Many people discredit binary options as gambling. They claim that simply picking a market direction is much like betting on red or black with roulette. Are these claims true? This article will tell.
Are binary options trading or gambling?
To determine whether binary options are trading or gambling, we first have to define both terms. The dictionary offers a number of definitions for gambling. The closest definition to what people talk about when they call binary options gambling probably is: “To stake or risk money or anything valuable on the outcome of something involving chance.”
According to this definition, any action has to fulfil two criteria to count as gambling:
- The action has to involve money or anything valuable.
- The outcome has to be determined by chance.
Now, do binary options fulfil both of these criteria? Of course they do. But is that a bad thing? After all, any form of financial investment involves money and an outcome determined by chance. The entire premise of technical analysis is to determine which outcome will most likely happen. Therefore, there is always an element of chance. No investment is certain to be profitable. Any prediction is at best likely, but never sure to happen.
So, what is trading? According to the same dictionary, trading is the “act of buying, selling, or exchanging commodities with the goal of making a profit.”
Do binary options classify as trading according to this definition? They do as well. After all, you are trying to make a profit, right? On the other hand, every roulette player is trying to make a profit as well. Apparently, the difference between trading and gambling is fluent and not that easy to define. Most investments qualify for both definitions. The difference, however, is which definition is more dominant in what you do.
Are you gambling or trading?
Are you depending entirely on chance? Do you invest randomly and have no clear cut strategy? In that case, you are gambling with binary options. You are no different from a roulette player betting on red or black.
Typical signs of a gambling approach to binary options is the lack of a clear strategy, and either no money management or the use of a Martingale money management system. Over time, gambling will always cause you to lose money.
If you have a clear cut strategy that you follow methodically and improve constantly, and if you are using a conventional money management system, on the other hand, you are not depending on chance alone. Of course, any investment in financial markets involves an element of chance, but that does not necessarily qualify it as gambling.
To understand the difference, think of a simple coin toss: If you had a coin that shows heads or tails 50 percent of the time and you would get a payout of less than 100 percent in case you win, you would be gambling. You would be hoping to beat the odds using sheer luck.
If you had a way of predicting the coins side right 60 percent of the time, or get a higher payout than 100 percent if you are right, you would be sure to make money over time. In that case, you would be investing not gambling: You would be using a system with a certain earnings potential to make money.
With binary options, solid technical analysis is the difference between gambling and investing.
Discrediting binary options as gambling is a way for traders of other assets to out themselves on a pedestal they do not deserve to be on. In financial markets, there is no certainty. Therefore, whether what you do qualifies as gambling or trading depends on how you approach your trading, not on whether you are trading binary options or conventional assets.