When people are about to start their trading adventure they typically evaluate binary options trading and traditional forex trading. It is worth understanding the differences between these types of trading because, in doing so, you will be able to gain a better idea as to which type of trading is better suited to your skills, budget and objectives. In this article we outline several of the characteristics of options trading that make it distinct from more traditional forms of trading.
Difference 1: Limited Downside Risk
When trading options, investors are able to gauge up-front the amount of capital that is being put at risk in any given trade – what you pay to enter the contract is the maximum amount that you can lose on the trade. In contrast, when trading traditional currencies using instruments such as CFDs (contracts for difference) you are exposing yourself to a full spectrum of outcomes, including potentially damaging losses that could wind you up bankrupt.
Because of the open-ended risk associated with traditional trading, especially that involving CFDs, binary options represents a safer option for investors who are just getting started. After getting sufficient experience in the markets and after refining a strategy that works for you, you can revisit other forms of trading. But as a starting point, options trading represents a limited-risk approach that will better suit your risk profile.
Difference 2: Options Span Various Underlying Assets
When trading options, investors are able to select from a range of currency pairs as the underlying assets on which the contracts they trade are based. However, options also offer investors access to a variety of underlying assets in different asset classes – including stocks, indices and commodities. When trading traditional forex, however, investors are by definition limited to trading currencies only. For this reason, options enable investors to capitalize on a broader range of opportunities.
Different 3: Options Brokers Offer Advanced Features
There are many options brokers out there and the sophistication of their offerings are highly variable. Some of the leading options brokers, including OneTwoTrade, are now offering advanced features that enable investors to gain greater control over their trades. For example, investors can take advantage of features like ‘double up’ (a way to essentially double the size of an existing position), ‘sell’ (a way to get out of a contract before it expires) and ‘roll over’ (a way to extent the time-to-expiry of an option). The great thing about these features is that they introduce greater variety into the trading experience. In contrast, with traditional forms of trading, investors are typically limited to vanilla ‘buy’ or ‘sell’ trades which, although sufficient for some traders, fail to accommodate the same variety of use cases as can be supported by options trading.
As outlined above, several key differences exist between options trading and traditional trading. The extent to which such difference should influence your decision to get involved in one form of trading or another will vary depending on your individual needs, experience, budget and trading objectives. Investors who are seeking a low-risk way to speculate in the markets should definitely look closely at options trading as a way to get going in the early stages of their trading adventure.