We analyze the main differences and find out where you really can earn
Today I will answer one of the most frequently asked questions in the world of trading: what is the difference between Forex and binary options ?. In my article you will find detailed answers to questions such as What are binary options, how do binary options work, is it possible to make money on binary options? I will also share my opinion on what is better and more profitable, Forex or binary options.
New with instant profit
About 10 years ago, most brokerage companies specializing in exchange markets suddenly began to blow a new super service – “binary option” – on every corner. At that time, few people understood what it was, but the thirst for instant profit made this tool very attractive. In those days, no one had such an offer, because it was, in fact, a pocket casino, but with constant online access and a minimal starting wallet. Enough time has now passed and the consumer has begun to realize that a binary option is not such a brilliant tool and that more often it leads not to instant profit, but to instant loss. To give your own assessment of this tool, you need to understand what it is.
What is a binary option?
So what is a binary option? To answer this question, let’s look at its structure. The name itself consists of two words – binary and option. The word “binary” is a derivative of the concept of “binary model” – a model that has only two options for the occurrence of an event, either “yes” or “no”. This model is just one of the foundations of the tool, you either won or lost, there are no other options. Now the word “option”. Everything is much deeper here, this concept is taken as a derivative of a real stock option. An “exchange option” is a derivative financial instrument, which is based on the rule of contract execution in the future in case of fulfillment of any pre-agreed condition.
So, bringing these two concepts together we get a tool that works according to the rules of the exchange contract and has only two options for the occurrence of the event. In other words, at the conclusion of such a contract, you either earned or lost.
Consider the principle of the binary option based on the most popular contract parameter – “higher / lower”. This type of contract means that you choose the target price level and direction of the transaction. For example, we believe that the EUR / USD currency pair will decline over the next 5 minutes. We select the level from which the reference will be made and put the option to lower. Therefore, if the price after 5 minutes is below this level, we will make a profit, and if higher – we will lose. Choose a bet size, for example, $ 50, and go!
Our option position will look like the chart above. Everything below the red line is our profit, and everything above is a loss. The main distinguishing feature of such a contract will be the fact that it does not matter to us how many points the price will be higher or lower – our profit or loss is always fixed.
So, after the conclusion of the option contract, 2 minutes passed, and during this time the price went below our reference level. Consequently, if our option expires now, we would receive a profit equal to 80-85% of our rate.
After another three minutes, our option was fulfilled, since his life had expired (expiration took place). But, alas, the price soared at the very last moment and went above our starting point, thereby making us a loss in the amount of our $ 50 bet. So simple.
Of course, in the binary option, there are many more different variations, but we will talk about them directly when comparing with the Forex market.