It is not uncommon for new traders to confuse the various types of trading. Binary options, Forex, and CFD each involve similar elements, so it comes as no surprise that there would be some confusion. Here, you’ll find details on all three forms of trading, including some of the most important topic – risk and profits. After all, it is these two that primary considerations for those who are considering trading as either a hobby or even as a future career.
Binary Options Trading
Binary options are often referred to as “all or nothing” options. The reason for this is that in a standard trade, the trader earns a set amount or nothing at all. Worth note, however, is the fact that many brokers do now allow trader to close out binary trades early, locking in a partial profit. For this reason, the all or nothing designation should really no longer apply. The basic binary options trade is centered on the prediction of price movement. If the trader things that the price of an underlying asset will be higher or lower than the start price when the fixed trading period ends, they will earn money if the prediction is correct. This is also why the strategies with Binary Options are so much more unique than typical strategies. The asymmetric nature of the instrument allows for the implementation of these types of strategies.
Binary options trading is not without risk, of course, but this form of trading does provide many ways to limit risk. Traders are encouraged to use reasonable investment amounts for each trade and to complete market analysis prior to each trade (rather than just guessing at price movement). Finding a reliable binary options broker is important. When trading with this financial instrument, you’ll want to have access to a solid trading platform and a broker that handles banking procedures in a secure and upstanding manner.
Binary Options trading has also got quite an unfair rap recently as a number of binary option scams have cropped up across the internet. It is therefore very important when trading with these instruments that you are able to seperate the instrument itelf from some of the unsavoury practices of those that tend to operate on the industry’s outskirts.
CFD Trading
The simplest explanation of CFD trading would be the difference between the level at which a trade is entered and then exited. CDFs are financial instruments that mirror the price movement of an associated underlying asset. Gains or losses occur whenever the asset price moves, with the determination being based on the position that was taken. In CFD trading, physical underlying assets are actually never owned. Similar to the other two forms of trading that we will be discussing here, the trader enters into a contract with his or her broker. CFDs are also regulated by the FCA (Financial Conduct Authority) unlike binary options in the UK. Those who trade CFDs are provided with access to high leverage amounts, often starting at 2% of the total margin requirement. In some cases, the margin requirement may climb as high as 20%. When lower margin requirements are in place, the trader is provided with the potential for larger profits. However, it is worth mentioning that higher leverage levels can equal more substantial losses. There are several key advantages to CFD trading, such as the aforementioned reduced margin requirements, few (sometimes no) fee, access to markets around the globe, no shorting, and no limitations such as those seen in day trading.
Forex Trading
Forex trading involves trading on the values of paired currencies (for example, USD/EUR). The need for the exchanging of currencies is the main reason as to why the Forex market is currently the largest and most liquid financial market in existence. Due to the highly liquid nature of the FX marketplace, traders are given the opportunity to enter into very large Forex trades without making an impact on the associated exchange rate. These larger-sized positions are made available to traders in part due to the low margin requirements utilized by most Forex brokers.
The total amount of leverage can be both good and bad. While traders can profit from large gains whenever rates make a modest but favorable change, they are also put at risk of large losses whenever the currency rates do not move as they had forecast. In spite of the risks associated with trading in the foreign exchange, the available leverage amounts render Forex a very attractive option for traders around the globe. While some traders choose to focus on only one of these forms of trading, others make use of all three. In many ways, they can be overlapped, as the same analysis carried out for one asset can be put to use among all three forms of trading. All three have their specific benefits and risks, and traders need to be aware of this. The keys to success for each of these are the same – education, money management, strong analysis skills, and the ability to limit emotional trading. Those who master these elements are sure to succeed.