Understanding The Difference Of Binary Options vs Forex Trading
For many decades, the business world had one primary means of investment, and that was in the classic method of buying and selling things. It was simple and straightforward, and it meant that you were only going to make a profit if you bought something and sold it at a higher price than what you bought it for, or your combined costs when you got together certain materials was lower than the final price you attached to your final product.
This basic concept of business held true for centuries and became more sophisticated in the 20th century, even though the underlying principle remained the same. However, instead of being relegated just to manufacturing, or the traditional commodities market of goods like wheat, oil or goal, it extended to more complex ventures, such as shares in different companies, or even the exchange of currencies on the Foreign Exchange market.
Over the last 20 years, there have been some changes in the way trades are made. Part of that has been the “democratizing” process of the financial world embracing the Internet, making online trading a more practical, accessible way for others to engage with trading. The other part has been the rise of speculative trading, which is a form of trade that’s not based in buying and selling, but predicting. Forex trading and binary options trading belong to this newer form, but what are they? And how do they differ from each other?
First, let’s look at what Forex and binary options trading have in common. Both of them are speculative forms of trade. This means that there’s no actual buying or selling involved. A binary options trader doesn’t pick up some stock in Amazon, anticipate a new announcement that makes the business even more lucrative, and then sell that same stock as demand rises to make a profit. Forex traders don’t actually buy Euros wait for favorable exchange rates, and then sell the currencies back onto the market for a profit on that exchange.
Instead, what both forms of trade do is speculate on fluctuations. Forex and binary options trading are both about change, and whether the trader is skilled enough to predict a change rising or falling price movement. A binary options trader, for example, may not actually buy Amazon stock and then sell it at a profit, but, if that same trader anticipates a new announcement from the company that will raise its stocks values, that same trader can put that knowledge to use, and make a “call trade,” which predicts a rise in the price of the asset. If that trade plays out as predicted, a profit is made.
So, in the case of both Forex and binary options trading, profit is not made based on how much you can buy and then sell. It’s based on whether you know the market well enough to predict the fluctuations that will occur in it.
Despite having a similar concept in terms of trading, Forex and binary options are very different in many fundamental ways. One of the biggest is focus. Forex trading is aimed at just one market, while binary options trading embrace three.
Forex trading is actually the older of the two forms of trade, though still very much a newcomer by the standards of centuries of finance and business. It began in the 1990s, just as online trading began to take off. The chief concern of Forex trading was—and is—the Foreign Exchange market, which is where the combination of “For” and “Ex” comes from.
Forex trading is concerned with currency “pairs,” which is usually just the interaction between two different kinds of currency, such as the Euro and the American Dollar, or the British Pound and the American Dollar. In most cases, a currency pair will consist of one currency paired to the American Dollar as that is the dominant currency in the market, and has been used as the “reference standard” for many decades. Other pairings are possible of course, such as the Canadian Dollar and the Japanese Yen, but are not as common.
Binary options trading, on the other hand, looks at the stock market, with corporate shares, the commodities market with goods like wheat, petroleum and even gold, and the Forex market as well, with its various currency pairs. It does not limit itself to just one area, and that means that binary options traders have many more options to choose from as far as their area of interest goes.
Another way that Forex and binary options trading differ is in the ways they determine their outcomes. Both of them are speculative, and require a trader to predict a result, but in binary options trading, the result is fixed, and method of prediction is simpler. Binary options traders will always be presented with a possible trade, and they will have to choose between their prediction regarding the price of an asset going up, or down. The profit they make is percentage of what they choose to invest.
This means if a binary options trader chooses to make a trade on the price of gold, predicting that the price will go up, at a return of 75%, then if that trader invests $10,000 in the trade, and is correct, the profit will be $7500. If the trade is wrong, then the $10000 will be lost.
Forex trading requires not just a prediction of up or down, but a prediction of how far up or down a final result will be. The profits that are made on a Forex trade are tied to these final results, meaning that the profit—or loss—of a trade is not fixed. There’s a real possibility that a trader may make more or less profit than anticipated on a trade, and also a likelihood of losing more or less on a trade that goes badly.
In either form of trade one thing remains the same. It is the trader’s business sense that leads to consistent, reliable profit. Only by understanding the market and the forces that affect it can regular profit be made.
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