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Monday, August 18, 2014

Binary Options trading v/s Day Trading - explained

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Many of the newbies on financial world are not familiar with differences in various trading options available and consider them as a single entity of 'share trading'. This is broadly correct, however share trading itself consists of dozens of trading styles, explanation of each and every trading style is beyond scope of a single blog post.

Best way to learn basic about each of the trading style is by knowing it wrto another trading style. Since majority of the share trading techniques differ only at operational level, It is required that one should know operational level in a detailed manner.

In this post I would discuss about difference between two common share trading techniques-

Day Trading v/s Binary Options trading

Since Binary Options trading and Day trading deal with making or losing money in financial markets. All the similarities between Binary Options trading and Day trading thus ends in the previous sentence.

Now all attributes mentioned hence forth are differences between the two:

A binary option trading is a type of options trading in which investor's ROI depends entirely on the outcome of a TRUE/FALSE market proposition: a trader who specializes in binary options trading would either make a fixed profit or a fixed loss. On the other hand, in Day trading positions are opened and closed during the same trading session. Outcome of money invested in day trading depends on number of factors including entry price, exit price, and the number of shares, contracts or lots that the trader bought and sold. Thus Day trading looks much complex then Binary Options trading.

Binary trading options is basically somewhat similar to gambling but legally allowed(something to cheer) . Binary options traders "gamble" on whether or not an asset's price will be above or below a certain amount at a specified time. If price breaches the amount then trader earns accordingly. Day traders also attempt to predict price direction, however ROI's depend on the factors mentioned in previously. There is another similarity between Binary Options trading and Day trading both binary options traders, day traders can calculate maximum profit and loss feasible from their investment by using profit targets and stop losses. Following example illustrates this similarity - a day trader might enter a trade and set a profit target of INR400 and a stop loss of INR300. Day traders, however, can "let their profits run" to take full advantage of large price moves. Now if an amateur day trader doesnot use stop loss, then their losses can seriously go out of control and they can lose all of their money in a single stock. Day trading has very vast domain and include stocks, currencies, futures, commodities, index trading funds.

Binary Option trading can be done for various investment instruments too like stocks, currencies, futures, commodities, Exchange traded funds. Functionality of binary option trading is explained by following example: Assume there is a yes/no situation: Will the price of $ vs INR be above 62 at 1:30 p.m.? If a binary option trader thinks 'yes', he buy's the binary option, if he thinks otherwise then he sells. The price at which you buy or sell the binary option is not the actual price of $ but a value between zero and 100. The trading range fluctuates throughout the day, but always settles at either 100 (if the answer is yes), or zero (if the answer is no). The trader's profit/loss is calculated using the difference between the settlement price (zero or 100) and the price at which trader bought or sold the option.

So I end my post here and hope that know you would probably know very basic difference between Day Trading and Binary Options trading and it should be helpful.


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