Are Digital Options Gambling Or Investing You Decide

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Is This Simply Gambling?

By Toby Robinson

A common question we hear is “Are binary options just gambling?“. The answer is not clear cut. As with many forms of investment, binary options can be used as purely ‘punts’, but astute traders will be using strategies and techniques to ensure the last thing they are doing is gambling. So the answer is not black and white.

Is All Investing Gambling?

Without getting into a semantic debate about the definition of gambling, it could be argued that any form of investment is a ‘gamble’. A hedge fund manager buying a large chunk of shares in a multinational corporation has an element of risk to it. Any form of financial disaster could impact that company. The manager is (hopefully) aware of this, but is satisfied that the potential gains are worth the risk. On the flip side, a private investor might hear about a tiny internet start up trading for pennies and buy shares without any form of research into the company or it’s business model. That would strike me as a gamble.

So if we have established that it is possible to gamble in traditional share trading, it is certainly possible in binary options. But just like the hedge fund manager above, it is also possible to trade based on expected value. In my opinion, once a positive expected value has been established, the line has been crossed from gambling to investing.

Are binary options gambling?

How To Avoid Using Binary Options To Gamble

Firstly, there is nothing wrong with using binary options for a flutter, as long as you know that is why you are using them and are not gambling with money you cannot afford to lose. That applies equally if you are using them to trade really! Binary options offer a quick, exciting way to speculate on the markets and are probably more entertaining than some other forms of betting, so why not? Some of the platforms are designed with gambling absolutely at the forefront of the design – flashing lights, pulsing price graphs and competitions. People who use binaries for a bit of fun are well catered for.

If however, you want to avoid using them to gamble, there are a couple of checks you can make, based on your own trading:

  • Use genuine underlying assets. Some brokers, particularly at weekends, will provide ‘assets’ based on random number generators. It is not always clear that traders are not actually using ‘real world’ underlying prices though. Some are labelled ‘volatility indices’ but they are not based on any official index, purely a number generated by a computer. No amount of technical analysis or research is going to help you here. These are a good old fashioned gamble. You will never be able to establish positive expected value on a random number – if you do, the broker is effectively giving away money. How likely is that?
  • Use a strategy. It is a broad statement, but needs to be – there are many strategies that work for people, and I am not going to question any of them. The point is, if you do not have a strategy for identifying the trades that might be profitable, and a money management plan to ensure risk is managed, then it is unlikely there is a positive value in the trade. The strategy might only apply to a single trade, a particular news event perhaps, but it should fit into a wider risk management plan somehow.
  • Understand positive expectation. Make sure you are aware of whether the trade will be profitable or not over the long term. Any single trade can win or lose, but over the long term, would this trade prove profitable? It boils down to the payout and the number of times this trade would finish in the money out of 100. If you need to win 57% of trades to make money based on the payout you are getting, and expect the trade to win 65% of the time – you have positive expected value – go for it!

So whether binary options are gambling or not depends on the trader. They can be used to gamble, but they can also be used to invest. It all comes down to what is going on between the ears of the person placing the trade.

…and the next time you hear a binary options snob writing them off as a gambling, ask them if they have life insurance (Read this to find out why)

Is binary options trading gambling?

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It is more about whether you are gambling with binary options.

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  • Binarium
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  • Binomo
    Binomo

    2nd in our ranking!

If your decisions are educated and your strategy has a positive expectancy then you are not gambling.

If you make bets for the thrive of the game or the hope of getting rich quick then you are gambling.

Seasoned poker players are not gambling. Card-counters are not gambling. On the other hand, many “investors” are gambling with “safe” stocks.

What is Binary Options? How to Trade Binary Options in 2020

What if you could trade a stock and know exactly what you will win or lose? Binary options are a lure for new traders because they are simple to use and your potential gain or loss is known in advance.

Do you think the price of gold will be above or below X amount in 10 minutes – Yes or No?

If your bet is correct, you get a fixed pay out. If you are wrong, you lose the cost of the options contract. The outcomes and your risk are clearly defined.

If you bet on the horses or football games, then you are very familiar with this win or lose proposition called gambling. Binary options have been compared to bets on a roulette wheel – Do you expect the ball to land on an even or odd number? – and even Russian roulette.

If you are looking to make easy money, you are not likely to find it in binary options trading. Whether or not binary options are a form of gambling or investing depends on the learning, skill and experience you dedicate to trading them. If you toss a coin – heads the price will rise, tails the price will fall – your chances of winning are 50/50. After trading fees, you will inevitably lose money. This is gambling. Alternatively, like any good trader, you can use fundamental and technical market analysis to decide whether to buy or sell a binary option.

What Are Binary Options?

Binary options are an all-or-nothing bet on the future price of an underlying asset. The trader receives a fixed payout if the price of an underlying asset (e.g., currency pair, stock) hits a preset level at a preset expiry date. The expiry date may range from a minute to a month, but is generally intraday (minutes to a few hours). Here are two examples of fixed-return high-low binary options:

Market price – In a simple high-low binary option trade, the trader chooses whether the expiry price will be higher or lower than the market price (the strike price). The trader buys a binary option betting the gold price will rise above the current market price of $1,300 in the next five minutes.

Set price level –The trader buys a binary option betting the price of gold will reach 1,310 in two hours. If in two hours the price of gold is above the strike price, the trader receives a payout. If it is below the strike price, the trader loses the cost of the option.

If the expectation is the stock price will rise above the strike price, the trader takes a long position and buys a call option.

If the expectation is the stock price will fall below the strike price, the trader takes a short position and buys a put option.

Why Should I Trade Binary Options?

Binary options allow you to easily place money behind your opinion on a market? Do you expect the price of gold to rise above $1,300? Will Netflix stock rise or fall after today’s earnings announcement? Will the unemployment rate report show an increase or decrease?

Let’s take the unemployment report as an example. A falling unemployment number is a bullish signal for the US market that can strengthen the USD against the EUR. If US unemployment falls, traders short the EUR/USD. If unemployment rises, traders typically go long the EUR/USD.

There are many barriers to buying an option on the bet that the EUR/USD will rise based on a higher US unemployment rate.

  • Your broker may require a higher account minimum to trade options
  • The size of potential losses if the EUR/USD price falls is unknown
  • The price could rise but not enough to cover the bid-ask spread after fees
  • The orders of large traders with faster executions speeds will be filled first, which could result in price slippage
  • The use of leverage will magnify any losses
  • In the event of losses, you could receive margin calls

Th binary option, in comparison, has two possible outcomes:
��The price rises above the strike price – The unemployment report is negative, the USD price falls and the EUR/USD price rises. You get a payout.
��The price falls below the strike price – If the currency pair falls below the strike price before the expiry time, you lose the cost of the option.

How the payout is calculated can differ among binary options providers. See the binary options broker and exchange examples below for two popular payout models.

Best Binary Options Brokers 2020:
  • Binarium
    Binarium

    Best Binary Options Broker 2020!
    Good Choice for Beginners!
    Free Trading Education, Free Demo Account!
    Get a Sign-Up Bonus Now!

  • Binomo
    Binomo

    2nd in our ranking!

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