Consider a typical Binary Options trade, which has a time frame, where early closure may reduce the payout rate. In this, the trade succeeds if the price of the underlying asset is higher than the price at the beginning of the trade and does not succeed if it is not. This can be described as a strategy on the underlying, in that it is a trade where a positive differential between the start and end price results in a fixed payout. If this were done in Forex trading with the underlying asset, then the problem could potentially be the fixed time and how long the time is.
There reason this could be problematic is that Forex tends to move in ways more complex than simple direction, at varying speeds. So in a short time frame, a Forex pair may not not move enough to make a sufficient amount of differential. In the longer term it may move far in the opposite direction, or even return close to where it was.
This tendency to move in complex ways, is as much a problem for binary options as it is for Forex. But the difference is, the payout is fixed, making it potentially worthwhile to trade on short term time frames and limit potential loss on longer term time frames. So binary options enables or can be a strategy which would be problematic in Forex trading, with the caveat that the set time frame may not cohere with what the market is actually doing.
The capacity to match the market, as a strategy, that is to end trades at will is a flexibility that Forex trading has. This flexibility is a double edged sword, as this very capacity can make automated trading seem attractive. Binary options can indeed be seen as a kind of automated strategy, where the exit and time frame is taken care of by the strategy. It's just that this exit is set and not sensitive to the nature of the market at the time, as an automated strategy may aim to be.
In all time frames a Forex pair can potentially move significantly, at speed. But in shorter time frames, this tends to be in news events. Over longer terms trends can be possible which significantly change the differential. But it is also likely that a pair will retrace, in a manner which can be problematic to hold as time goes on. Because the magnitude of a retracement does not matter in binary options, as long as it ends in the right place, it potentially enables longer term trades than in Forex.
Binary options trades can be fast, 60 seconds or less. A 60 seconds or less Forex trade is feasible, in scalping, but this is also something which needs to be repeated at length, to make up a sufficient nest egg of small differentials (unless large trade sizes are used, with concomitant risk). And each trade also has the possibility of loss of well, depleting or removing the nest egg. Indeed very short term trades have a problem of being faced with the effect of immediate inputs into the market changing patterns in random ways, thus making trading potentially more problematic, assuming that there are some biases in patterns formation which can help the trader over longer term time frames, which consume random events.
Fast trading is also feasible in a news event, where the market can move strongly in a direction in 60 seconds or less. This is a risky trade, which in the highly volatile environment can equally turn negative, either by going in the opposite direction or oscillating.
But binary options can trade into any market, it just needs some movement. However the same problems with direction that happen in news events are also a problem for binary options, as it needs a direction and an oscillation can turn a short term trade from a success to a loss, if it happens within the time frame of the trade. But short moments of momentum may exist, which can be visible on the line chart.
So both ways to trade face similar problem in the way pairs move as they establish value on a chart. But binary options may make feasible trades which can be a problem in Forex, at the cost of reducing a potential larger gains from a trend for example or a more significant medium term range trade.
Forex trades have no inherent drawback for ending 'early', as they do not have an inbuilt set time frame. Thus trades can potentially be matched to the way the market appears to be moving, cutting losses and making gains, even if smaller ones. However the problem with this is that following the market can be following a complexity of moves which may tend to result in any positive differential being reduced or removed.
In between following a rule and tracking the market is a whole range of other strategies, including looking for regularities, which could be viewed as partly matching the market and partly following a pattern, as they can be grounded in market open and closes, for example or other liquidity events. These strategies can also potentially be used in binary options, as its fixed time frame may help with trades based around set times. But the problem with regularities is the same as with patterns, they may not repeat or may repeat at unpredictable intervals.
- Forex trades can be as long or as short as the trader wants
- Binary options typically have a set time frame which must typically be adhered to for the full payout
- Forex trades can potentially be more sensitive to the way the market is moving, thus strategies can be adjusted
- Binary options are themselves a strategy, but is this strategy always suitable for the nature of the Forex market
- Binary options can be long term trades, without exposing the trade to onerous retracements along the duration of the time frame
- Forex trades can also be long term trades, but with the risk of retracements ending the trade
- Forex trades have open ended profit and loss potential
- Binary options trades typically have a set payout and limit loss to the traded sum
- Binary options trades typically assume a direction will happen within a certain time
- Forex trades also need a direction to happen but are not time limited
- Forex trades can be effectively time limited by such factors as a depth of a retracement, or other issues
- Very short term trading is usually part of the binary options strategy set
- Very short term trading is possible in Forex but may encounter difficulties
- Binary options can make inherent assumptions about the market in creating a strategy to trade on them
- Forex trading can make less inherent assumptions about the market