It’s possible to make (or lose) money with by trading binary options or by day trading, and the two types of trading may appear similar on a superficial level, but there are some important differences between them.
Binary options overview
With a binary option, you either make a fixed profit or a fixed loss. Binary options can be available on different kinds of underlying assets, from stocks and commodities to major events such as jobless claims announcements. A binary option is about a yes/no question; traders are, in a sense, gambling on whether an asset’s value will be at or above a certain amount (the strike price) at a specified time (the expiry), or whether it will be below this amount.
The price at which you buy or sell a binary option contract is not the actual price of the underlying asset, but a value between zero and 100, depending on the probability of the asset’s value reaching the strike price. The trading range for a binary option contract will fluctuate throughout the day, but always settles at either 100 (if the answer is yes – the price is at or above the strike price) or zero (if the answer is no). The trader’s profit or loss is calculated by subtracting the price at which they bought the contract from the settlement price of zero or 100.
Day trading overview
In day trading, positions are opened and closed during the same session, which is not a fixed time period, although it is rare that a position is kept open overnight. Day traders buy and sell different kinds of financial instruments including stocks, commodities, forex currencies, etc. Day traders also attempt to predict the direction of the price movement of an asset, but their profits and losses are not fixed and depend on their entry and exit price, the size of the trade, the number of shares, and money management techniques such as stop loss and limit orders.
For example, a day trader might enter a trade and set a profit target of $100 and a stop loss of $25. Unless they put in a limit, they can let their profits run above $100 to fully benefit from a large price movement. If a day trader held onto a trade and didn’t put in a stop loss order, the loss on an unfavorable trade could quickly get out of control as the trader waits desperately for the price to move in the other direction.
How are they different?
In a nutshell, binary options allow traders to know in advance what their maximum profit could be and what their maximum risk is, while in day trading it is only possible to restrict trading outcomes by placing limit orders and stop loss orders. That is, if a day trader does not use proper money management techniques, both their potential profit and potential loss are entirely unknown and possibly limitless.
Binary options also have a fixed expiry date and time, while day traders have the option to close their position at any time or wait for a limit or stop loss to be triggered. The holder of a binary option also does not have the right to buy or sell the underlying asset, while the day trader does.