Trading is simply a collection of decisions, and your success in it reflects how good your decisions were. Apart from the first decision to trade itself, perhaps the next most pressing choice is what kind of trading you want to undertake. A popular option is options trading, while an even larger market is the forex market. Faced with this tough choice, you cannot help but wonder; which is the better option between learning how to trade forex, and options trading?
What is Forex Trading?
Forex trading, or currency trading, basically involves exchanging a base currency for the value it is worth in another currency, known as the exchange rate. In very simplistic terms, it is a market that exists for nations, financial institutions, and individuals to access the currencies of other regions for purposes such as international trade. While forex at the national level has a few different kinks to it, the part that would want to interest you as a retail trader or investor is the forex spot market. Although the vast portion of the trading volume is carried out by financial institutions such as commercial banks on behalf of their customers, it is also possible for individual investors to learn how to trade currencies to satisfy their needs. There is also the opportunity for them to leverage the periodic fluctuations in the exchange rate to make profits, which is a very common way for traders to make profits. Forex trading is not relegated to the spot market. There also exist forex futures and forwards markets where investors and institutions formulate agreements to trade two currencies against each other at a predetermined price. These contracts derive their prices from the spot market, but variations often exist in the prices regardless. However, these fluctuations are common to the markets, and traders get to wager on the price movements by taking up long or short positions to make some profits. Also, popular Forex brokers may offer their clients access to futures and forwards markets in addition to the spot market. These additional markets can provide traders with more opportunities to profit from currency price movements, as well as added flexibility in terms of the types of contracts they can trade. With the right knowledge, strategy, and broker support, traders can navigate these various markets and potentially achieve success in Forex trading."
What is Options Trading?
Options are rather similar to futures in the stock market. They are also contracts with specifications on when a particular asset on the market will be sold and at what price. However, the main difference between futures and options is the strictness of the agreement. Futures contracts oblige both parties to follow through with the terms of the agreement, while options contracts merely confer a right upon the parties which they can choose to exercise or not. A “premium” is paid as a fee to buy or open an options contract position. The two main kinds of options are call and put options. A call option gives its buyer the right to buy an asset at a predetermined price within a particular time frame. When the buyer exercises this right, the seller of the option is mandated to follow the terms of the contract of sale. Put options, on the other hand, work in a way as to give the buyer the right to sell an asset at the predetermined price within the agreed period. Once a put option buyer chooses to exercise the selling rights, the option seller is mandated to buy the assets as stipulated by the contract. Thus, a call option buyer makes profits the higher the price goes, while a put option buyer profits from downward price movements.
Options trading is a leveraged market, which allows the trader to amplify the trade value by several times its original size. This can magnify profits, as well as losses.
Comparison
- Profitability: Forex markets can be incredibly volatile due to the many actors on the international economic scene, and with more volatility comes more trading opportunities. Options trading also occasionally causes volatility, but may not be as high as forex trading. Options can be leveraged to multiply earnings, as much as in futures trading in forex. Although the forex market may bring forth more trading opportunities as long as you know how to trade forex, both can be equally profitable depending on how they are traded.
- Options: In the sense of options, forex trading ironically nicks it over options trading. By learning how to trade the forex markets, you can enjoy the offer of spot, forwards, and futures trading markets which can encourage several different trading techniques and opportunities. Options trading does not offer as many markets, although it can nevertheless be traded in different ways.
- Risk: The volatility and slippage in the forex market could make it riskier than options markets as well. In trading, every opportunity for profits is also an opportunity for losses. Thus, the nature of options trading naturally makes it safer. However, risk management techniques, such as stop-loss which you would learn with how to trade forex, can help mitigate risk in the forex market.
- Easiness: The high level of liquidity in the forex market and the fact that it offers spot trading make it relatively easier to trade, with a basic knowledge of how to trade forex enough. Options trading requires a degree of proficiency to properly understand and navigate the market.
Conclusion
So, which is better? The frank truth is that it is near impossible to pick which is better between the two. In fact, they are two entirely different concepts. Bigger matter of fact, some exchanges can even allow you to trade forex options (but as long as you are very versed in how to trade forex)! So you could view it as forex trading being a market while options trading is more of a technique used across markets, but predominantly in the stock market. Whichever you choose out of the two would be based on your personal considerations and preferences.
