In binary Forex options trading, a trader generally predicts for one of the two outcomes and can earn a fixed payout for every contract he invests in. For example, if you decide to invest in EUR/USD contract which closes above 1.0822, you have two options: either you can bet against it or bet for it. If you bet correctly that it will close at 1.30 at the end of the day, you can earn a fixed amount per contract. But if you fail to judge correctly, you will lose the amount that you sold the contract for.
On the other hand, Spot forex trading are contracts that are bought and sold on the basis of the current price. In spot trading, prices are often settled on the spot in a ‘physical market’. For example, when you visit a money changer and carry out any transaction in any foreign currency, it will be termed as a spot forex trading. Here, the transaction takes place immediately, and prices are decided on the basis of the current market price.
Comparison between Spot Forex and Binary Options
- In binary options, a trader can either earn a fixed payout or suffer a pre-defined loss, whereas in spot forex the profit or loss can vary, as it is based on the current market prices. Thus, binary options offers limited risks and reward features. On the other hand, spot forex can have practically indefinite risk and reward potentials.
- Initially spot forex trading opportunity was available to big corporations only, but later the opportunity was extended to retail investors as well. Binary options trading opportunity is also available to small investors, and the online marketplace has been specifically created to cater to the investment needs of the retail investors.
- Spot forex trading often involves a higher transaction cost than a binary options trading. In the spot market, the spread is generally quite high and this makes the transaction of spot forex trading quite higher.
Both binary options as well as spot forex trading can be carried out through automated online trading platforms however. Both can be a preferred investment vehicle for small investors because of their lower risk tolerance.
Spot forex trading can be more risky and a trader needs to use the stop loss feature to minimize the losses. While in case of binary options, the profit and loss are pre-defined and there is no stop loss feature available to the traders.