Binary Options vs. Forex Trading
Since their launch in 2008 off-exchange traded Binary options have grown massively in popularity, while the take up of their exchanged traded counterparts has been much slower. The phenomenal growth of the Binary industry has been fuelled by aggressive marketing focusing on the ease of Binary Options trading and how traders can make impressive returns within the space of a minute. Some have suggested that Binary options may slowly erode the dominance of Spot Forex trading.
In this article we are going to take a look at some of the pros and cons of both Binary Options and Spot Forex as financial instruments.
Binary Options
Easy to understand . Binary Options are very easy to trade. Traders simply find the instrument they want to trade and then make a decision regarding whether the price of the instrument is going to rise or fall over the selected time period.
High Payouts . Part of the recent growth of the Binary industry is that brokers aggressively advertise impressive returns often in excess of 70%+. Those trading Binary Options can potentially make a 70% return.
Poorly regulated industry . Currently only Malta and Cyprus regulate Binary Options as financial instruments. While this is a start in the right direction many feel that Binary Options aren’t really a financial instrument and should be categorised as a form gambling.
Odds Stacked In the houses favour . While a 70%+ return on an short term option may sound great when you drill down into it, the firm offering the option has the odds stacked in its favour. Traders have to on average predict price movements with 60%+ degree of accuracy to simply breakeven. Anyone with trading experience will tell you that this is extremely difficult.
Firms Profit off client loses . The interests of the firm aren’t aligned with the customer. As there is no market for the trading of these options firms can’t hedge positions and only profit when the client loses. This is not the case with Forex brokers that do not operate dealing desks, meaning that interest of the client and brokerage are perfectly aligned.
Spot Forex
Heavily Regulated Environment . While there are still numerous brokerages that operate completely unregulated in many jurisdictions Spot Forex is heavily regulated. In European Union Forex falls under the EU’s MiFID legislation which ensures a minimum standard of financial regulation. Those who do their research will be able to choose between a range of highly regulated and reputable brokerages.
Client and Brokerage Interests Better Aligned . True ECN and STP Brokerages profit from volume placed through the brokerage rather than from clients losing money. This means STP and ECN brokerages ultimately want clients to profit to ensure they continue to receive trading volume. Even Market Makers can profit from successful clients if they do everything correctly from a risk management and hedging point of view.
Leverage: Traders can take advantage of significant amounts of leverage. This allows traders to take on much bigger positions than they would otherwise be able too. This can help traders maximise potential profits though leverage can also work against a trader.
Complex compared to Binary Options . Spot Forex trading is much more complicated and those new to financial trading will face a steep learning curve. Pips, Lots and leverage will all be new to those who don’t have prior knowledge of the Foreign exchange market. This is a significant barrier to entry to many who want to simply make money from financial markets without taking the time to learn the ins and outs of trading.
Conclusion
Many consider Binary Options as a poor product with some likening Binary trading to gambling. This comparison is not unreasonable with Binary Option firms profiting from client losses in a similar way to how bookmakers profit from their clients. This creates a clear conflict of interest as it is in the brokerages interest for clients to lose, combined with a lax regulatory environment has led to the industry gaining a bad reputation. In my opinion, Spot Forex is a superior product and those who are interested in trading financial markets should certainly look into Forex as one option. Of course all forms of financial trading involve significant risk and individuals seek independent advice to determine whether trading is for them.