Forex versus Binary Options

Forex trading and binary options trading have a lot of things in common, but there also some significant differences. In this blogpost I will discuss some important advantages and disadvantages of forex and binary options trading.

No complicating calculations with binary options

forex binary optionsWhen you trade forex then you most of the time need to make quite some calculations before you can open a position. Calculating your risk is easy, but you also need to calculate your lot size and depending on the currency pair and the currency of your account, you need to convert that into the right currency. Altough there are some excel files to make some calculations for you, it will take some time anyway and this ain’t practical when you want to open a position fast.

With binary options this is way easier. You only need to calculate your risk and that’s it. No converting or whatsoever, so you can open a position very fast.

No stop loss with binary options

When you trade forex then you probably already have experienced this situation: You opened a position in the direction of the trend, but then the price goes against you and hit your stop loss. You have closed your trade with a loss and soon after that, price goes in the right direction and reach your original take profit level. Every trader hates this scenario, but it is actually just part of the game.

With binary options you don’t have a stop loss. It only matters if price is on the right side at the moment the option expires. What price does in between doesn’t make any difference. Now, this may sound like a plus, but in my opinion it is very relative.

With binary options trading you have to deal with expiration times and similar situations can happen with this. I already have experienced many times that price went in the right direction, but shortly came back and at expiration the position was a loss. Would it have been a forex position then it would have been a winner.

So in my opinion there is a difference on this point between forex and binary options, but I think there is not a clear advantage. It is just about personal preference.

Trade management

We all know the saying “Plan your trade and trade your plan”. In actual practice for me often the saying “Plan your trade well and screw it up later on” applies way better. I know the theory, but still I closed a lot of my positions before take profit level was reached and on the long term that can really hurt your profits.

If this doesn’t sound familiar to you, that’s great! If you have the same problem then you should really consider binary options. When you have opened a position with binary options then there is no trade management. You just have to wait until the option expires. In other words: You can’t screw up! (at least not from the moment you have opened that particular position).

Probability with forex and binary options

Personally I think a lot of people underestimate the difference when it is about probability. With forex trading you can decide the risk/reward ratio for yourself and therefore you have influence on the needed win ratio to become profitable on the long run. Please read the strategy article “Probability with forex trading” for more info on this subject.

Basically the math is simple. When your risk/reward is 1:1 (you risk as much as you can win) then you need a win ratio of >50% to be profitable on the long run. When you trade only setups with a risk/reward ratio of 1:2 then you already make profit when your win ratio is >34%.

Banc de BinaryWith binary options the story is a “bit different”. The only influence you have on your risk/reward is choosing the currency pair with the highest payout rate. At Banc de Binary AUD/USD has the highest payout rate (90%). The return on investment on most currency pairs in fact varies between 72% and 79%.

It is very important to realize that you don’t even have a risk/reward of 1:1. Actually it varies between 1:0,7 or 1:0,9. This means that with a win ratio of 50% you don’t even have a break even result, no you suffer a loss. To become profitable on the long run you should have a win ratio of at least around 60%!

This is quite some difference. I know the advertisements are very nice: “Receive 91% on your investment!”. Sounds very nice, but the truth is that you lose 100% of your investment if your trade is a loss……

By telling this I don’t mean that you can’t be profitable with binary options. You just have to realize the difference.

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