Forex Binary Options: Are They Any Better Than Spot Forex?

If you have been involved with retail spot Forex trading for a while you might have heard about the world of Forex Binary options. To the inexperienced trader these options seem like a far less risky way to make an income while “playing the market” but certainly options are more risky, more difficult to profit from and even more unregulated that spot Forex. Through this article I will explain to you what Forex Binary options are, what their objective is and the problems which are associated to their trading. I will draw a clear comparison between both worlds so that you can see what the advantages and disadvantages of binary options are against retail Forex trading.

So what is a Forex Binary Option? This is a type of derivative (a.k.a synthetic instrument drawn from calculations over other instruments) which allows you to play the Forex market with “fixed odds” against a given type of outcome. In the simplest type of binary option you generally speculate against price being higher or lower than a given level at a given time, winning money when this happens and losing it when it doesn’t. In a typical binary option example you will be required to say whether you believe price will be above or below 1.30 in the EUR/USD within a day and if your guess is correct then you will make a given amount of money. There are also other options which play with difference market characteristics, for example there are options that pay if the market reaches or doesn’t reach above a certain level or if a certain level of volatility arises. As you see these options are called “binary” because you always have fixed odds against two possible outcomes.

This may sound like a very good thing. There seems to be no money management and simply no need to worry, if price does X then you get a profit and if it doesn’t then you lose. What most people do not consider is that binary options have several hidden details which make them most likely harder to trade profitably than retail Forex. Let us begin with the true risk of Binary options. Most brokers which offer this service usually tell you that you can make 70%+ profit on a single bet – making it sound like a great deal – but they always fail to tell you that if you lose a bet you lose all the money you put into it (some brokers may give you some pennies back but in the end you lose your wager). In essence the Binary Forex market works a lot like roulette where you bet on a given outcome and if you lose you lose all your money. The fact that you only make 70% when you win makes this a very bad deal since the broker is keeping a 30% profits between those who win and those who lose (talk about a juicy profit). This makes your risk to reward much worse than in retail spot Forex, you’re in reality paying an extremely high “spread”.

Most people who go into Binary options believe that they will be able to get massive profits simply by guessing correctly a few times and here is where the second problem with Binary options materializes. You might think that it is easier to simply make a bet about directionality but the main problem here is that you’re losing a degree of freedom you have in retail Forex: time. In Binary options you need to guess direction outcome at a given time, something which makes it very hard to do since directionality in Forex trading tends to be difficult to predict at fixed time intervals. Given the fact that you have a very bad risk to reward ratio inherent to the Binary options game you already have a dramatic disadvantage with retail spot Forex.

Now one of the worst things of using Binary options is that the “brokers” who offer this service generally operate more like casinos since Binary options appeal more to people who like to “bet” instead of people who are actually into this as traders or investors. The fact is that Binary options do not constitute instruments traded by banks and therefore you are – all the time as far as I could find – trading against the broker, you’re effectively making a straight bet against “the house” and you have no option to modify or get out of this wager after it is placed. In effect binary options have almost no regulation and they are therefore more risky in this regard than retail Forex brokers (which often have at least some type of regulation).

In essence Forex binary options yield more similarity with a casino than with trading. When using these derivatives you have a much worse chance at making a profit since the edge you need is much bigger as the risk to reward ratio you have is fixed and you have an inherent loss of the time flexibility parameter. Binary options offer you a disguised feeling of “easier profits” when in reality you are trading with a reduced edge, with less regulation, against someone who is actively holding the opposite side of your wager (although this can also happen in retail Forex it doesn’t happen most of the time as a ton of ECN and direct STP brokers are currently becoming available). In the end Binary options will not be your holy grail as if you can’t make it retail forex trading then you will most probably also fail (even harder) in Binary options as the edge you need there is even bigger (due to a bigger inherent gap between your profitable and losing wagers , a random strategy with the same risk on Binary options loses money FASTER than in retail FX).

My advice is therefore to stay away from Binary options as they do not hold any true mathematical advantage regarding “winning odds” against Forex trading. As a matter of fact retail Forex offers a much more regulated market (even though it is not very regulated) with the need for a much smaller edge to profit and no constraints regarding degrees of freedom (like the time constraint on Binary options). If you would like to learn more about my work in automated trading and how you too can earn an education in this field of Forex trading please consider joining, a website filled with educational videos, trading systems, development and a sound, honest and transparent approach towards automated trading in general . I hope you enjoyed this article ! :o)

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