Binary Options vs Forex – Which trading tool should you choose?

Two Financial Instruments Every Investor Should Know

In the world of online investing, trading tools come in many forms for investors to choose from. Among all these tools, binary options and Forex are considered highly popular choices among professional traders. This is because both instruments can generate attractive returns, but only if the trader understands how they work and the differences between them clearly beforehand.

What Are Binary Options?

Binary options are a type of financial product characterized by a specific feature: betting on the direction of the underlying asset’s price. Investors must decide whether the price will go up or down within a set period. If the prediction is correct, they will receive their initial investment back plus a return ranging from 70-85%. If the prediction is wrong, the entire investment is lost.

Key features of binary options

What makes binary options special is the very short expiration time, ranging from just 1 minute, 5 minutes, up to a maximum of 15 minutes. The advantage of this is that traders can see results very quickly, but the downside is that the risk is also high.

Types of Binary Options Trading

Binary options trading offers only 2 choices:

Call Option – Predicting the price will go up

Traders believe the asset’s price will rise and open a position to earn a return when the price actually increases.

Put Option – Predicting the price will go down

Traders expect the price to decrease and open a position to earn a return when the price actually falls.

Practical Example of Binary Options Trading

Suppose the GBPUSD pair is currently at 1.3902. A trader believes that within 5 minutes, the price will go higher, so they place a $100 call.

If the prediction is correct: After 5 minutes, GBPUSD closes at 1.3950, which is ( higher than 1.3902). The trader will receive $185 (100 principal + 85% return).

If the prediction is wrong: After 5 minutes, GBPUSD closes at 1.3880, which is ( lower than 1.3902). The trader loses $100 the entire amount.

Is Binary Options Gambling?

This is a common question among investors, and the answer depends on each person’s trading approach.

If trading is based on guessing, randomness, or emotions without a proper money management plan, it can be considered gambling.

If trading is systematic with data analysis, risk calculation, and reasonable capital management, it should not be classified as gambling.

Legal Status of Binary Options Varies by Country

Thailand – No legal regulation yet

Thailand has not enacted laws regulating binary options trading. This means investors facing issues with brokers must pursue legal action themselves, which is often costly and difficult to enforce.

Other countries with bans or restrictions

Australia – ASIC found only 20% of traders profit, and since May 2021, retail investors are prohibited from trading.

United States – FBI reports that most websites offering these services are scams.

European Union – ESMA issued a ban on marketing and selling to retail investors since March 2018.

Belgium – Trading has been prohibited since August 2016 due to concerns over fraud.

Canada – Online advertising and trading options with less than 30 days maturity are banned.

Israel – Generally banned due to classification as gambling rather than investment.

Germany – Bafin plans to ban advertising and sales to retail investors.

Forex – Another Popular Trading Instrument

Forex, or the foreign exchange market, is the largest financial market in the world. Traders can buy and sell currency pairs such as EURUSD, GBPUSD, etc., 24 hours a day, 5 days a week. This market has no fixed central location but is spread across major financial cities worldwide.

Binary Options VS Forex – Similarities

Although they are two different tools, they share some similarities:

• Online trading – Both can be conveniently traded via the internet.
• Low initial capital – Traders can start with a small amount of money.
• Speculating in both directions – Whether prices go up or down, there are profit opportunities.
• High returns – If predictions are correct, both can offer attractive profits.

Binary Options VS Forex – Differences

Despite similarities, there are many clear differences:

Accessibility and trading hours

Forex – Open 24 hours, 5 days a week. Anyone from banks to retail investors can access it.

Binary Options – Traders must consider the opening and closing times of the underlying assets, which may vary.

Duration of instruments

Binary Options – Very short-term, from 1 to 15 minutes. Cannot be changed after opening a position; some brokers allow closing early but with some loss.

Forex – No expiration date. Traders can hold positions from less than 1 second to several months, but overnight fees apply.

Risk and volatility

Binary Options – Due to the very short duration, volatility is low, and profit or loss is predetermined. Regardless of how much the price moves, the profit/loss size remains fixed.

Forex – Highly volatile market, influenced by large lot trades or major news. This volatility directly impacts profits and losses. Traders may lose their entire account or make unlimited profits.

Profitability potential

Binary Options – Typically offers 50-80% profit of the invested amount. Leverage is not available; returns are fixed.

Forex – Leverage can be used, allowing traders to borrow money to increase position size. Returns can reach 200% or more, but the risk of significant losses is also high.

How to Choose Which to Trade

For those who want to clearly control risk

Binary Options – Suitable because you know exactly how much you will lose or gain before opening a position. However, traders need to win at least 80% of trades to have a positive overall return.

For those seeking higher returns

Forex – Offers more flexibility. Traders can set take-profit and stop-loss points themselves. Winning less frequently is acceptable if large wins offset losses. Forex trading requires more skill and experience but offers higher potential returns.

Summary

Binary options and Forex are vastly different trading tools. The choice depends on each individual’s skills, dedication, and goals. Those who prefer simplicity and clarity might choose binary options, while those aiming for higher returns and willing to accept risks might try Forex trading. Regardless of the choice, education and practice are key to success in trading.