Lately there has been a big interest towards Binary Options trading. The most traders still do not use them. While the complete process is somewhat complex we will try to simplify it for you and give you a general overview and comparison so that you can decide if they are an option for you or not. In order to understand the comparison you should know a little about a Binary Option. The Binary Option is simple: It is either a “yes” or “no” answer at the end of a certain time period. E.g. you may buy a Binary Option which says the USD/JPY will be over 83.25 by 4pm EST today (many Binary Options are less than a week in length). You pay $40 and if you win you will get a payback of $100. The time goes by and at 3:45 the USD/JPY has hit the 83.50 mark where you need it to be. So now you can collect $100.
Let us have a look at the opposite scenario now. You buy the same Binary Option and the trading day goes by as the USD/JPY course goes down. The pair is going down to 82.50 at the end of the binary’s time period. This is where people tout the idea of Binary Options. The loss is still just the $40 you paid for it. This is how a Binary Option works: You have a specific risk parameter which is the maximum you can lose. If you were active in the Forex market you could be down much more at the closing of the day if you did not set a stop loss.
But let us have a closer look. This requires several things. For sure a trader would not let a position tank on them like this. You have a defined risk which is called your stop loss. In the scenario where the pair fell your stop loss would have got you out of the market. This also assumes that you were risking more than $40. It is very possible that you are trading with a micro account and might only be risking $20. Try to explain to the Binary Broker that you would only like to buy "half of that position”.
On the other hand let us think about if you were correct and the USD/JPY shot up like in the first scenario mentioned. At 4pm EST if you are in the Option you are done. You take your $60 and go home. But if you are trading the Forex market there is no reason why you need to get out of the trade because it could be the start of a whole new trend. Finally there are people out there who hold positions for years. This is something which a Binary Option is not built for. In fact it is safer to hang onto a trade than getting in and out of it continually like the Binary Options would have you do. By managing your stop losses you can control risk and let the gains build over time as well.