Forex trading, by definition, is the buying and selling of currencies of different countries. For those who are new to the financial market, when we talk about Forex trading, we are always talking about dealing with a “Pair” of currenccies. In other words, it is about buying a currency and selling another currency simultaneously.
For example, when we buy the EUR/USD currency pair, we are buying Euros and selling U.S dollars at the same time. Conversely, when we sell EUR/USD, we are selling Euros and buying U.S dollars simultaneously. The exchange rate of these two correlating currencies is determined by the market.
The way which Forex traders earn is by pocketing the differences between the prices they paid for a currency pair to that of the prices which they get when they liquate their market position. Basically, there are two ways to go about trading Forex. The first way is by dealing directly in the currency pairs themselves.
If a Forex trader feels that the U.S dollar is going to rise against the Euro, in this scenario to profit for the upward fluctuation of the U.S dollar, the Forex trader will need to hold a “long” market position on the EUR/USD currency pair.
In other words, the Forex trader needs to sell Euros and buy U.S dollars and hold this position until the U.S. dollar exchange rate rises in relation to the Euro. Once the trader feels that the rise has plateau, he can then liquate his market position to realize his gains.
When trading in Forex, a trader will be required to hold or sell his asset until:
1. He liquidates his market position manually to realize his profit or minimize his loss.
2. His trade is closed automatically due to a “Stop Loss” or “Take Profit” order.
3. His trade is closed due to a “Margin Call”. A margin call occurs when the balance in the trader’s account falls below the broker’s required minimum deposit.
Forex traders utilize the margin facility provided by their brokers to leverage their investment capital a few hundred folds in order to maximize their profit potential. Nevertheless, the risk pertaining to a Forex trader’s transaction is also magnified many folds to the extent that a trader can lose his entire trading capital in his trading account if the market moves against him. This is the main reason why Forex trading in itself is extremely risky.
The second way to trade Forex is with binary options. With binary options trading, the risk is lowered significantly to the extent of a trader’s investment and not to the extent of his entire trading account capital. It is just like purchasing any options as the trader can only lose the actual amount invested.
Besides having lower risk, a trader can have more control over the level of risk he wants to undertake. Furthermore, even if the binary option expires “out of the money”, the trader can still recoup back a portion of his initial capital investment (normally around 10% to 15% depending on the broker).
In addition, with binary options trading, traders have at their disposal more asset types to take advantage of the various market situations. For example, let’s say the market is ranging, with normal Forex trading; a trader is likely to incur losses due to his stop loss orders catching. With binary options trading, a trader can use “Range Binary Option” to profit from the market when the market is within a range as well as outside a range.
Another type of asset which is available with binary options trading but not normal Forex trading is “Touch Binary Options”. With this type of binary options, traders can profit from situation where the market is “testing” the support and resistance lines but doesn’t breaches them.
With normal Forex trading, a trader can only trade in one direction and when the market is volatile with strong fluctuations; such situations tend to result in Forex traders suffering losses. This is another area where binary options trading reign supreme.
In summary, although the level of possible profits achieved is higher with normal Forex trading, the risk level is also very much higher as well. With binary options trading, the risk level is lowered significant while still allowing traders to reap a respectable amount of profits. In short, binary options trading is ideal for those traders who are just getting their feet wet in the financial market.