Forex Trading Vs. Options Trading: Which is Better for You?

Hello there! Aspiring traders. We know you are curious about trading but don’t know where to start with so many options (a little poor joke doesn’t hurt, right?). Well, you aren’t alone. Many people are confused between Forex trading or Options trading. Well, especially for our aspiring traders we are going to explore two of the mainstream lines: Forex and Options: Which is more profitable. By the end of the article you will pretty much feel confident with a clearer understanding of how these two markets work and which one you should go for.

Well if you want a mini heads up Forex trading involves exchanging one currency for another, whilst options trading is more like buying or selling contracts that you need to buy/sell an asset at a specific price.

FOREX Trading:

Forex Trading or if we elaborate this we get foreign Exchange Trading, is the buying and selling of different currencies. Like when you exchange your dollar for euros while traveling to Europe, but this time with a much bulky amount.

In the Forex market traders make profit by buying a currency at a lower price and trying to sell them at a much higher price. Let’s assume you bought a thousand 1 euro for 1.20 dollars and end up selling them when the rate goes up to 1.25, you will make a profit of $5 (100×0.05). So what happens in the FOREX market is that here traders are predicting whether a currency will go up or down, in terms of the opposite currency. For example, let’s say the euro will get stronger against the Japanese yen, you buy Euros with yen. If the euro’s value goes up, you sell the yen back for dollars and make a profit.

Options Trading

Now if we move forward to options trading, here the process is a tad bit different. This involves buying and selling assets which you have full authority over. But here is the catch. You can only buy or sell assets at a specific price before a certain date. And these are the contacts known as options, which have two sub categories i.e call options and put options. Each gives you an advantage of setting the price.

With call options you can have the right to buy an asset at a set price whilst the put option gives you the right to sell that asset at a set price. If we make an example to make things simple let’s assume you bought a call option for a stock of ABC Co. at $50. You paid a small fee for that option. Now, if the stock price rises to $60, you can buy it at $50 and then sell it at $60, eventually making profit. And now you may be wondering what if the price doesn’t rise above $50? In that case you lose only the fee that you paid for the option.

And What’s the Key Difference Between  Forex Trading Vs. Options Trading?

So, you already know the basics of each. But still confused, which one should you go for? Well, sorry but there’s no one size fits all answer. Depending on your goals and risk the decision changes.

Market/Trading Hours:

As we already know, the forex market is open 24 hours, 5 days a week. No time limits for trading. But on the other hand, the options market has predefined hours, more specifically 9:30 AM to 4:00 Pm EST.

Leverage

Forex trading has a higher leverage that allows you to control a large amount of currency with little investment. And this may seem like a bigger profit but sometimes it turns into larger losses. Moving on to Options trading, it also allows leverage but here you can control a large number of shares with small investment like a contract.

Risk and Reward

It’s a no-brainer that higher leverage equals higher risk. Forex trading though can be profitable, it can lead to losses sometimes. On the other hand options trading limits your risk to the amount you actually paid for. But here’s a catch. Understanding different strategies can be a real deal.

Complexity

In forex trading all you have to do is to predict whether a price is going up or down. Pretty straightforward, right? But did you know options trading can be more complex with various strategies like straddles, strangles and spreads.

Forex might be your champion if:

• If you can spend whole day keeping an eye on the market deals
• If you like things fast paced and exciting

Options might be a better fit if:

• Calls and Puts Option give you some flexibility that the other one doesn’t have.
• Options contract has an expiration date, and you are okay with that.
• You prefer limited risk.

Forex Vs. Options Vs. Other Trades

Futures Trading

This is almost a twin of Forex minus the trade contracts for future delivery of financial instruments. As being alike of Forex, it can be very risky due to high leverage.

Stocks Trading

The name says it all that it involves buying and selling the shares of companies. Though it’s less risky, it requires a huge amount of capital.

Binary Options

Binary options can be a simple yet a very risky option. All you need to do is to predict if the price will be above or below at a certain level within the prescribed time.

Which One Should You Go For?

Like previously mentioned there’s no one fit answer but yes, if you want limited risk, options can be your one. But if you prefer high liquidity and 24/7 trading, go for Forex. And if you want no extremes stocks will be your one.

Conclusion

It’s a no-brainer that both Forex and Options have their own characteristics and benefits. Before picking one, make sure it aligns with your goals, risk tolerance and capital. Whichever option you choose, try to invest little and continue learning. Happy Trading!

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