Binary and stock options, forex: similarities, differences, trading
The world of finance provides those wishing to make money with many tools, of which binary options and forex - the most popular. But which instrument to choose for earning on the market, how to choose, is it possible to work with several? Let's try to answer these questions.
A binary option is a bet on a decrease or increase in the value of an asset. The trader observes the dynamics of the price of the asset in the trading terminal, forecasts it for a certain period of time, bets on the asset. Profit is fixed in case option forecast turns out to be correct. Loss - value of option in case of wrong prediction before the maturity date. Ordinary options are similar to stock options in that the trade is based on forecasted value of underlying assets and traders use the same terms - Call and Put option, term expirationsThe order of opening positions for both types of options is similar. Otherwise, stock options have big differences with binary options. In order not to be confused by the properties of these instruments, let's understand the differences between binary options and other instruments.
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Binary options trading (Fig. 1) is by definition a risky occupation, but it allows precise control of income and losses, which not everyone takes advantage of. If you do not understand the principles of making money on options, trading will turn into a "guessing game", like betting on horse races or casinos. The probability of losses is very high. At the same time the loss is equal to the loss of capital, not just the drawdown, because only one asset is traded - you can not use binary options to preserve the capital.
Binary options also differ from exchange options in that they are not directly related to exchanges and are regulated by brokers - the party to the transaction is a brokerage company, so there may be noticeable deviations in the value of the underlying asset from its exchange, more or less fair price. Binary options are offered by many companies, most of which are registered offshore. Among them on the market there are many intermediaries in trading options with an excellent reputation - you can find them in the ratings Binary options brokersBut there is always a risk of losing money for various reasons.
The advantage and disadvantage of trading with regular options is that the user does not need knowledge at the beginning - you can start trading after registering on the platform and making a deposit. This should not be done, as without knowledge the trader will only get rid of his money very quickly. Options will bring income if you pass Binary options trading training - theoretical basics of trading and training in the demo mode. Of course, it is necessary to learn how to use indicators for binary options.
You do not need a large deposit to start trading conventional options, many companies offer to start trading with 10 dollars or even less on the account, and to make transactions from 1 dollar per asset. The potential profit is fixed and can be calculated in advance.
Brokers support the trading of many types of options, but above all, currency options. Short expirations from 30 seconds are used more often in trading, but the most popular option trading strategies are 1 minute and on 5 minutes. Although, of course, asset trading strategies with long expiry times are also possible, at a moderate pace. Intermediaries and third-party resources provide users with different types of trading signals online for binary optionsfree of charge or for a fee. But in this case it is better to follow the adage "trust but verify".
Trading stock options (Fig. 2) is a bilateral contract. According to the terms of the contract, firstly, the investor working with ordinary options, in the case of purchase, has the right (but not the obligation) to purchase the underlying asset (call option) or - secondly - the obligation, in the case of sale (put option), to deliver the underlying asset, at a certain time, at a certain value - which is agreed upon in advance. The usual option has other conditions, which are specified in the specification.
Exchange options are regulated by the exchange, which controls the legality of transactions and guarantees performance if one of its participants for some reason can not fulfill his part of the transaction.
The main difference between stock options and exchange options is that with the latter you can implement a large number of very complex trading strategies and create multi-level financial products. Exchange options are available for assets such as stocks, commodities, futures and fiat, cryptocurrencies and so on. Ordinary options are an excellent option for hedging and reducing risks in trading, the potential profit from them is not fixed and not limited, it is provided by the dynamics of the traded asset. Stock exchange and intermediary commissions are rarely higher than 1% from the option.
More complicated, but more solid
To work with exchange options, initially you need a rather large deposit to the exchange - to enter the exchange trading you need an initial entry of thousands of dollars. But even more important for effective trading of exchange options is considerable knowledge about the market, the work of the exchange, trading trends, etc. It is necessary to learn technical and fundamental analysis, to be able to develop strategies and implement them, especially as such options offer a wide range of strategies. In addition to insuring the positions of the entire investment portfolio, stocks, futures, with the help of stock options you can make money on a trend, on a sudden jump in the value of an option in the exchange, and even on its failure to move out of the price corridor and so on. Such opportunities mean continuous improvement of trader's skills. With the help of options it is possible to realize even a strategy of making money on non-linear value dynamics, but this requires a highly skilled trader in stock trading. Conventional options hedge risks and the novice trader has time and opportunity for both option trading, analysis and education with reduced risk.
Binary options vs Forex
To make a bet in binary options, one only needs to know the amount of the option, the trend of the value in the market and the expiration time. If the price moves in the right direction by at least 1 point, then the trader will receive a fixed amount of income, if not in the right direction - there is a chance of losing capital. Trading Forex (Fig. 3) is a bit more complicated. To do it you need to choose a lot, possibly also a leverage, choose the account type depending on spread (fixed or floating). Accordingly, you need to know what the spread is - this concept does not exist in conventional options, and on forex it's key. Also, entering forex is more expensive than in BO, although now some Forex brokers also offer entry from very small amounts.
Know and be able to
Although forex is often advertised as a trade where even a beginner can make money, this is not entirely true. In theory, if a beginner "from the street" is very careful and cautious, he can make money on binary options. In practice it is highly unlikely - you need to be well versed in what you are doing. But on Forex there is not even a theoretical possibility to earn to a user, who sees the trading terminal for the first time. It's necessary to master the terminology, the basics of the technical and fundamental analysis, to practice on the broker demo account and very carefully enter into real asset trading, strictly observing the rules of money management.
Spread is the difference between the cost of buying and selling a currency, the source of an intermediary's earnings. This parameter should be constantly monitored in order not to lose money on the spread when closing the position. Also, when trading on the Forex market, it is very desirable to know what ECN, NDD and STP accounts are and why they are needed. It is necessary to know and be able to choose the type of orders execution - Market or Instant, and also types of pending orders - Buy Stop or Limit, Sell Stop or Limit. Thus pending orders - Stop Loss and Take Profit - are not a guarantee of preservation of the deposit. For example, when strong news comes out, a jump in price breaks either Stop Loss or Take Profit, and the trader does not have time to retain the deposit.
There are currency pairs, and CFD contracts, and securities, but, in fact, all these transactions are carried out on the same type of contract - Contract for Difference (CFD - Contract for Difference). The key condition of the contract: if the user bought the asset and its price went up, he gets the difference between the purchase price and the price of the following sale. And on the BOO there are top binary options - "above/below" and "one touch," and there are other types of option contracts, such as "range option" and "ladder option. Most people only contract classic options because the other types are extremely risky - but they are out there.
How to drain the deposit
Earnings in forex are generated by how many pips the price of an asset gains, with no spread, with traders risking their entire deposit. In binary options, you cannot lose more than the option price on a contract and you can specify a return percentage. On the other hand, the ease of entering options trading greatly increases the risk of loss, as it gives the illusion that trading options successfully is as easy as starting. Binary options are similar to gambling and provokes a logical desire to win back. Martingale, a strategy on conventional options, which is to constantly increase the rate, is popular for this particular financial instrument.
But the structure of options trading on the market is such that if you make a bet 100%, the profit will be up to 90%, respectively, if at least one bet is unsuccessful, then the second - a successful contract, the amount of past loss will not return. The probability that the beginner will get involved and will not be able to stop until he loses the deposit is higher on binary options than on Forex, where at first he must at least understand where and what to watch and what button to press - and there is no need to click anything until he understands everything thoroughly. But in Forex there is also a chance of getting carried away and losing the deposit - this is not because of gambling, but because of an inaccurate calculation of the risk-to-profit ratio of an asset. The question is that the trader can see that the price does not go the way he predicted, the losses begin, but the trader tries to "sit it out" believing that it will not cross a certain level and does not close the deal. As a result, the entire deposit is lost.
Forex - more
The difference of the forex market is that with practiced skills, the trader can earn more per transaction than in conventional options, since the profit in forex is not fixed. When trading forex is successful, a trader earns a profit on each pip of price change, if he correctly forecasts its direction. Unlike binary options, forex strategies work better on long time intervals, although trading is possible on almost anything, starting from scalping. Another difference is that forex has the ability to place pending orders, which automatically open or close trades when the price reaches an exposed level. It is also possible to exit a trade at any time.
Margin trading is possible on forex market - forex brokers provide leverage, sometimes huge. Experienced traders are offered a toolkit that allows them to achieve great success with minimal deposit. In this case Forex platforms, especially the old ones with a good reputation, have no problem to pay large sums of money to successful traders. As in the case with options, the forex rating will help you find the best partner.
Choice of tool
So, we can conclude that stock options, binary options and forex have their differences, advantages and difficulties. Before opening an account on a trading platform or exchange, traders must decide on their goals, the size of the deposit and assess their level of knowledge. Binary options are the easiest way to start a business, but they are also the riskiest because they are more like gambling. Which does not rule out the possibility of turning binary options into a source of income with a competent approach.
Forex trading, unlike other types of trading, initially implies knowledge and trained skills, although there are also many opportunities to lose money. But there are advantages - more forecasting possibilities, no restrictions on profit, more reliable regulation, unlike other platforms. Rating of forex and binary options brokers, will help you choose a suitable trading platform. Stock options initially require a large investment in assets and a good understanding of the market. Experienced traders recommend studying it with the purchase of the first asset.