Trading, Gambling, Binary Options Tra-mbling?
Unfortunately, or fortunately, Binary Options have a lot in common with gambling. That is why Binary Options get so much flak from the mainstream investment world. The thing is, whenever you point your finger at someone else you have three fingers pointing back at you. Traders can gamble on stocks, bonds and commodities. Gambling, like beauty, is in the eye of the beholder. It all comes down to how you approach your trading, what drives you to trade, how you make your decisions and if you are able to sleep at night. The difference between gambling and trading has nothing to do with the vehicle. A desperate person can make a risky as hell gamble on market direction using stocks, options, futures or forex just as easily as he can by using Binary Options. What the media won’t tell you is that when you trade with Binary Options, your potential losses are way way less than if you were gambling in a $25,000 minimum margin account trading spot futures.
How Gambling Relates to Trading?
Before I begin to expound on why Binary Options are and are not gambling, lets dig a little deeper into what gambling is, and how it relates to investing, trading and speculating. By definition, gambling is the wagering of money on an event of uncertain outcome for the purposes of material gain. In order for gambling to occur three conditions must be met. First, there must be some consideration, i.e., the money you put down. Second, there must be some form of chance involved, IE the toss of the dice, turn of a card or direction of market movement. Third, there must be some reward or prize given, otherwise there is no point in the activity. To extend this definition to gaming, gaming is gambling allowed by law. The key word in this definition I think is uncertain, the wager is on an event with an uncertain outcome. There is some uncertainty with Binary Options so they have that in common.
Moving on to investing, the definition here is an item or asset purchased with the intent of making wealth or creating income. When you invest you are actually buying something such as a stock that pays a dividend, goods or inventory for future sale or a factory where you produce something of value. In the financial sense investments include stocks, bonds, mutual funds and other tangible assets that provide income or have a reasonable expectation of appreciation such as real estate. The key is that an investment has tangible, inherent, value, whereas a gamble has no value. Binary Options are not an asset in the sense of investing. When you buy a binary position you gain no inherent value, you do not control the underlying asset, so binary also has that in common with gambling.
Trading is the actual exchange of money for assets or positions. This can be for bonds, gold, oil, stocks, indices or Binary Options. When you give money for a position, or accept money for a position, you are trading. Everyone who participates in the market is a trader. An investor makes a trade when he buys shares of stock XYZ. A speculator makes a trade when he shorts oil or buys a call option on the Dow Jones Industrial Average. The big difference between the two is expectations. The investor knows that it will take time for his investment to pay off and it is the pay off over time that he is looking for. The speculator is looking for a quicker buck and will get out of a position if it doesn’t move fast enough When you make a binary trade you are putting money down for a position, this position can be a short or long term speculation but is not an investment. In this case Binary Options are like trading, but at the same time also, like gambling, because a gambler will also “trade” money in exchange for his “position”.
Speculating is where the lines between trading, Binary Options and gambling get really confused. Speculation is the act of trading or investing in the market in such a manner as to appear to be gambling. Speculators use derivative investment vehicles like options to try for big gains while limiting losses. This can be as simple as opening a position with a tight stop loss or as complicated as in depth fundamental and technical analysis couple with sound money management techniques. It can also be very risky, or very safe, it all depends on how you approach it. A gambler can make no analysis of his market. You may say he could count cards or use some other such mathematical probability, but the gaming houses frown upon that. I never heard of any trader, investor or speculator getting his fingers broken for counting a moving average or trading on a support break. So, in terms of Binary Options, a speculator will use analysis to make a trade whilst the gambler will just make a trade.
How Is Binary Options Like Gambling
Binary Options is like gambling in a couple of ways. It is, however, also a form of trading that can be used for speculating the markets, which is not gambling. Like gambling you are putting down your money on an event of chance. Like gambling you are doing this for the purpose of gaining a payout and like gambling you are not creating wealth, merely profiting from an outcome. Like gambling, Binary Options can be approached with risk and without a plan. It can also be approached as a speculation using analysis and management. Management is the key to successful Binary Options trading and speculating and it comes in a couple of forms.
What do you need to manage risk? Going back to the definition of gambling and the word uncertain. Uncertainty creates risk for you as a trader. The very best trades and traders are not betting on events of uncertain outcome. They are speculating on the direction of market movement using years of experience, scientific and mathematically derived analysis as well as an understanding of market mechanics, business and the economy. This is a far cry from a gambling junkie trying to Martingale himself out of a hole on the spin of a roulette wheel or turn of a card on the blackjack table. Risk management is also not betting your whole account, or a large portion of your account, on one trade. Only the rankest gambler would bet their whole stake, or a large enough portion of their stake to wipe them out, on one trade.
In the end it is not what gambling has in common with Binary Options, but what Binary Options have in common with gambling. Or rather, how Binary Options, like any other speculative trading vehicle, can be used for gambling. If I have said it once, I have said it a hundred times, it all comes down to your approach. If you are randomly trading on super short time frames without using technical or fundamental analysis and making trades of variable size, then you are most probably a gambler, or at least gambling. If you are making informed decisions based on sound analysis techniques and managing your losses then you just might be a market speculator.