Binary options vs Forex: Which profit-making tool has greater potential?

Investing in the financial markets has become more diverse, not just limited to stocks. Nowadays, many investors are interested in new financial instruments, one of which is binary options and forex. Both have the potential to generate profits, but each operates differently and carries different levels of risk.

Similarities between Binary Options and Forex

Both binary options and forex are highly popular among traders worldwide. Why is that? Let’s look at the clear similarities first.

Both tools can be accessed via online platforms without the need to visit a broker’s office, as trading can be done from home or any location with an internet connection.

Investors can start with a small amount of capital. Just having a basic amount of money can allow you to begin trading, gradually increasing your investment as you gain more experience.

Both trading formats allow speculation on both upward and downward movements. No matter which way the market moves, there are ways to profit.

When predictions are correct, both binary options and forex can generate attractive returns relative to the initial capital invested.

Key Differences: Binary Options vs Forex

However, when examining both in detail, clear differences emerge that seem to influence investor decisions.

Market access and trading hours

In forex, investors can access the foreign exchange market nearly 24 hours a day because it is spread across major financial centers worldwide. When Hong Kong closes, London may be open, followed by New York.

In contrast, binary options traders need to monitor the opening and closing times of the underlying assets because binary options are often linked to various underlying assets such as stocks, stock indices, or foreign currencies, each with its own trading hours.

Position duration

Binary options have a short lifespan, typically ranging from 1 minute, 5 minutes, 15 minutes, or slightly longer. After the expiry time, the trade ends, and traders immediately know whether they win or lose. The return or loss is predetermined before starting the trade.

Forex traders have the flexibility to hold positions for as long as they want, from as little as 10 seconds to several months or years, with additional costs for overnight positions.

Price volatility beyond boundaries

Binary options are traded based on very short timeframes. Price volatility in such short periods is not considered a significant factor. The key factor is whether the closing price is higher or lower than the opening price. The profit or loss is a fixed amount that does not change.

In forex, volatility is a primary factor affecting profits or losses. Even a fractional percentage change in price can result in significant gains or losses, especially when leverage is used.

Profit potential

Binary options generally offer a fixed return, usually between 50%-85% of the invested amount per trade. Leverage cannot be used in binary options trading.

Forex allows traders to use leverage to increase the size of their positions, potentially generating profits of over 200% per trade. However, this also increases the risk.

What exactly are binary options?

Binary options are (financial derivatives) that require traders to predict the direction of the underlying asset’s price movement. Typically, binary options have only two choices: Up (Call) or Down (Put).

For example, imagine trading a binary option based on GBPUSD at 1.3902. If the trader believes that in 5 minutes the GBPUSD will rise, they open a Call Option and invest $100.

If the prediction is correct and GBPUSD closes above 1.3902, they will receive a total of $185 (100 initial + 85 profit).

If the prediction is wrong and GBPUSD closes below 1.3902, they lose the entire $100.

Two types of binary options trading

Call Option: This position is opened when the trader expects the price to rise. A Call Option profits in a bullish market.

Put Option: This position is opened when the trader expects the price to fall. A Put Option profits in a bearish market.

Binary options: investment or gambling?

Many people ask whether binary options are an investment or gambling.

The answer depends on the trader’s approach. If trading is driven by emotion, without a plan, money management, or prior analysis, it can be considered gambling.

However, if traders have a clear plan, conduct thorough analysis, manage their funds and risks systematically, it can be viewed as a form of investment. Nevertheless, to be profitable in binary options trading, traders generally need to win more than 80% of their trades over the long term.

Legal status of binary options in various countries

In Thailand, there are currently no specific laws regulating binary options trading. This means investors must bear the risks of transactions through foreign brokers themselves. If problems arise, legal remedies involve direct legal action against the broker, which can be complicated and costly.

In many countries, financial regulators are cautious due to fraudulent incidents involving binary options worldwide.

Australia: The ASIC agency considers binary options highly risky. Studies show only 20% of retail investors succeed, leading to a ban on retail investor participation from May 3, 2021.

United States: Authorities have investigated and found most binary options websites to be scams. They do not recommend investors engage with them.

European Union: ESMA has banned the marketing and sale of binary options to retail investors since March 23, 2018.

Belgium: Banned binary options trading since August 2016 to protect consumers from fraud.

Canada: Banned online advertising for binary options and products with less than 30 days maturity.

Israel: The Securities Authority bans binary options, classifying them as gambling, not investment.

Germany: BaFin plans to ban advertising and selling binary options to retail investors.

What is forex?

Forex (Foreign Exchange) or the currency exchange market involves buying and selling foreign currencies. Traders buy one currency and sell another simultaneously.

For example, if a trader believes the euro will strengthen, they buy euros and sell pesos. If their prediction is correct, they can sell the euros back at a higher price for profit.

Which tool should you choose?

For binary options: Suitable for those who want to clearly define their risk, knowing both profit and loss from the start. However, consistent winning is necessary to achieve long-term profitability.

For forex: Suitable for those seeking higher profit potential, with flexible money management and willingness to accept higher risks. Traders do not need to win frequently but must manage risks well.

Regardless of choosing binary options or forex, the key is education, practice, and disciplined money management, as losses can occur in both formats.