Forex Trading Vs. Options Trading. What are the key differences?

By Ekzaga Staff

22 May 2018 11:29 am


Forex Trading

Forex Trading, also known as FX Trading or by many as the Foreign Currency Exchange, is a financial market where a person can buy or sell foreign currencies in order to try and make a profit. Let's say you want to buy the AUDUSD currency pair. If the AUD goes up in value relative to the USD and then you sell it, you will have made a profit. A trader in this example would be buying the AUD and selling the USD at the same time.

For example, if the AUDUSD pair was bought at 1.0615 and the pair moved up to 1.0700 at the time that the trade was closed/exited, the profit on the trade would have been 85 pips. (See the chart below…)

 

Options Trading

Options Trading allows you to buy or sell options on large amounts of stock, futures etc. that you feel will either go up or down in price over a certain period of time. Just like trading Forex, Options has notably been touted as risky form of investment. However, with experience and expertise you can employ diversified hedging techniques in options trading that can reduce risk exposure for your overall portfolio.

With Forex Trading, you can leverage your buying power to control more stock or futures for instance, than you could have normally. However, there are key differences between Forex and Options Trading. Many of the differences are described below.

 

24 Hour Trading

An advantage you have with the Forex Currency Trading (Forex) as compared to Options trading is your ability to trade 24 hours a day, five days a week if you wish. The Forex Market is open longer than any other market. If your goal is to make double digit gains in a market, it is great to have unlimited time each week to make those trades. Whenever some big event or major announcement happens around the world (in recent memory we had Brexit and its impact on sterling), you can be one of the first to take advantage of the situation with Forex Trading.  You won’t have to wait for the market to open in the morning like you would if you were trading Options. You can trade from your computer, phone or tablet instantaneously, all hours of the day and night.

 

Trading Limits and Profit potential

In forex, there are no limits to how much one can profit or loss, and there are preventive measures such as a stop loss placement. These means you can fix how much you can potentially lose i.e. trade will close automatically when price reaches your stop loss. Similarly, you can place any desired profit targets and trade will close at take profit level. With options trading, a trader is subjected to a contract with fixed risks and fixed rewards over certain period. Options trading works in much the same way as a roulette: if your prediction is wrong, you lose all the money you risked, but if your prediction is right, you receive your money back plus a return. A common set-up is for the trader to make 70% of what they bet on any trade that they get right. For instance, if a trader puts a $20-dollar trade on the value of the GBP/USD going up, and the guess is correct, he would receive $14 dollars plus his initial investment. If the value of the same currency drops, however, the trader loses 100% of the money that they put in.

 

Rapid Trade Execution

When you use the Forex Currency Trading System, you receive immediate trade executions. There is no delay like there can be in Options or for that matter other markets (stocks, equities etc.) as well. And your order gets filled at the best possible price instead of guessing which price your order might get filled. Your order certainly won’t have slippage like it can with Options. Slippage is the difference between the expected price of a trade and the price at which the trade is actually executed. In Forex Trading, there is a lot more liquidity to help with eliminate slippage than there is in Options Trading. ECN (Electronic communication network) Forex brokers are mainly used for HFT (High frequency trading) where traders profit from Nano movements in price. ECN brokers execute trades almost instantaneously nullifying slippage.

 

Liquidity

Forex Trading has the advantage of being more liquid than any other market, including Options Trading.  With the average daily volume in the Forex Market reaching close to $5 Trillion dollars, there is no comparison. The liquidity in Foreign Currency Trading (Forex) far surpasses that in the Options Market. This means when it comes time to trade, Forex Trades will be filled much easier than Options trades will. This speed means more potential profit. Couple this with instantaneous trade execution in Forex Trading, and you have the ability to make a lot of trades quickly.

 

No Commissions

Forex or FX Trading is Commission Free because it is an inter-bank market which matches buyers with sellers in an instant. There are no middleman brokerage fees as with other markets. There is a spread between the bid and ask price and this is where Forex broker firms make some of their profit. This means you can save money when you trade Forex compared to Options trading where there are commissions since you would be working with a brokerage firm.

 

Greater Leverage

Online Forex Trading can give you much greater leverage than playing Options. However, with Options, you can also manage putt and call options in a way to greatly increase your leverage. Leverage can be very important when you know what a currency is going to do. You can achieve as much as up to 400:1 or greater in Forex Trades compared to less typically in Options, but it can be close. This means with Forex trading, there can be substantially more potential profit if you make the right move.

 

Limited Risk is Guaranteed

Since Forex Traders must have position limits, the risk is limited since the online capabilities of the Forex Trading system automatically initiate a margin call when the margin amount is greater than the value of the account in dollars. This keeps a Forex Trader from losing too much if their position goes the other way. It is a good safety feature that is not always available in other financial markets. Forex is different than Options in that with Options, you only have a certain period of time to trade before the options expire.

 

When considering the differences between Forex Trading and Options, just keep in mind your preferred trading style and the type of risk you are willing to take. There are definite advantages to Forex or FX Trading that may allow you to profit greatly if you develop a good system and stay within your trading limits. If you are ready to go, then begin researching a good Forex broker with whom to open a Foreign Exchange Trading Account.

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Limit OrdersTick
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Additional EducationTick
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Negative Balance ProtectionTick
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