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The Profitability Factor
Simply put, the profitability factor of a trade is the ratio of how much money can be made versus how much money is lost in that trade. Even though this concept is used to basically describe trading systems, we will adapt this a little to compare the profit factor in the binary options market versus other conventional markets such as the forex market.
When deciding on what financial market to invest in, the profitability factor is definitely one of the key points that must be taken into consideration. After all, the whole essence of investing in the financial markets is to make money, and the more money that can be made from an investment, the better. For instance, if you could put $1200 in one market and make $300, but if there is another market that can take $800 to make $300, the latter would obviously be more profitable because an increase in the invested amount would deliver more returns assuming the same level of profitability is achieved.
This is where the appeal of the binary options market lies. Using some of the trade types such as the Call/Put options with short expiry times that start at 60 seconds or 15 minutes, it is possible to achieve a level of compounded returns that gives this market a higher probability factor than the other financial markets. Let us take the forex market and the binary options market as markets that can be compared on the basis of the profitability factor.
Theoretically, can someone with $500 in the forex market make $5,000? In theory, he can do this if he is able to make 250 pips from 2 trades, staking all his money in the trades. But in practice, we know that this is not possible. There are leverage and margin requirements to consider, and staking all your money in one or two trades in order to hit it big is not going to work in the forex market. Generally, it is accepted that traders must not risk more than at most 5% of their accounts in the market at any one time, so a trader with $500 in the forex market is going to need at least 50 to 100 profitable trades to make $5,000 out of his money. This is surely going to take quite some time to achieve, as the profits in forex are purely a function of how many pips the trader can achieve in a trade. If the trader makes only one pip in his favour, all he goes home with is the financial equivalent of one pip.
Now let us examine the case of a trader with $500, seeking to make $5,000 in the binary options market. One key point to consider is that profitability in the binary options market is not a function of how many pips the asset has moved in the trader’s favour. Unlike in the forex market where a pip in a mini-lot trade is equivalent to $1, a pip in the binary options market in the trader’s favour is equivalent to the entire payout for that trade. Consider this. A trader looking for a quick scalp, stakes $100 in a trade in the forex market, and makes five pips profit. He goes home with $105 (profit + capital). Another trader stakes $100 in the binary options market for a trade with a payout of 80%. The asset ends the trade with one pip in his favour, and he walks away with a payout of $180 (profit + capital), $75 more than the forex trader. By the time 10 of such trades have been taken on an intraday basis, the forex scalper goes home with just $25 profit while the binary options trader would have gone home with $800 profit. This is a profitability factor of X32 in favour of the binary options trader for every day both traders are in the market, assuming profit-making frequency remains constant. With such astounding figures, we really wonder why retail traders are flocking to the forex market in droves when they really ought to be trading the binary options market.
Another point we can use to illustrate the profitability factor in the binary options market is the fact that a trade like the Call/Put trade can be concluded in as quick as 15 minutes. Unless you are a master scalper, it is hard to make any real money in forex in just 15 minutes, unless you are probably trading the news. Trading the news is not a piece of cake and many more will lose money than make money on it, so a forex trader cannot really count on that as a source of making money in 15 minutes in the market. But for binary options traders, this is how the market is structured. You can actually trade 15-minute trades several times a day on several different assets for great results.
It’s clear, therefore, that the profitability factor of the binary options market outstrips that of the forex market by a mile. Not only is this the case, but a trader with little money in the forex market will find it really hard to get going because the same effort required to trade a $500 account is the same required to trade a $10,000 account. In contrast, a binary options trader can take the little money that he has and make it go a long way.
Binary options traders must be adequately prepared to wring out maximum profitability from the binary options market by setting themselves in position to receive proper training and by using an assemblage of tools that will make their job worthwhile, check out our binary options blogs by professional traders to learn what to do.
Binary Options vs. Forex Trading | The Definitive Guide
Binary Options vs. Forex | Introduction
Now if you reading this article, you’re probably either a trader who is already trading forex looking to explore the world of Binary Options trading, or you’re a total newbie who is looking to learn the differences between Binary Options vs. Forex Trading in your quest for financial freedom. We’d attempt to explain the key differences between Binary Options trading vs. Forex trading in a simple and straight-forward manner below.
Binary Options Explained | Binary Options vs. Forex
Binary Options in simple terms means you’re betting that the price of an underlying commodity (be it a forex pair, commodity or stocks) goes up or down in a given time-period. As such time is a critical factor in the success of your trade entered.
You also know upfront how much your returns would be should the trade be successful. Returns of more than 80% ROI (Return on Investment) is the norm in binary options trading. Yes it really is that high! As a trader you also have the option to ‘fold’ the trade or close the trade before the set time-period is reached – thereby limiting your losses (i.e. a ‘stop-loss’ option of sorts vs. forex trading).
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In Binary Options trading as opposed to Forex trading, your losses are also limited to the maximum amount of the trade. I.e. if you traded with USD 100 per trade, then your maximum loss is limited to USD 100 should the trade go side-ways.
The following points highlight the main points of Binary Options Trading discussed above:
- A trade’s Profit or loss is established up-front.
- The expiry time for a trade is also selected up-front.
- A diverse range of underlying assets ranging from forex, commodities, cryptocurrencies, stocks etc. across many industries are available for trade in Binary Options.
- Binary Options can only be traded during normal trading hours. However Digital Options (another form of Binary Options trading offered by IQ Options is available after normal trading hours)
- No potential for using leverage.
Forex Trading Explained | Binary Options vs. Forex
Forex trading is the global platform where various currency is exchanged. It is also the world’s largest marketplace by far, with more than USD 5 trillion being traded daily. Trading takes place in forex pairs and a trader compares the value differentials between two currencies, such as the US Dollar and the Euro (USD/EUR) pair for instance.
Forex trading also involves a high amount of variability. On top of deciding in which the direction a currency will move, traders must also predict how high or low it will go. Losses are also NOT LIMITED, meaning if you don’t practice a consistent and proven stop-loss strategy – the potential losses you’d incur from a trade that go sideways is – UNLIMITED! This is one of the major downfalls of forex trading vs binary options trading, and is something a new trader should definitely keep in kind, when executing his/her forex trades.
In Forex trading vs. Binary Options, there is not set expiry time. This means that you can have an open position lasting for days, weeks or even months if you have the stomach for it. Of course we truly hope for your benefit, that you have a robust stop-loss strategy in place to cater for any unpredictable swings in price.
Do also keep in mind the commission and various charges that your forex broker would subject you to when you keep a forex trade open over an extended period of time. You should always take this into account to work out the profitability of the trade at the end of the day. This is especially important when executing trades with thin or slim profit margins.
Being the biggest trading market, forex trades can be executed 24 hours a day from Monday to Friday. Forex trading also allows the use of leverage, meaning you could trade with USD 100 with a leverage rate of 1:10, be effectively trading with USD 1000. Of course with leverage comes the issue of managing risks and again having robust stop-loss strategy to account for unpredictable swing in prices.
The following points summarise the main points of Forex Trading as discussed above:
- No limits on profits or losses per trade (although limits / stop loss orders can beput in place)
- There are no set expiry time for Forex trades (days, weeks etc)
- Forex is less diverse than trading binary options in terms of the instruments available.
- Forex trades can be made 24/5
- The potential for using leverage exists in trading
Binary Options vs. Forex | Compared
#1 Return on Investment
When it comes to Returns on Investment, Binary Options vs. Forex trading offers a fixed, significantly high amount of return (we are talking about a minimum return of 80% ROI – Return on Investment), which you’d be hard-pressed to find anywhere else. Binary Options Trading as compared to Forex Trading also offers transparency – meaning you’d always know how much you can potentially earn when your trade goes the way you want it to.
In Forex trading, although you can potentially earn more than 80% if the stars align your way, there are a SIGNIFICANT number of unknowns, for most instances forex trade returns average less than 10% per trade. In addition, the number of unknowns, the time you’d have to hold the trade, the commission you’d have to pay per trade and the risks your trade is exposed to often negate the return you’d make on forex trading.
VERDICT : Binary Options is the clear winner for offering a FIXED and HIGH ROI in a short period of time.
In Binary Options vs. Forex trading, your trades is only kept active or open for a fixed time interval. These time-intervals can be selected from as short as 30seconds, 1 minute or 2 minutes etc. These short time periods mean that you can always be ready to watch your trade pan-out accordingly. If you think the trade would not end up the way you want it to – you always have to the option to ‘close-out’ the trade – thereby limiting your losses.
In Forex trading however, due to the variability of the trade, you’d have to be keeping an eye on your trade the entire time it is open! This means keeping an eye on your trade on your mobile whilst using the toilet, in bed, at work etc. Basically you’d be keeping your eyes glued to your phone or your computer the entire time your trade is open which can be hours or days for that matter.
You had also better have employed a robust ‘stop-loss’ strategy on your trade to catch any unwanted swings that would wipe-out your trade. All of these means that forex trading requires a lot more monitoring on your part to ensure a profit on your trade. Even then, the profit that you may obtain after going through all of the above may not even reach 10% per trade!
VERDICT : Binary Options is the clear winner for earning a significant ROI within a short period of time.
In Binary Options vs. Forex trading, the use of leverage is not available. You’d always be limited to the amount of funds you put in to trade. This works great if you’d like to always know that should the ‘shit hits the fan’ your loss is limited to the amount you have put into your account. Say if you invested USD 1000 to jump-start your investing journey, if you got all of your trades wrong and made all of the wrong decisions – you’d have burned USD 1000 at the end of the day.
This also means that even if you’re a SUPER-AWESOME trader, you trades would be limited to the amount of funds you have and what you can make out of it – although with average returns of 80% per trade – yoru invested money would turn into a pot of gold in no time at all with Binary Options trading.
In Forex trading however, the wonderful world of leverage is widely available and used. This means that with your USD 1000 in your account, with a leverage ratio of 1:10, you’d effectively be trading with a capital of USD 10,000, and with a ratio of 1:100, you’d effectively be swinging around USD 100,000! Now do bear in mind however, should your trade go sideways – your risk exposure is to the entire amount! So before you start trading like no tomorrow – ensure that you understand this about Forex trading.
VERDICT : Forex trading is the winner. (However if your risk appetite suits limiting your losses – Binary Options trading could be a better fit for you)
#4 Diversity of instruments
In Binary Options vs. Forex trading, as the underlying instruments available to trade is virtually limitless – you have the option to trade in forex, cryptocurrencies, stocks, commodities etc – you are literally spoilt for choice. Think there’s an opportunity in trading gold today? Sure it’s available in Binary Options trading. Spot an opportunity in trading the USD/AUD pair? Absolutely, you can do that too in Binary Options trading.
However for Forex trading, as the word implies – you are only limited to trading the forex pairs available. Although this by no small feat is small – you can trade all the major pairs, exotic pairs etc – you’d still be limited to trade only forex currency pairs and won’t have other instruments available.
VERDICT : Binary Options trading is the winner here for the variety of trading instruments you’re able to trade on.
#5 Learning Curve
In Binary Options vs. Forex trading – all you literally have to do is observe the trend of the instrument and select whether the price of the underlying instrument would go up or down over a fixed period of time (say 30 seconds). Although a basic understanding of technical analysis and chart reading would come in handy in indentifying trade opportunities – essentially this is all you have to do to get the trade right.
Forex trading however does require a significantly steeper learning curve, in terms of risk management and chart or technical analysis knowledge. You’d also need some understadning of the geopolitical situation of the various countries and currencies you’d be trading on. The use of leverage in forex trading (should you choose to do so) also means that your ‘stop-loss’ strategy employed has to be robust and be able to account for any unpredicted change in prices.
VERDICT : Binary Options is the clear winner for ease of learning to trade for a new trader.
Binary Options vs. Forex | Summary
In summary, as you can see from the above, Binary Options vs. Forex trading offers some significant advantages over forex trading in terms of returns, instruments available to trade on etc. Binary Options trading is also great for beginners and has a significantly LESS learning curve in getting started trading. In fact you could get started in the next 5 minutes by simply registering for a FREE TRADING ACCOUNT with the global leader in Binary Options trading platform HERE.
When it comes to Binary Options vs. Forex trading and making the smarter choice, you should always consider the following factors as an individual trader :
- Return on Invesment
- Risk / Reward ratio
- Learning curve required
When it comes to all of the above, Binary Options trading is the CLEAR WINNER – as compared above.
Get started on your FREE Binary Options account today with IQ Options – the Global leader in Binary Options broker with presence in over 168 countries today!
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Binary Options vs Forex
Binary Options have become widely popular during the last two years. The main reasons for this, is that they offer high profit returns and they are easy to trade.
In this article I will try to outline the main differences between Binary Options and Forex, so that you can evaluate which is the better trading method for you. A good way to start is to provide definitions of both and look at an example of a trade.
Guest post by Peter Traychev of ActionBinary.com
After you read this article, please share your views with us! We encourage you to use the comment box at the bottom of this page.
Forex definition: When trading Forex you are speculating that the value of one currency will increase or decrease compared to another, in an attempt to make a profit. For example: The current price of EUR/USD is 1.30850 and you think the price will increase in the future. You buy 1 lot of EUR/USD and wait for the price to increase to the point where you want to close the trade and realize the profit you want.
Binary Options definition: When trading Binary Options you only have to predict if the price of an asset (for example currency pair or stock) will increase or decrease from its current price over a certain period of time. For example: The current price of EUR/USD is 1.30850 and you think the price will be higher in the next hour. So you place a “Call” option on EUR/USD and wait to see its price 1 hour from now. If your prediction is right you can make a profit of 80% of your investment.
Forex: You can use margin to trade Forex. The maximum margin is determined by each broker, and sometimes can be up to 1:200 or 1:500. Margin allows you to increase your investment capital so you can make a larger trade and make a larger profit if your trade is a winning one.
Binary Options: Margin is not used when trading Binary Options. You can still make a large return on your investment (up to 80% or sometimes 400%), so Binary Options are still very attractive for traders. The good news is that you can never get a margin call.
Payouts and Losses
Forex: With Forex you never know what is the maximum profit you can make on a trade. You can set a limit or stop order so that you can be guaranteed a certain percentage profit if the limit or stop is executed. The losses in Forex can be managed with limit/stop orders, the same way profits are managed. The maximum loss with Forex may be all of the money in your trading account.
Binary Options: Before you make your trade you will know exactly what is the payout and loss return percentage that you will get for the particular option, when it expires. Some brokers offer payouts up to 80% or sometimes 400% depending on the option traded. This means that if you invest $500 on an option and the payout is 80%, you will make $400 profit if the option is a winning one. Some brokers don’t offer “loss back”, which means that if your option trade is a losing one, you will lose the amount you invested in the trade, but not more.
Closing a position
Forex: You choose when to close the position. You can close your position anytime the market is open and the broker has to accept and execute the order.
Binary Options: Before you make your trade you have to select when you want the option to expire (example: 1 hour or 1 week from now) – at the “expiry time” your trade will close automatically. The broker offers you different types of options with predetermined expiry times. Some brokers allow you to close your trade early, but you will exit your option at a percentage of the expected return. The “early closure” option is not offered by all brokers, and might not be available during the whole time the trade is active. Another important point to mention is that some brokers allow traders to delay the expiry time, to the next expiry time. This is called “Rollover” and the traders will need to increase their investment by a certain percentage, sometimes 30% in order to be able to do this.
Forex: There are a variety of order types in Forex. The most important ones are the market (Buy/Sell) orders. Also there are more advanced orders such as: Limit, Stop, OCO (One Cancels the Other), Trailing Stop, Hedge orders, and others.
Binary Options: There are about five Binary Options types which you can trade. They include: High/Low (also referred to as: Call/Put or Up/Down), 60 Seconds Options, Touch/No Touch Options, Boundary Options, and Option Builder.
Forex: Some brokers allow you to trade micro lots, which is 1,000 units of the base currency in a Forex trade. The maximum trading amount is determined by each broker, and can be up as high as 100 standard lots or $10,000,000.
Binary Options: Each Binary Options broker determines what is the minimum and maximum trading size for its clients. Sometimes the minimum trading amount can be as low as $5 per trade, and the maximum can be up to $1,000 or $5,000 or more.
Forex: When trading Forex you have to consider what are the spreads and rollover/swap, and if there are any commissions.
Binary Options: There are no spreads, rollover/swap or commissions when trading Binary Options.
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