Binary options and forex are the most popular financial instruments used for trading. Although they share common characteristics, they are quite different from each other. So let us dive in deep and understand binary options and forex trading, as both are exploited and can be considered broker scam.
Forex trading started in 1971 when President Richard Nixon decided to let the US dollar float freely against other currencies. Since there is fluctuation in the value of one currency against another, speculators now have a financial instrument to make a profit by trading these currency pairs.
Although the inception of the Euro reduced the number of tradable currencies significantly, it had little effect on the popularity of forex. However, the advent of the internet greatly changed the trading perspective of the world. The increasing globalization made forex even more popular amongst the traders, and as of today, it continues to be the largest and most liquid market globally.
The inception of binary options is quite new and began in 2008 when the United States Security and Exchange Commission approved binary options as a form of trading. Soon many other countries followed in the United States SECs’ footsteps and started adopting the binary market, and the market started surging.
Binary options work on an all-or-nothing concept. You have only two choices to choose from, and they will decide whether you make a profit or a loss. Binary options are based on the price trend in the market. If your prediction comes true, then you make a profit; if not, then loss.
However, some regulators have been out there to ban binary options in recent years as they feel that this system is rigged, as many traders have registered cases of fraud, scam, and use of unfair trading practices. Although such cases are staggering, countries haven’t banned this financial instrument yet.
Working of a Forex Trade
Forex or FX or foregin exchange is where a pair of currencies are traded. The trade is carried out at a mutually acceptable price between the buyer and the seller. If you have traveled, you must have exchanged your national currency for the local currency. This is what happens in forex trade, but there’s a difference, you trade for profit while trading in forex.
The currency rates change frequently. Unlike other financial instruments traded in an exchange, forex trading is done over the counter. If you read the forex market correctly, you can make a significant profit. Most brokers also offer leverages where the chances of making a profit increase many fold. However, there is a pitfall while using leverages, as the chances of making profits are greater but so are the chances of incurring losses. For example, some brokers are known to allow leverage of 200:1, so if you invest $100, you can make a profit of $20,000. However, there can also be a loss of $20,000 instantly.
There are different types of forex trades like forwarding markets, futures markets, swaps markets, spot markets, and options markets.
Working of a Binary Trade
Binary options are becoming more and more popular amongst traders. It is very easy, requires less investment, does not depend upon the market condition, and requires little study or research.
Instead of owning an asset, you trade at the price at which the asset’s current price is traded. So you need to predict the price of a particular asset above a specific value at a certain time. An asset can be any financial instrument like stocks, shares, commodities, or even forex currency. You win if your prediction comes true and lose all your stakes if the forecast is wrong.
For example, if you wish to trade in binary options, you choose the crude oil trending at $120 a barrel. A binary option at $60 offers you a strike price of $122, expiring on Friday at 17.00 GMT. If the value of the crude oil exceeds $122, then you win; as your option is worth $110, you make a profit of $50($110 minus your original stake of $60). However, if the price drops below $122, you lose your $60
How does a broker commit a scam?
Broker scams occur due to most brokers who are not regulated and are prone to commit a crime. Since no authority binds them, they can effectively scam you. For example, some brokers will advise you on buying and selling a specific currency pair.
Binary options scam depends upon the timing of the trade. The broker will have current feed on the market price fluctuation. What the trader gets is a delayed feed. It means, the brokers are aware of the trending prices and assets, and thus the trader gets manipulated by the broker.
Before choosing a broker, do some research. Now that you know how the forex trade and binary options work and how they can be manipulated you can very well avoid a potential broker scam.