Binary Options and Forex/CFD trading represent three ways for traders to get into the game, three ways which – in some aspects – are quite similar, while in others, they’re indeed radically different. Virtual currencies can be traded through all the above said methods, although the degree of direct exposure one’s investment has to the actual price-variation of the said currency is different from one to the other.
Let us start with the beginning, by taking a look at what binary options is. Binary options are financial derivatives, which allow traders to essentially place wagers on the direction of the price-change of the underlying asset. There are two basic things one needs to understand about binary options contracts. First off, they never grant the trader ownership of the traded asset in any shape or form. As financial derivatives, they are instruments which act as a layer between actual ownership-based trading and the investor’s money.
Secondly, binary options contracts feature propositions, every variable of which is known before the trade is actually launched. The trader knows the amount of money he/she invests, and he/she also knows exactly how much a win would yield. The win condition is also known, obviously. In a nutshell: binary options contracts operate with fixed risks and fixed rewards According to some, binary options trading is little more than gambling. If the trader’s prediction goes wrong, he/she ends up losing his/her full investment. It if is right, the trader gets the investment back, plus a return. To be profitable over the long run, the trader needs to win the majority of his/her trades.
Some binary options brokers use the exchange-based format, which allows traders to trade against their peers. Most brokers licensed by CySEC though, trade against their clients themselves, taking on the role of the “house” and thus giving birth to an irreconcilable conflict of interest.
With CFDs, guessing the direction of the price movement is still important, but the actual size of the said price-movement is also important, as it determines the eventual size of the trader’s profits.
With Forex (FX) trading, the focus is on the size of the price-movement, which means that in order to be profitable, one doesn’t actually need to end the majority of his/her trades with a profit. A single successful trade can be profitable enough to make up for losses incurred through several other trades.
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Another difference between spot FX and binary options/CFDs is in the fact that with the former, the trader can actually choose to close a position any time he/she wants to, while with the latter two, the expiry time is set before the launching of the trade.
Everything considered, it is safe to say that binary options and FX represent the two opposite ends of this spectrum, while CFDs are a sort of halfway-point between the two.
Lately, many FX and CFDs brokers have added other cryptocurrencies (mostly Bitcoin, Ethereum and Litecoin, but also Iota, Ripple, Dash, Monero, Zcash, Bitcoin Cash, BlackCoin, Peercoin, Primecoin, Reddcoin and others) to their tradable asset selection, so those drawn to this vertical do indeed have the opportunity to trade digital currency through derivatives and FX.
Which of these trading instruments is the best fit for you? It all depends on your trading style and money management preferences. The depth of your involvement in trading is also a factor in this regard, as is the method through which you make your market predictions. One thing is certain though is that if you’re serious about day trading, you should avoid trading and investing with binary options brokers.