Binary options: Gambling or Trading?
This question is a never-ending argument between supporters and opponents of binary options. Most opponents classify Binary Options as gambling; especially when they compare Binary Option to number of different games offered in the casinos. The range of games there is pretty varied: from roulette, blackjack, slot machines or even flipping a coin. The argument is that the chance to win is only based on a pure luck. Opponents that refrain from such radical comments compare binary options to “just” sports betting (horse racing, football, etc.).
I was always very keen to understand, why such question is so often being asked? Why is it so important to answer, and why does it even matter? It doesn‘t make any sense to me. From my perspective more important question to ask would be how can one protect own money against potential loss or losses? Or, how can one become a successful investor? If you agree with me, than the answer is actually much simpler than anyone could think: stay away from binary options!
Comparing: binary options trading vs. gambling in casino
Comparing binary options as an investments (or trading tool) to a roulette played in casinos is not quite ideal way to demonstrate whether binary options are closer to the edge of gambling than to investing. Those who offer this comparison completely ignore the fact that binary options have many forms. Especially when considering the aspect of maturity. In fact this is the reason why such comparison does not make much sense.
The formula is quite simple: the shorter the time frame of option is, the lower the impact of any technical or fundamental analysis, strategy, economic or political events.
OK, let’s assume that binary options can NOT be traded only for a longer periods of time, such are days or weeks. Then of course there are many similarities to gambling especially with 60 second binary options. To make the right decision in 60 seconds, supported by analysis, strategy, various events etc., it is practically impossible! In such a short period of time it does not really matter whether the markets are in bullish or bearish trend, because the price of the underlying asset constantly fluctuates up and down – as you can see on the image.
So, if you haven’t got any instrument analysis available, how do you predict the price movements? You can NOT! You have to just GUESS and believe in your luck similar as it is in playing the roulette.
Similarities between roulette played in casino and 60-seconds binary options
To list a few similarities where 60-seconds Binary Options are really like a gamble, please see below a few points.
- 1) Knowledge, skills, research, analysis, strategies etc. doesn‘t really give you any advantage to win
- 2) Your chance to win is based only on your pure luck
- 3) House always wins (in a longer run) because of negative expected value
- 4) You can see the result in a very short period of time almost immediately
- 5) Chance to win is lower than 50%
Comparing: binary options trading to sports betting
On second hand there is another category to look at, if we are making such comparisons. And that’s comparing Binary Options to Sports Betting.
We must say that there is one major fundamental difference. Binary options trading as an equity trading or FX trading offers to traders the possibility to predict the price movement using fundamental or technical analysis. There are various strategies or signals that can be followed. A good trader is able to reflect and analyse the impact of external forces on price movements such as: market events, economic and political development etc. And such information is used to beat the market.
Sports’ betting has in many ways similarities to binary options; although a sport betting is categorized as gambling. If you want to increase your chances to win in sports bet you need to take the match seriously and do your own research. Prepare your own analysis; keep track of injured players, their current shape or form, historical results, and so on. Also in this case, very important role plays also your experience as well as your luck. All those facts increase the probability of positive expected value.
Similarities of binary options to sports betting
The basic versions of Binary options and sports betting have more similarities that you think:
- 1) You can start betting / trading with a very small amount
- 2) You always know your possible reward for each bet (or trade)
- 3) You always risk 100% of your deposit
- 4) You always bet (or trade) against the broker
- 5) There is no physical asset: Each bet (or trade) is just a deal between you and broker (nobody owns anything)
- 6) Each bet (or trade) has a fixed time frame, (hours, days, etc)
- 7) Knowledge, skills, research, analysis, strategies etc. increase your chance to win
Summary: Trading or gambling?
I am listing these two groups of similarities to demonstrate that it is not as simple to label and generalize binary options either as gambling or trading. It offers many different types of trades with different lifespans. And these differences are actually the key to make the right decision, whether it can still be considered as trading or already a gamble.
Binary options as trading
If we look at binary option from a long term perspective, we could consider them as an investment tool. The long term period provides a space to analyse the market and thus minimize the impact of coincidence. And I can also imagine that this tool in long term being used as a hedging instrument by traders.
Binary options as gambling
But the shorter the life of the option is (matter of minutes or even seconds), than the binary options are much like gambling, and the success depends only on luck. To this category undoubtedly belongs the most popular 60 second option that triggers trap for all traders. In such a short time period it is impossible to apply any strategy or analysis. It sounds very appealing when someone promotes this kind of option, and uses words such as fundamental or technical analysis, or even moving averages. The truth is no human being is able to predict the price movement in the next 60 seconds and state that it is based on any analysis. It is just a simple bet very similar to roulette.
When we incorporate these few basic facts, the truth is that trading 60 second binary options is pure madness!
Casino vs. Binary option broker vs. Sports betting broker
At the end allow me to add one more comparison from a bit wider perspective: As you probably know the casino is a business of making money allowing customers to play games of chances. While players can win in the short term if they get a bit lucky, over the long run it is a always casino that wins.
Why? Because the house always wins! How are they doing it? The answer is very simple: that negative expected value. Every bet that customer makes has negative expected value meaning that the casino can expect to win a few cents every dollar bet. And the longer the time frame or more players in the game is the more certain it becomes. The more customers that play and the longer they play, the more money the casino makes.
So, where is the similarity to binary options broker? At the first we should call things the right name. Is really binary options broker a broker in the true sense of the word? At first glance it may seem that your broker mediate trade on the market, but the truth is, whereas, that is is the same principle as sports betting: odds are written by the broker. Yes, every trade you will make is only deal between you and the broker – you play against the house. No one owns, buy or sell anything (that’s also a reason, why you can start “trading” with such a small amounts. Because every binary options bet you make has negative expected value exactly as do the games of chance in a casino. In fact binary options trading is not trading at all, it is a game of chance made to look like trading.
Interesting articles regarding binary options issues
- Binary Options – Trading or Gambling?
- In European first, Belgium bans binary options
- After Israel’s ban, Canada also deems it gambling and warns about financial and personal risks
- Netherlands joins France and Belgium in outlawing binary options and some CFDs
Despite the similarities to gambling, binary options are not considered as gambling by most governments. But is this really the problem of binary options? No! FX trading or Spread Betting have crossed that border of gambling long time ago and no-one really cares.
The true problem of binary options however hides somewhere else. It is linked to insufficient regulation and lack of setting robust boundaries for binary option trading. Sadly this gap is heavily misused by fraudulent or non-regulated brokers, which is quite visible from the fact that the amount of black listed brokers (incl. those that are regulated) is much higher than those that play fair.
However rest assured, you will never, ever over the long run make money if you are placing bets that have negative expected value.