The rising popularity of online trading has mostly been centered in the forex and binary options markets. So, many new traders find themselves interested in both but not sure which is better suited to their trading style and investment goals. Since changing from one market to another can lead to potentially costly mistakes, it makes sense to look at a comparison of both in order to determine which market is most likely to lead to consistent returns for your individual financial approach.
With binary options you can trade currencies too, but why should you do that when you can also directly register at a forex broker? Forex is a market with variable returns; the more pips in profit territory your trade is, the more profit you make. The reverse is also true; the more pips in loss territory your trade is, the more losses you make. In contrast, binary options present fixed returns; your payout for a profitable trade is fixed irrespective of how many pips the trade has moved in the trader’s favor. However, losses are capped to whatever was invested in the trade.
Although binary options are quite rightly referred to as financial instruments, there are some ways in which they are akin to gambling. For example, the fact that you know in advance exactly how much you will earn if a trade moves your way makes binary options trading similar to fixed-odds betting on the results of sports matches or other events. Many traders regard binary options as a fast way to win (or lose) money. For this reason, some countries continue to regulate binary options as a gambling instrument rather than a financial instrument. This is however changing.
In contrast, foreign exchange trading has a real practical purpose for the countless corporates and financial institutions across the world that use the market to facilitate international trade or to hedge currency risk on overseas income and expenditure. Individuals who trade foreign exchange also tend to take more of an investment approach, sometimes trading forex to diversify their trading portfolio or hedge risk on other financial instruments such as company shares or commodities.
Forex trading and binary trading are quite different and it is important to understand these differences in order to become a successful trader. The forex market is a well-regulated market with lots of brokers who stick to the rules most of the time. The rules defining forex are well defined in jurisdictions where currency trading is regulated. Binary options are still, for the most part, not properly regulated. This has opened the door to many brokers who perpetrate dodgy practices in the market.
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