Binary Options vs CFD (Contracts for Difference)

Binary Options have long been everybody’s sweetheart but the trading scene is always changing and evolving, so we have to keep up with it. The new kid on the block is the Contract For Difference and in my view, it doesn’t steal the spotlight from Binary Options, but instead it adds more diversity to our trading. This new addition doesn’t mean that binaries are obsolete or yesterday’s news, it simply means that your favorite restaurant now has a bigger Menu, it means you can now have strawberry jam on your pancakes whereas before you could only have maple syrup. You decide what you like, but to do that, let’s compare these two ways of trading, both very popular today.

 

Binary Options vs CFD – A Straightforward Comparison

Assuming you know what Binary Options and Contracts for Difference are, I am going to jump straight into the comparison between these two types of trading. If you don’t know what I am talking about, then this article is definitely not for you… or at least not yet. So please, go back and read What are Binary Options and What Are Contracts for Difference (add link later).

 

Binary Options vs CFD: Newbie Friendliness

On one hand, we have Binary Options, which are very simple to pick up and trade: just decide if price will be higher or lower at expiry time than it was when you opened the trade. Sure, there’s more to it, but that’s the backbone. On the other hand, we have CFDs, which are definitely more difficult to trade, simply because you need to be familiar with a lot more terms and elements of a trade. When you open a CFD trade you have more decisions to make: Should I use a Stop Loss? If Yes, then where should I place it? Same with the target… and what about pip value? Is the spread too high? Should I wait until it tightens a bit? Decisions, decisions!

After a while it will all seem easy but by that time you will not be a newbie anymore, and that’s why, talking strictly from the perspective of a newbie, CFDs are definitely harder to grasp than Binary Options.

 

Binary Options vs CFD: Psychological Aspect, Set and Forget

Binaries are “clean”, CFDs are “dirty”. You probably don’t know what I mean but hear me out: after you’ve opened a binary trade, you don’t have much else to do than watch it and wait for expiry (some traders don’t even watch the trade so they don’t get stressed out). In some cases you can extend the duration or close the trade early but those are not really popular features. That’s about it. You generally cannot interfere with a Binary Options trade, it’s set and forget, it’s clean.

On the other hand, we have the “dirty” CFD: you can modify most of the elements of a trade and this means that you are faced with decisions even after opening the trade, not just before. This means that you are constantly battling with issues like “Oh, price is approaching my Stop Loss… should I move it further away? Should I cancel it altogether? I know price will reverse in my direction. I don’t want to lose this trade so I will move my SL.”

Then you have the other situation, when price is going your way and you are in profit. Knowing that the more price moves, the more money you make will trigger your greed: “Hmmm, 20 points in profit, maybe hold on for 100 points and make bank. Yea, I will move by Take Profit at 100 points” But at around 50 points in profit, price reverses and goes straight to your Stop Loss. Damn, your greed just turned a 20 point profit into a loss. Next time you have a 20 point profit, better take it. Oh, but maybe next time price will move 500 points in that direction and you will kick yourself for closing too soon. See what I mean? Dirty! And with lots of “What ifs”.

     

Binary Options vs CFD: Controlling Profit

In Binary Options your profit and loss are not affected by the distance that price travelled from your entry. One pip is all you need to win or lose a trade but the payout will be the same even if price travelled 50, 100 or 1,000 pips because in Binary Options you are either right or wrong, it doesn’t matter by how much. With CFDs the story is different: the more pips (points) price travels in the direction predicted by you, the more money you can make. Example: you open a Buy at 1.3450 with a pip value of 1 USD. At 1.3500 you will have a potential profit of 50 bucks but at 1.3600 your potential profit is 150 bucks.

This means that you have 2 ways of controlling your profit potential with CFDs as opposed to only one with Binaries. Firstly you can profit more by using a bigger investment amount (this is the same for both ways of trading) and secondly, you can profit more by allowing your trade to travel a bigger distance. Some traders say that CFDs are more profitable because of this additional way of money management, but I say the most profitable way of trading is the one that suits you best.

 

Binary Options vs CFD: Controlling Loss

CFD trades can be customised with Stop Loss and Take Profit levels, which allows for better money management and risk management. Contrary to “popular” belief, Binary Options are not the only trading style where you know right from the start how much you can lose. By setting a Stop Loss, you can define your maximum risk with CFDs as well.

Of course, Binary Options have this feature already built-in so human error is eliminated because you really cannot lose on a single trade more than you invested. With CFDs, you can forget to set the Stop Loss or you can mistype it and that can be disastrous.

 

Binary Options vs CFD: Risk to Reward Ratios

There is a big difference between BO and CFD when it comes to win accuracy and how that influences your overall balance: when trading BO, you need around 55% accuracy or more just to break even (out of 100 trades you have to win about 55) because the profit percentage you make on each trade is determined by your broker. With CFDs the story is different because you can adjust your own risk to reward: if you set a 20 pip Stop Loss and a 100 pip Take Profit, you can potentially make 5 times more money than you risked (in this case your risk is 20 pips), meaning that one successful trade covers 5 of your losses.

See the difference? In BO you can make 80% profit (that’s a happy case because on some trades you will only make 65% or even less) but if your trade is Out Of The Money, you lose 100%. If you lose 5 times and win once, things are not very rosy for you. On the other hand, one good CFD trade can cover for 5 losses, or 2, or 10, or 7. You decide because you adjust your own Risk to Reward Ratio by “playing” with the Stop Loss and Take Profit levels. Of course, it’s a delicate balance that’s harder to get right in the beginning and that’s another thing that makes CFDs less newbie friendly.

 

Binary Options vs CFD: Expiry Time

Most CFDs don’t have an expiry time, but if you ever traded Binary Options you surely know that expiry time is one of the most important elements of a trade and that it can make the difference between In The Money and Out of The Money. A CFD trade can stay open until your desired target is reached, no matter how long it takes price to get there, or it can be closed at any time before expiry. *Note: some CFDs have an end date but this depends on the asset and the broker you are trading with.

There is one instance where having a Stop Loss (the way of controlling risk in CFD trading) is worse than having an expiry time. Here’s an example: say you use a 50 pip Stop and price takes it out straight away. That’s about it, you are out of the trade. However, if you were trading binaries, you wouldn’t care how much price moves against your position as long as the expiry time is not reached. Example: you open a Put with an end of day expiry and price jumps up by 50 pips. If you were trading CFDs with a 50 pip Stop Loss, you would be out of the trade but because in this example you are trading BO, you are still in the trade and still have a chance to win it if price reverses by the end of the day.

 

Binary Options vs CFD: Direction, Trade Size and Spread

Maybe the biggest similarity between BOs and CFDs is that in both types of trading you have to predict the direction where price is going. You will only make money with Binary Options and CFDs if you predict the correct direction. Yes, I know it’s obvious but hey, we are comparing stuff ;)

Next we have another similarity: in both Binary and CFD trading, your profit and loss are closely related to your investment amount. The bigger your trade size, the higher the potential payout. Of course, that’s a two-edged sword because the bigger the investment, the higher the risk.

And finally, the Spread: when trading Binary Options, you only have one price for both Calls and Puts. That’s the price at which the broker is willing to offer you the Option. When trading CFDs the broker will offer two different prices for Buys and Sells. The difference between them is called the Spread and you will have to pay it for each trade. Hmm, Binary trades are free if I remember correctly…

 

Conclusion: Do We Have A Winner?

Yeah, of course we have a winner: The Trader! The trader is the ultimate winner of this BO vs CFD “battle” because with this new CFD trend, we have more options and more trading styles. I don’t believe that one is better than the other; they just have some differences and traders will have to decide which style fits them better. If you are the trader who wants quick, 60 second profits, then Binary Options are your game. If you don’t want to worry where to put your Stop Loss and Take Profit, again, binaries are for you.

On the other hand, if you are a patient trader who stays in a good trade for longer, to get a better reward (remember more pips, more money), then CFDs are for you, but the learning curve is harder to tackle. In the end, it’s up to you if you want to invest some time and learn a new way of trading or stick to traveling the known path.

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