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Spot forex trading or forex binary options - Which is preferred?

Contributed by ForexTraders

As the saying goes, “Beauty is in the eye of the beholder.” The same can be said when judging the “beauty” of trading currencies the traditional way on the spot forex market versus trying your hand at the latest popular currency genre – forex digital options. The goal for both trading activities is to record consistent positive net gains in the topsy-turvy world of foreign exchange, the largest and most liquid market in the world.

Newcomers to forex trading are said to be migrating in droves over to the binary world, where two simple keystrokes can immediately deliver enormous rates of return. All one has to do is key in an amount for your option and then decide will the market go up or down before the expiration time limit. What could be easier than that? The traditional route requires endless searching for high-probability opportunities, assessing the risk/return ratio, executing a trade order, along with a protective stop-loss order, and then deciding when it is appropriate to close your position.

Retail forex trading in the spot market can be a daunting task without the proper preparation, hours of practice on free demo systems, and nerves of steel when it comes to making decisions. It helps to be analytically inclined, but discipline is the name of the game. The market is always changing its personality, and the successful trader must always learn to adapt, based on his appreciation of many hard-earned lessons in the past, most likely having to do with judgment lapses that occurred at the worst possible moment.

Impatience and inexperience bring newcomers to their knees, resulting in an early fatality rate of roughly 70%, but binary option providers have attempted to address many of the procedural pitfalls with spot forex trading. Binary options, or all-or-nothing or digital or a host of other terms, pay a specific reward for being correct about future market direction for the chosen currency pair, or other asset class, if you wish to broaden your scope of attack. You choose your amount, so that is fixed, as well as all other risks up front.

If you pick the correct outcome (there are only two, the reason for the “binary” name – ties are rare, but rules define the outcome in case it happens), then you get a specific payoff, like 75% of your wagered amount. Websites use a standard “dashboard”, such that executing an order is simple and straightforward. Some brokers will even refund a portion of your wager, up to 15% in some cases, when you guess wrong. Investment terms abound on these broker sites, but everything still has the look and feel of gambling.

The cost for all of this straightforwardness is incorporated in the various payoff/refund ratios, which vary with time and asset class, but are fixed once you have executed your trade. As long as you adhere to sound money management principles, never betting more than 2% to 3% of your account value at one time, then you do not have to worry about margin calls, stop-loss orders, or debating when it is the right time to close a position. When the option expires, the broker settles up with you right then and there.

Early payoff ratios in the industry were harsh, but competition has brought the odds back in line. A typical 75% payoff and 15% refund scenario will require a 55%/45% win/loss ratio to break even, roughly the same with traditional spot forex trading.

Digital forex options may be the current rage, but select your broker carefully and adhere to a disciplined plan of attack. Good Luck!

This is guest article by Tom Cleveland of www.forextraders.com. Visit his website for further research on binary options and his binary option series