16 February 2017

Forex Trading vs Binary Options Trading: Fitting to the Structure of the Forex Market

Binary options trading can use Forex pairs as an underlying, so how does this differ from trading the pairs themselves. Forex trading can be done many ways with different strategies, but at its most basic, it involves buying a Forex pair, in the belief that at some stage it will rise higher or selling it in the belief that at some stage it will be lower in price.

Binary options can come in many trading formats but at their most basic, the High/Low format involves buying the option in the belief that the underlying Forex pair will rise in value or selling it in the belief that the underlying Forex pair will drop in value. So what's the difference, both trades depend on the direction of movement of the price of a Forex pair, relative to a start point.

The difference is that binary options trades are usually set in time, there is no open ended time frame as there is potentially in Forex. So the trader is speculating that the price of a Forex pair will rise or will fall and stay above or below the start price at the end of this time frame. The amount of rise or fall, that is the depth of the movement of the price, the differential does not matter, except that there is one. This is because the payout of this kind of trade is typically fixed and is based only on whether the price stays above or below this barrier set by the start price, at this end point.

In a way though Forex trades also depend on the movement within barriers, but barriers set by the market. This is because Forex pairs can move up or down and may tend to move in structures of moves up and down to get from time point A to time point B. This tends to time limit a trade, as deep moves opposite to the traded direction may not be sustainable or a set of move up and down may not be worth continuing to trade, for various reasons. So Forex trades can be limited effectively in time by the nature of movement of prices in the market. That is what patterns in markets can be about, the way they structure movement of prices imposing limitations on the apparent open ended limitless nature of a Forex trade.

This can also be brought back to binary options. Because while it may seem simple to speculate that a price will be above or below a start value, in fact exactly the same potential patterns should apply, as the underlying asset is a Forex pair in the market. So the potential of a binary options trade to return the fixed payout becomes limited by the way a pair can move in the market.

Thus in some sense, the way a Forex pair moves, the existence of patterns contingent on value levels, stop and limit orders, big figures, inputs into the market, computer program, traders trading on the expectation of patterns and helping to shape them to some extent and so on can impose limits on the apparent potential of Forex and binary options trades.

This does point to a potential advantage of Forex, that trades can be dynamically shaped to the market by the trader, in the short and the longer term. However binary options also have this advantage: that the time frames may allow for trades, especially on short term time or long term time frames, which may simply not be practicable with Forex trading, in normal markets as opposed to extreme market conditions such as volatility around news events on the long or short term. In this sense the structure of a binary options trade may potentially fit to certain market conditions which Forex trades may not.