Binary and digital options allow traders to speculate on the direction asset prices will move in a certain period, and they both have a binary outcome. Even though they can be strikingly similar at first glance, they’re not the same.
The FCA banned the sale of these types of options in the UK, yet they remain a popular form of online trading.
This article will cover the differences between binary and digital options and how to start trading in a safe way with a regulated broker.
Binary options trades are based on a “yes or no” proposition and will always have one of two outcomes. Traders predict the direction the price of an asset will move, either above or below the strike price, by a pre-determined time.
Binary options are financial derivatives that can be traded on any asset or market. They’re simple and offer investors a clear indication of the risk and reward involved in a trade.
Digital options also allow traders to guess the movement of prices and determine if they’ll be above or below a certain point at a specific time. However, digital options also allow for speculation regarding the degree of price change.
When you trade digital options, you can manually select the price that you believe an asset will hit before the expiry. You can stick close to the current market price to play it safe, or increase your risk, and in turn your potential profit size, by setting the strike price further away.
How Are Digital and Binary Options Similar?
As you can see digital and binary options aren’t too different from one another and they share many characteristics. Mainly they both:
- Involve predictions on price movements
- Operate with an expiry date when the position automatically closes
- Have only two outcomes – a trader is either correct or incorrect
- Have clearly identified risks and rewards – potential profit and loss are known upfront
On top of this, both are derivatives and traders don’t own the underlying assets.
How Are They Different?
Although they share a fair few commonalities, there are notable distinctions between digital and binary options. Essentially, digital options are a twist on binary options and let traders speculate on more than just price movements.
Binary options ask traders whether asset value will increase or decrease. Meanwhile, digital options give them more control and let investors manually set a stake price.
Digital options are short-term and often have closer expiry times. You can trade within different timeframes, however, the expiry period for digital options will range from 1 to 15 minutes, whereas binary options can be settled within a minute, few days, or a month.
Closing an option
Traders can close digital options before the expiry time, which isn’t possible with binary trades. This can be beneficial if they believe an early exit will lead to larger profits.
Binary options offer a fixed return on your investment. However, with digital options, since you can move the strike price far from the current trading price, you can increase your profit potential.
How to Start Trading
Binary and digital options are very attractive to both seasoned investors and traders new to the financial markets. So, here’s how to get started:
- Open an account – find a reputable online broker and start an account. Trusted Options is properly regulated and offers you access to financial markets as well as tools you can use for technical analysis
- Select an underlying asset – choose between commodities, indices, stocks, forex or cryptos
- Set the parameters (expiry date and stake price) and place your trade
- Wait for expiry, or close early if you’re trading digital options and it seems beneficial.
About Trusted Options
Trusted Options is a regulated online broker that’s successfully attracted more than 1.7 million traders. You can start trading and make use of our free demo and wide range of resources and tools.
Check us out and open an account to trade with a broker you can trust!