Foreign currency exchange (Forex) trading is also called FX Trading takes place when the trader trades in different national currencies attempting to make a profit. One currency may become stronger compared to the other and if the right trading strategy is developed, a substantial profit can be made.
An option is a contract that allows an investor to buy or sell an underlying instrument (security, index, ETF, etc) at a predetermined price over a certain period of time.
Options trading allows the traders to sell or buy options on futures, stocks, whose price will fluctuate over a particular time period. In this trading also the trader can leverage his purchasing power to control more futures or stocks than he could otherwise purchase.
Options Trading vs Forex Trading
If forex and options are compared it can be determined that forex advantages are 24 hours trading, better execution speed, liquidity, much smaller commission (forex spread). On the other hand, options have the potential to deliver higher percentage returns, offer a number of strategic alternatives where traders can combine with other assets.
Trading 24 hours
One of the major advantages of Forex trading compared to options trading is that the trader can trade 24 hours daily, on five days every week. The Forex market is open for a longer time compared to other markets, so traders who wish to make more profit, can spend more time trading weekly. Also if there is a major economic event, the forex trader can take advantage of the event to finalize trades quickly on his computer and make a profit. The trader will not have to wait for the morning market opening like options traders.
Trade execution speed.
Forex traders find that the orders they place are executed immediately since there is a lot of liquidity in the Forex market. The order is executed at the best possible price, the trader does not have to waste time guessing the price at which the order may get finalized. This is in contrast to Options trading where there is often a delay in executing orders due to the lack of liquidity, due to which the order may ‘slip’.
Since the daily volume in the Forex market is approximately two trillion on an average, then the Forex market is far more liquid than any other market including the market for options trading. Hence when the trader is finalizing a Forex trade, it will be executed far faster than any options trade which he places at the same time. Faster trade execution can result in greater profits. Since almost all Forex trades are executed instantaneously, the trader will be able to make more trades faster, using the profit from other trades.
In Forex trading, an inter-bank market exists where the buyers find matching sellers immediately and there is no commission paid. No brokerage fees have to be paid to the middleman like other markets. The firms involved in Forex trading are making their profit partly from the spread between ask and bid price. So traders can save some money for Forex trading compared to Options trading, where commissions have to be paid to the brokerage firm they are using.
Leverage is important for a trader who knows how the value of a currency will change. Forex traders online have far greater leverage than options traders. Some forex traders can get a leverage of 200:1 while the leverage for options is usually less. However, options traders have the addition call and putt options which will greatly increase their leverage if used properly. Hence trading in forex is far more profitable for traders who make the right trade due to greater leverage.
One of the features of the online system used for Forex trading is that the Forex traders have limits on their position. So the risk is limited and when the margin amount is more than the account value in dollars, a margin call is automatically initiated by the system. This ensures that the losses of the forex trader are limited if his prediction is incorrect. This Forex market safety feature may not be available for the options of financial markets. For options, traders can only trade for a limited time period, else the options will expire, unlike forex.
So while choosing between trading in Forex and options, a trader should consider the risk which he can take and the trading style preferred. Some traders find that there are many advantages of forex trading for making bigger profits if they develop the right trading system and remain within the limits for their account. Traders interested should start researching various forex brokers to find a suitable broker for opening a Forex account.