Differences between binary options CFDs (01/20) - All information for traders

Binary options & CFD. Differences of the products in Test & Analyze 2020. Prepare yourself for the risks. Find out everything worth knowing in the guide.

Binary options have recently been on the rise among private customers. But binary options are not the first product that enables customers to leverage trading straight away and without detours. The so-called CFDs or forex trading are also traded via the security deposit and thus via a lever. Strictly speaking, it means that the customer only uses a fraction of the capital for a trade when he actually moves it.

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Practical example:

If we want to trade the currency pair Eur / Usd Short via the spot market, the following happens in the background: For example, we sell 1 lot (standard unit) Eur / Usd. That means we buy the U $ and at the same time sell the euro. The standard unit is 1 lot = € 100,000. The security deposit or margin, however, is in most cases to be deposited in the amount of € 1,000. Although there are additional transaction costs that are calculated via the spread and the commission, the actual volume traded is never handled by us personally. This creates a leverage effect of 1: 100.

If the EUR / USD exchange rate moves 2% in our direction, a profit (excluding transaction costs) of € 2,000 will result on the € 100,000 traded. So also a profit of 2%. However, since we have only deposited a security deposit of € 1,000, which represents our commitment, we achieve a profit of 100% based on the margin. This is the so-called lever effect. The whole thing works with equity CFDs, apart from differences in transaction and swap costs.

Although CFD trading involves a high level of risk, sometimes high profits can be made achieve. For this, however, traders must keep an eye on the prices and can e.g. For example, use a real-time financial chart.

Differences in risk management

The difference to binary options is that the customer has to deal more explicitly with risk management. This does not mean that the binary options trader does not have to do it, but in contrast to pure Forex and CFD trading, binary options are equipped with a property that automatically minimizes risk by limiting the runtime. The leverage effect also does not arise from the security deposit, but from the lower price of the option.

Based on the example above, the difference is that the Forex or CFD trader has to develop his own exit strategy, He has to determine how much he is willing to lose and at what price he wants to get out. He controls the whole thing via the Stop Loss and Take Profit Order. This shows that the forex broker, in contrast to binary options, offers brokers much more sophisticated trading platforms such as MetaTrader 4, with which different order types can be used and more complex trading strategies can be implemented.

The binary options trader must answer these questions do not pose. Because its exit is predetermined with the term of the option. Its possibility of loss is also limited to its use, while the position of the CFD trader can also run into the minus beyond the deposited margin. (CFD margin requirement)

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Example: Let's continue the example and the EUR / USD exchange rate would increase by 5%. However, the capital in the account is only € 3,000. With a leverage of 1: 100, our loss of 500% on our € 1,000 bet would be enormous. This would even exceed our existing capital of € 3,000. In such cases, the position is closed by the broker and the trader suffers a total loss.

This is the reason why the CFD trader has to pursue stricter risk management than the trader of binary options. Because the lever works in both directions. Of course, he cannot, as shown in our example, simply use € 1,000 per trade if he only has € 3,000 in available capital. That would be a 33% stake per trade and definitely too much.

Now one could assume that the trader would not have to worry about binary options. But one should not be encouraged by the limited risk nature of binary options to take too much risk. The binary options trader also has limited capital in the account and if he cannot and does not want to lose everything with a trade, depending on how much he pays in, he must also think about how much he is willing to do per trade lose and use.

Also the binary options trader should not use 30% of his existing capital as shown in our example. Because this 30% is gone at once if the trade does not go as intended.

Profit from movements in currency

Take advantage of educational offers

So there are advantages and disadvantages to the respective products. The trader must learn to understand these and of course always be aware of the risks of trading. For this he often has educational offers from the broker. So also in the case of the broker 24option. The broker has created a section specially created for this.

The customer can find out about free e-courses and look over the shoulder of professional traders. E-books for self-taught further education are of course also not to be neglected in the offer.

In some cases the broker 24Option also offers the early sale of binary options. This function can be roughly equated with the function of the stop loss or take profit order. In this case, the customer can pursue tighter risk management. The broker offers more detailed information either via the tab "Early Closure" or via the "24option Live Chat".

In any case, the prospect should not refrain from being smart before trading close. The fast processing and the fastest possible start of trading in many cases solve the temptation to skip further training offers. This can have fatal consequences if you as a beginner do not know how to manage the risk.

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