risks in life, then binary options trading will fit you better.
Forex or Binary Options Trading – Risk vs Reward
Reason why over 95% of forex traders end up losing money lies in NOT caring about the risk. Forex brokers lures new wanna be traders with up to 1,000x leverage.
Greed vs fear – it’s what moves price of any market. This also explains our motivation why we do most of the stuff in life.
Greed is not necessarily a bad thing because it gives us motivation to take risk and do most of the stuff in life. What actually separates good trader from a bad is controlling emotions.
Control greed, know how much money you’re comfortable risking, then you are half way to becoming a long term profitable trader.
With forex trading there is a chance to lose more than what you have on your trading account. It’s not even uncommon for forex brokers to go bankrupt for not being able to close a trade due to gap forming.
Can High Leverage Bankrupt A Forex Trader
Just remember SNB decision on Jan 15th 2015 to remove EUR/CHF peg at 1.20 & move interest rate to -0.75%. This caught almost entire world off guard and caused few respectable fx brokers to go out of business. Euro dropped around 3,300 pips vs CHF within 15 minutes.
Simple calculation: trader using 100x or 200x leverage could with $1,000 of his money easily buy 1 lot of EURCHF. Each pip move would then be equal to 10 CHF profit or loss.
With 3,300 pips loss = 33,000 CHF loss (over $31,000 loss). Every $1 of trader’s own money in this trade, created over 30x the loss for a trader.
How Does Binary Options Trading Sound Now
Well I didn’t want to scare you with above example but it is something you need to think about before entering each trade.
No.1 priority before entering any trade – be it forex trade or binary options trade should be…
How much can I afford to lose?
If you don’t know the answer to this crucial question or you don’t care, then you’re not investing but gambling. In this case you’ll have a better luck & chance making money with casino or sports betting.
Binary Options Trading Why All The Hype
Word binary means 2 and with binary options trading this means you only have 2 options. If you think price will go higher you buy CALL options. If you think price will go lower by options expiry time you buy PUT option.
This is it – so simple yet effective.
No need to worry about any stop loss, margin call, gap forming over the weekend, sudden shocking news by any central bank…
Plus you only risk how much you put in an options trade before entering a trade and that is your max loss if trade go against you.
If we look again in above 3,300 pips lost forex trade.
With the same $1,000 invested in buying EURCHF Call option, we would lose just $1,000 and not over $30,000.
And with most binary options trades you can also close the trade before options expiry to either take some profit of the table or to minimise the loss.
Can Options Trading Make Same Returns As Forex
With so much less risk in trading options, you probably think if reward is even worth trading binary options.
Well with different type of binary options there are also different rewards that can go in nice returns.
You can read our blog post How To Make Money Trading Options SP500 Example. We go into analysing our tweet about an option’s trade that in 3 days generated return of investment (ROI) of 752%.
Final Words Forex or Options Trading
If you made it to read by here, then you should figure already what kind of a trader are you.
You like high leverage, scalping for few pips and day trading and care more for reward than risk?
Or you like steady reward and knowing your risk to only what you feel comfortable losing?
In summary: if you know what you are doing then trading either forex or options or mixing both can be both rewarding.
Now it all depends on what type of a trader are you.
High risk takers will choose forex spot trading. Lower risk takers going for long term steady profits, will go for options trading.