There is a lot of financial assets one can choose from on the IQ Option platform. Options are very popular nowadays. Mostly because they are quite simple to trade and there is a fixed payout rate. But many traders choose to trade on the forex market and this will be the subject of today’s guide.
An overview of the Forex market
A forex market is a place where the traders can exchange the currencies. It can be described as the largest market in the world as more than $1 trillion is exchanged every day. It is known as the Foreign Exchange, Forex or shortly fx.
The Forex market grew as a consequence of trade exchange between different countries, organizations, as well as individuals. An fx transaction takes place when one currency is sold and another bought or the first one is bought in order to sell another. There is always a currency pair in forex exchange. If, for instance, you choose to trade the EURUSD at 1.14067, you are buying 1 Euro for 1.14067 US Dollars.
Who set the forex prices?
Forex price is set by demand and supply. Sometimes governments, central banks or the brokers have an influence on the forex price, but generally speaking, it is determined by demand and supply.
We can distinguish a bid and ask price in every currency pair. The price at which someone wishes to sell the currency at this particular moment is the bid price. And the amount of money that someone is ready to pay for a specific currency at this moment is called the ask price.
It is good to know where the prices are coming from, but it is not the most important piece of information for you. More significant is how to make a profit by selling and buying different currency pairs.
How do you earn a profit in the forex market?
You already know that you are trading a currency pair on the fx. Let’s take an example of the EURUSD currency pair. Let’s say you are trading EURUSD at 1.1576/1.1578. This indicates that you can purchase 1 EUR for 1.1578 Dollars or sell 1 EUR for 1.1576 Dollars.
When you are buying a currency, you hope its price will increase with time so you will be able to sell it with a profit. On the contrary, when you are selling a currency, you hope for its price to decrease so you can buy it again but at a much lower price.
Your profit, or loss, is the difference between the price you are selling or buying now and the price at which you will sell or buy in the future.
Let’s go back to our example. You obtained the EURUSD at 1.1578. The price rose to 1.1592 afterwards. It means you can sell it with a $0.0014 profit.
This is not a high profit, however, you can increase it by defining amount and using a multiplier on IQ Option.
Who is your opponent in the forex market?
Many actors are taking part in the forex exchange. There are small actors which are autonomous traders and big actors as governments, banks or institutions. Do not be discouraged by it. The prices are determined by supply and demand and there is no one big actor who can control the market. So the chances to profit on the fx are equal to all.
A comparison between Forex and Options markets
Trading in the Forex and Options markets differs a lot. Here, I will describe 6 main differences between the two markets.
A fixed expiry time
In options trading, you have to choose an expiration for your transactions beforehand. IQ Options offers expiry time from 1 minute to 1 month.
When you are trading forex, there is no preset expiration. Your trade will remain open until you close it manually or the price achieves the level of stop loss or take profit you have previously set.
There is no stop loss feature in options trading.
In forex, stop loss allows you to limit your losses. Without it, you risk losing all the money from your account because a loss may surpass the invested amount. To protect your capital, set a stop loss.
Let’s assume you have invested $100. You have set a stop loss at 10%. This signifies that a position will be closed automatically when the invested amount drops to $90.
Take profit is a feature that functions in a similar way to stop loss in the sense of closing a transaction automatically. The difference is that take profit closes a position when a preset profit is gained. It secures the profit your trade has made.
With $100 investment and take profit at +$50, your position will be closed when it reaches a profit in the amount of $50.
This feature allows forex traders to make much higher profits. The leverage multiplies the amount of money you invest in a single transaction. For instance, if you put $100 in trade and use a leverage of x50, it is as you had $5000. This means your profit will be 50 times higher than you would have with only $100 without leverage.
Leverage gives great opportunities. However, you should always apply it together with stop loss and take profit because it multiplies not only a profit but a loss as well.
End of the trade
You have a fixed expiration time in options trading. This gives you some kind of certainty that at the end of preset time you will know the outcome of your transaction. It is possible to sell an option before expiration, but it will always cost you some money.
When you trade in the forex market, the trade ends when you decide to exit it or when the price achieves your strike price (stop loss and take profit). Otherwise, it stays open for hours, days or weeks.
This is the reason why many forex traders opt for currency pairs with often price fluctuations. It can be, for example, after some news release. When the price fluctuates frequently, you are sure it will hit the strike price during the session.
There is a fixed payout in options trading. You know how much you can earn or lose before entering the transaction.
On the contrary, the return in forex trading depends on the price movement. The further it goes, the higher the potential profit. It can easily exceed 100%.
Remember, you can also apply leverage. With leverage, the profit earned could be 500% or even more.
Naturally, it works both ways. You can gain a lot, but you can also lose a lot. That is why this is very important to set stop loss.
Forex is a little bit different from options trading. Nevertheless, it gives amazing possibilities to earn high payouts.
IQ Option offers its clients a free demo account. It is a very good idea to use it for practice. You will not lose your money and you will gain experience. You can check there if forex is something for you.
Wish you high profits!