Binary Options vs Swing Trading – Key Similarities and Differences
The financial market is replete with different kinds of trading instruments. Some are devised for long-term gains while others help you make a quick buck. Trends are changing and today we see a lot more people using these financial market instruments for parking the cash they can spare and opt for a more dynamic saving tool as compared to the traditional bank deposits.
Therefore, awareness about the various related modules and financial market instruments is of paramount importance. In that context here is a low down on two popular trading alternatives: Swing Trading and Binary Options, their similarities and their differences. But first of all, a small introduction into each of these trading methods:
It is one of the simplest kinds of option which has a fixed amount of gain/loss. In this case, the payoff is completely geared to the fact that the user gets paid of the option if it expires at a premium and gets nothing if it expires out of the money. It is from this straightforward, ‘yes/no’ state that the option has got its name, ‘binary’. Another important fact about these options is that the owner of these options cannot sell the underlying assets. The trade is restricted essentially at the options level.
However, traders must understand that these binary options are quite different from the regular options. These are traded on both SEC regulated platforms, as well as, on the internet outside the realms of regulations. This fact also exposes traders to the risk of potential malfunction and fraud, especially because traders have to make upfront payment to buy these options.
As the name suggests it is a kind of trading that depends heavily on the swing or the volatility in prices usually within a couple of days. The entire trading mechanics, in this case, is dictated by the difference in pricing at two different points of time and how a trader can use this price difference to their benefit.
It is particularly popular in trading of products that see sudden price fluctuation or a relatively larger rate of price movement within a short duration of time. That is exactly why Swing Trading is considered a short-term trading strategy aimed at capitalizing on these small gains over a short period, usually one to six days. As these trades essentially involve small positions, they are favored by small-time individual investors who don’t like taking big risks. Interestingly, you can even trade swings with binary options but let us first understand what are the essential features, differences and similarities between these trading alternatives.
Deciding on a strategy
Strategy is the first thing that needs discussing when we talk of the similarities between Binary Options and Swing Trading. Whether you are a beginner or a matured veteran in the markets, the strategy that you select for swing trading or trading in binary options often holds the key to your success. The strategy needs to be in pace with the existing trend and overall price position in the market. A good trading strategy helps the user to:
- Establish themselves in the market for future positions
- Gain confidence in taking up bigger or riskier trades involving the greater amount of money.
- Help develop the conviction to undertake larger and more complex trading alternatives.
- The right strategy also proves instrumental in harnessing an existing opportunity.
Examining the risk Profile
Right from the beginning I have mentioned how both, binary options trading and swing trading are fairly simple and easy to comprehend. But does it make these trading alternatives relatively low risk? Of course not! Just because something is simple to understand does not necessarily mean it will be equally easy to make money using it.
- Just as the return potential is high, a trade position using Binary Option or Swing Trading involves a relatively high chance of incurring losses if the trade goes bad.
- The time frames involved is very small therefore the investor/trader needs to be precise and extremely alert to new developments.
- Binary options have a set expiry period and if the trade is lost the trader usually loses 100% of the investment
- In swing stocks/forex trading you can place stop losses allowing you to lose only 10% of the investment, for example.
Improving with experience
While both these trading alternatives provide an ideal entry point for beginners, the profit potential increases only with more experience. Trading veterans have a much higher prospect of returns as compared to those who have been newly initiated into the trading arena. This is essential because the profit potential is related to the overall position timing, duration and trend and only a veteran or a relatively older market player will have the necessary understanding required to:
- effectively adopt a swing trading strategy or open position in binary options
- have a disciplined trading approach that alone can improve the trading prospects
- gain a broad overview of the local and global trends that can impact a particular trend
- properly assess the feedback that one gets from market sources
Assessment of the trend
One key factor which broadly determines the rate of success in the case of both Swing trading, as well as binary options is the identification of the trend and appropriate timing.
- Identifying the baseline and exponential moving average helps traders identify the price point at which the trade needs to be executed
- Often when the trend direction is strong, it is entirely the traders’ foresight that helps them zero in on the exact extent of profit or minimize the loss that might be potentially incurred
- Identification of the true trend helps in continuous profit and a broad ranging trading outlook
One key reason why Swing Trading or Binary Options are often touted as the beginner’s best bet is also because of the amount of units or the trading position involved. Most times trader can start off with fairly small trading amounts. Not only does this fact make these trading alternatives popular but also it helps beginners keep a control of their overall budget. Relatively small position also ensures that the extent of loss is much smaller in case the position turns unfavorable and does not turn out as expected.
Following the strategy minutely
In both types of trading the strategy needs to be traded to the last T. A strategy will bear fruit and be effective only when it is followed correctly and every step is implemented methodically. It is possible that many market veterans might be able to improvise or modify a given strategy with the current situation but for relatively new players it is far safer to just follow the strategy as advised and seal the pre-decided profit percent without wanting to be too adventurous. To start with it is advised to stick to the projected price appreciation and to try out even greater profit prospects, traders need to garner reasonable conviction in their abilities.
After reading the list of similarities charted out so far readers might feel that Binary Options and Swing trading mean the same thing. While there certainly are some similarities regarding the approach used for Binary Options and Swing Trading, it won’t be wrong to say that the similarities end right there.
Both these trading instruments are not just unique in their own way but they also work towards yielding completely different types of returns. More importantly you can trade binary options using a swing trading approach with much longer expiry times such as the end of day or in 24 hours. One thing that can not be done on a binary options platform is to trade very low priced company stocks. Sure, you have options to trade the stocks of a large corporations, such as Facebook, Apple, Google, etc but you don’t have access to many other companies that may be of greater interest to the savvy investor. And this is really where swing trading comes to life. It is one of the best investing methods for traders who want more variety and more control.
The primary catalyst
Swing Trading: In case of swing trading we would notice that the market momentum and trend reversal is what plays the most important role. Identification of the forming trend in relation to the its previous highs and traded volumes are paramount.
Binary Options: The primary catalysts is market volatility where big volumes are traded. It is extremely important for the trader or the investor to test the effectiveness of the strategy on paper before taking the final plunge.
Trend is your friend
Swing Trading: It is all about going with the trend and aligning positions in line with the trend. If it is long-term positions that you are looking for, you need to work it in a way that it adapts to the overall trend and the underlying sentiment that might be prevalent in the market.
Binary Option: In this case traders have multiple opportunities through the trading period to lock in their gains. They can trade with trend or against it.
Swing Trading: It is often passed on as a joke that perhaps the biggest risk in Swing trading is the risk of boredom. If you play the trends in time, hit on the right set of stocks, returns are likely to follow.
Binary Option: The profit potential is relatively larger, sometimes as much as 200% of the original investment when played out correctly. However, in case of a losing trade you will most likely lose 100% of the traded amount.
Swing Trading: Between the two, Swing Trading is relatively a more long-term approach and that entails that traders don’t need to trade in it on an hourly or a daily basis. Trades on an average are placed on a fortnightly or a daily basis and let the stock or the entity run its course to reach the price point you are targeting to liquidate your position. It is exactly this relatively longish time-period that ensures the targeted profit that traders might be looking at.
Binary Option: These have set expiry dates which are not negotiable and can range from 30 seconds to 24 hours. Traders invariably have to work within these set expiry times.
In a nutshell, both the Swing Trading positions as well Binary Options have their own set of advantages and disadvantages. While the relatively small entry levels make them extremely popular instruments for beginners and mid-level investors, the ultimate success of their strategy depends on a trader’s keen understanding and overall agility while trading in the market. As a trader, whatever trading style you might choose, you should never lose sight of your relative:
- Profit target
- Risk Appetite
- Ability to digest losses
- Ultimate trading motive.
Ultimately these are the factors that would help an individual investor to decide on an appropriate strategy.
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