Binary Options vs. Day Trading has become a crucial topic of discussion among investors or traders across the world. Why? Both trading methods can be used to make money in the global financial markets. And both Day Trading and Binary Options trading comes with risks that can also make you lose your money.
However, they are different. How? In the case of Binary Options, the profit and loss value of the traders will entirely depend on the traders’ decision on Yes or No. Besides, here you will make a fixed loss or profit based on your decision.
Now talking about Day trading, under this, the positions are closed and opened under the same trading session. And here, your entire profit will depend on different factors, such as the number of shares you have purchased, share’s exit price, entry price, contracts that you have sold or purchased, and more.
Understanding the major differences
As per the market experts, the Options are financial derivatives, and it provides the holder a right to sell or buy the assets or securities at an agreed price. On the other hand, in the case of the Binary Options, the process is automatically carried out.
That means you will not get an option to buy or sell any underlying asset. Another thing to consider here is under the Binary Options, you can deal with different types of assets, like indices, commodities, currencies, including stocks.
Besides, you can also trade on different events, for example, Payrolls announcements, jobless claims, fed funds rate, and more. The process of Binary Options trading includes a Yes or No option.
For instance, will the price of an asset go above USD 1000 at 2 PM? If your prediction is Yes, then you need to buy. However, for No, you will sell. Remember that the price at which you will sell or buy the asset is not the asset’s real price.
The price will keep changing throughout the day but will settle at zero or 100 based on your answer. Here, the profit and loss will be calculated considering the difference between the opening and settlement price.
Exploring the pros and cons of Binary Options
To understand which type of trading you should choose, it will be better for you to have an idea about the pros and cons of Binary Options vs. Day Trading. So, let’s talk about the advantages and disadvantages of Binary Options.
#1 You will enjoy faster returns on your investment
In general, with most investments, you will have to wait for months or sometimes years to witness the desired level of profit. However, in the case of Binary Options, you may be able to see a good return on your investment within a few seconds. In fact, the expiry duration in Binary Options trading is one day.
#2 High returns on investment
Do you know what is the most appealing thing about Binary Options? Well, it is the high returns from the trades. If you can choose a professional and reliable Binary Options broker, you can enjoy a payout rate of 70 to 90 percent. This is something that you will not find in Day Trading.
#3 Binary Options is a game of numbers
Consider the average trades; to attain the break-even, the traders only have to be right 50 to 55 percent of the time. Considering this fact, it can be said that through proper market analysis and making smart trades, you can make it profitable. This is a major difference between Binary Options vs. Day Trading that you should consider.
#4 Very easy to trade
Well, it has been seen that most of the Binary Options online trading platforms have started to cater to beginners and investors with little experience. You will find the platforms very user-friendly with some amazing features, like tutorials, demo account, live char option, and more.
Cons of Binary Options trading
As this is a form of investment, along with some pros, you will also face some cons with this. So, here are some major disadvantages of Binary Options trading that you should know about.
#1 You may lose your entire investment
Well, when you buy stocks, you can sell them and recover some money if the price goes down to prevent a huge loss. But in Binary Options trading, you can’t do that. Here, you will be making a prediction.
You are not allowed to buy assets. If you predict correctly, then the profit is yours. If your prediction is wrong, there will be nothing to take back. So, if you want to trade Binary Options, always keep this thing in mind.
#2 Binary Options market regulations
You all know that for investment, you should always choose a well-regulated market. But most of the Binary Options brokers are not regulated. So, this increases the risk related to the investment. This is a major reason why a lot of traders are now facing Binary Options scams.
Exploring the pros and cons of day trading
While talking about the difference between Binary Options vs. Day Trading, you can’t ignore the benefits of Day Trading to come up with a solid conclusion. So, the benefits are:
- You Can Earn More Profits
If done properly, all the successful day traders can earn a huge amount of profit quickly.
- A Great Level of Independence
Many day traders are working by themselves and self-employed. In fact, they are real entrepreneurs and can enjoy profits based on their own decisions.
It has been seen that most of the day, traders have occupied a mythical status in different communities. They are the persons who prefer to live by their own rules.
- No Overnight Risk
A day trader doesn’t have to worry about overnight changes or stock market crashes. You can quickly make your decision, even if there are some business scams, political strife, or economic downfall.
If you search, you will find only a few things that can match the high emotional level that comes with the profit obtained from this trading by putting in your own efforts.
Some disadvantages of day trading
Just like other forms of trading, Day Trading also comes with some risks. Different from growth or value investing and buy and hold trading, when you choose Day Trading, you are indirectly accepting a higher level of risk as it comes with a very short time frame. Some risks are:
- Higher Level of Volatility
Well, short-term volatility is something that most traders can bank on. However, the forecast made over a very short time with a lower probability of making a profit can be a very risky thing.
For example, if you predict it is going to rain tomorrow in the desert, then you can be wrong. But if you predict it is going to rain in the desert in the next three years, then you can be right, and your probability of being correct will be more.
Well, this market functions in the same way. You can’t accurately forecast the market prices, and it changes rapidly.
- Margin Risks
Traders who utilize margins to boost up their buying power always take a greater level of risk by buying stock using borrowed money. That means, even if you make losses, you will have to pay back the money.
- Tax Burden Will be High
You should remember that short-term profits from Day Trading can face a higher tax rate than profits generated from long-term investments. As a result, your expenses will be more.
Day trading can lead to a psychological addiction. Every trader wants to make money quickly, and they think this is the best option. However, becoming addicted to it can make you face some significant consequences. If you have borrowed money for your trading, then the situation can get worse.
Conclusion- You can go for both, but it’s up to you
You can consider Binary Options trading as gambling as you predict whether the price will go up or not. Well, the day traders also do the same, but their trading profit and loss can be influenced by different factors.
Just like the Binary Options traders, the day traders can also understand their maximum loss and profit by utilizing stop losses as well as profit targets. For instance, if you want to enter into day trading, you can set a stop loss at USD 40 and a profit target at USD 150.
But the major difference between Binary Options vs. Day Trading is that, in Day Trading, you can allow the profit to keep running so that you can take advantage of price movement. Besides, you can also trade on different instruments, like currencies, indices, ETFs, commodities, futures, and more.
Remember that one trading style will not always be better than others. In fact, they will suit different styles and requirements. Both the trading styles have more profit potentials. The capital requirements will also vary based on the trading styles and markets.
For those who don’t want to take much risk or stress, Day Trading can be a better option. And if you know the risks and want to make money faster, then you can try out Binary Options trading. Understand the pros and cons between Binary Options vs. Day Trading and choose wisely.