The forex market is the most liquid market in the world. As a matter of fact, more than $5 trillion in currency trades hands on a normal day in the market. So naturally, beginners are drawn to the excitement. However, the forex market is the last place that a beginner should start trading. The bottom line is that the high volatility in the market makes it nearly impossible for beginners to get predict what's going to happen next. Not to mention, the forex trading market has a big dirty secret; only about 5% of forex traders ever make any money in the market, regardless of their skill level! That means that in the spot currency market, even the experts have high chances of losing money.
The good news is that traders can still take advantage of the overwhelming amount of opportunities the incredibly liquid currency market has to offer without actually investing in currency. Instead, forex binary options give the trader all the excitement, but with much less risk. Today, we'll explain what forex binary options are, how they differ from currency spot trading in the forex market, and decide which is the better option overall.
Binary Options Have Changed The Way We View Forex Trading
Because of the high volatility in the forex market, there are several opportunities that open up for profit. The only problem is that taking advantage of those opportunities comes with an inherent level of risk that's like no other. However, in the world of binary options, there are only two possible outcomes to trades. Therefore, by knowing how much you stand to earn and how much you stand to gain, it becomes easier to manage risk in the process of trading forex.
What Are Forex Binary Options
Binary options in general are a derivative investment vehicle. This means that no asset is ever being purchased. Instead, the value of the option is derived from the value of the asset. Therefore, when trading forex binary options, traders aren't actually buying and selling currency. Forex binary options come in the form of currency pairs. For example USD/CAD. Given the example pair, if the trader believes that the value of the US dollar will rise at a faster pace than the value of the CA dollar, the trader would purchase a call option. Adversely, if the trader believed the CA dollar would rise faster, he would purchase a put option. If the trader's prediction is correct by the end of the expiry period, the trade will expire in the money and the trader will leave with predetermined gains. If incorrect, the trade will expire out of the money and the trader will end up with predetermined losses.
Forex Binary Options Vs. Spot Forex
There's no doubt that the high volatility in the forex market makes both of these options incredibly exciting. However, with forex binary options, the trader takes on less risk. Even with the leverage to make larger trades in the spot forex market, the odds are against the trader; that doesn't seem to be the case in the world of binary options.
Why Forex Binary Options Are A Better Way To Go
- Higher Returns – When trading forex binary options, the trader has the opportunity to earn up to 80% gains per trade. While this is possible in the spot forex market, it's highly unlikely. That's because for 80% gains to be realized in the forex market, traders will need to wait until their position grows to at least 2 to 50 times the stop loss on the trade. While it's possible, it's simply not probable.
- Lower Risk – In the world of spot forex, the trader can lose money even if the prices are moving in the right direction over all. This is known as “getting stopped out”. However, in the world of binary options trading, this simply doesn't exist.
- Ability To Hedge – In forex trading, there are several hedging strategies that can prove to be profitable; or in the worst case scenario, lead to no losses at all. This happens when a trader makes both put and call trades on a single asset. However, this isn't something you can do in the spot forex market. If traders hedge there, they'll end up with major losses.There’s No Good Reasons To Trade Spot Forex Over Forex Binary Options
The bottom line is that there isn't a reason that I can fathom that anyone would want to trade in the spot forex market when forex binary options are available. Because forex binary options are a derivative investment, which derives its value from the forex market, traders have the ability to take advantage of the compelling opportunities in forex without having to deal with all of the risk associated with doing so in the spot market. Also, with the ability to make trades with as little as $25 and the idea of knowing what you stand to gain and what you stand to lose, binary options trading is a great place for beginners to get started!