Binary Options: Financial Transaction or Gambling?

Introduction

Is binary options gambling? This is a question which has dogged the minds of many. However, it is a wonder why binary options trading has been singled out to be questioned in this manner. The truth is that whenever an individual or corporate institution trades the financial markets, no outcome is ever assured. The financial news is what moves the markets and in the world we live in where news travels round the world in the same speed as it takes to push out a tweet or a social media post, the financial markets can take a radical U-turn from the direction most analysts predicted in a matter of seconds. So if we come to the realization that no outcome in the financial markets is ever assured, would financial trading in itself not constitute a form of gambling? This is the school of thought of those who feel that whenever traders are trading investment options, they are basically gambling binary options.

But then there is the opposing school of thought which says that gambling has more to do with chance, and that strategically taking steps to analyze candlesticks, study financial assets, compare asset correlations in pair options or undertake trading in regulated assets, are actions which do not leave trading outcomes to chance. So in trying to influence the outcome by doing the needful, there is no way to say a binary options trader is gambling binary options contracts.

In this article, we try to answer the question: is binary options gambling and if so, should traders be gambling binary options as opposed to gambling on something else?

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Are Binary Options Gambling?

Binary options are investment options which are based on predictions, and in which there are only two choices provided for such predictions to be made. So for any prediction choice, the answer could be a “yes” or a “no”.

  • Will asset “A” be higher than market price? Yes or no.
  • Will asset “B” touch a price target within a week? Yes or no.
  • Will asset “C” stay in a price range within a 2-hour time frame? Yes or no.

Due to the fact that there are only two choices, there is a tendency for anyone to simply pick one of the investment options based on guesswork. After all, for any choice that is made, there is a 50% chance of making money. This is the uniqueness of binary options. In forex for instance, there is also a question of choice, but no matter the choice that is made, profitability does not simply rest on the correctness of that choice. The asset still has to perform creditably by moving in the chosen direction well enough to hit the desired targets. This is why forex does not have the “gambling” toga attached to it.

The situation is also not helped by the language used by regulators of the financial markets in certain countries. Some countries have actively left the regulation of binary options in the hands of the regulators of the gambling industries. For instance, binary options in the UK are regulated by the UK Gambling Commission, whereas the Financial Conduct Authority is the regulator of forex and other financial markets. In Malta, the regulation of binary options was left in the hands of the Malta Gaming Authority (MGA). The US classifies binary options which are not exchange-traded as a form of online gambling. Online gambling in the US is prohibited by law, so US citizens cannot participate in online-traded binary options. Belgium, Italy and France classify binary options as gambling and prohibit all forms of advertising around binary options.

Perhaps the structure of binary options as an “all or none” market where the trader either gets a payout for a correct prediction or loses the entire investment for a wrong prediction has also led to the comparison of binary options to the Vegas-style gambling done in casinos.

But do all these connote that traders who participate in binary options are simply gambling binary options contracts?

When Is Binary Options Gambling?

To gamble means trying to secure an outcome on the basis of luck, fortune or chance. In the strict sense, trading in any form is not a game of chance. But there are practices on the trader’s end of the deal which could be classified as gambling. If you are doing these things listed below, you are carrying out binary options gambling and not binary options trading.

a. Trading On a Hunch

There are traders who use the 50-50 rule to trade binary options on a hunch. You hear things like “I feel the EURUSD will head downwards today”, and trades are made based on “the feeling”. The market has no feeling. Trading on a hunch is pure gambling because the decision has no rational basis. There are established ways of trying to detect the possible direction an asset will assume. For instance, experienced chartists know that a rising wedge will in all probability, lead to a downside breakout when price is near the point of convergence of the trend lines which form the wedge.

Trying to trade a CALL option in this case because of a “gut feeling” that the market would continue to head upwards is a pure gamble and would almost likely end in failure.

b. Trading the Ultra-Short Term Options

Market trends are typically built on long term charts. Experienced technical analysts know that there is no way to predict where the price action of an asset would go in 30 seconds. Price action would be too choppy. Those who trade the 30 seconds options know that in effect, they are actually gambling on the outcome of such a trade.

There is a reason why the Japanese binary options regulators have banned the trading of short term options less than one hour on the trading platforms. They want to discourage binary options gambling (which is really what 30 seconds binary options trading is), and promote trading. Trading comes with decisions based on analysis; gambling is all about luck and chance.

c. Trading Without Analysis

Trading without proper analysis of the asset to be traded is pure gambling. Traders need demo accounts to hone this skill. One of the methods of analyzing assets for trading is by the use of candlesticks. Sadly, many brokers do not offer candlestick charts. The charts commonly provided are tick charts. Tick charts can be deceptive. You could see a currency showing an uptick, and decide that this could continue and you trade in that direction. If you are doing this, you are purely gambling binary options. Candlestick charts unlike tick charts, tell you exactly what buyers and sellers are doing in the market. Tick charts only present price information and nothing else.

Binary options is not a game of luck where a trader opens an account Monday, guesses through a few trades on Tuesday and Wednesday, then withdraws his money on Friday for a weekend of fun. It should be a methodically planned event. It is the planning and the analysis that takes the gambling component away and brings the trading component into the exercise.

Analysis and planning of binary options trades should not just be at the investment option level. The trader also needs to calculate the returns on investment. In binary options, a losing trade cancels out 2 winning trades. You therefore need to be correct at least 4 times out of 5 to make money. No amount of guesswork can beat this equation. Proper analysis and effort has to go into turning the equation to the trader’s favour.

Conclusion: Is Binary Options Gambling?

Some of those who have won big in casinos in Las Vegas and other places will clearly tell you that they developed a methodology to their playing. Don Johnson, the “Man Who Broke Atlantic City”, has admitted in a CNBC program which profiled his amazing winning run that he used elements of statistical calculations developed by friends of his who were Mathematicians. This clearly shows that even in the established gambling industries, there is an element of methodology which must be adopted to produce consistent winnings.

In the trading industry where binary options belongs, this must also be the case.

FAQ’s

Q: Is binary options considered gambling?

Answer: The product itself is not a gambling product as many would want us to believe. It is the attitude of the traders to the product that will determine whether the whole effort is one big binary options gambling operation or whether this is a trading endeavor. Binary options must be treated as a financial market product and not as a product that belongs to the Macau or Vegas casinos.

Q: How can a trader increase his/her trading edge?

Answer: Traders have to make conscious attempts to work out their trade choices based on established methods to achieve consistent results. It is not enough to guess through a few trades that make money. Over time, this will end as losing runs and will decimate the trading account.

Binary Options: Financial Transaction or Gambling?
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