The binary options market is one where the trader can gain or lose depending on the asset ending in one of two possible scenarios. The fact that trade results are all or none encourage some traders to take risks by guessing trade directions or using maximum risk in trading. This is why in some quarters, binary options has been compared with gambling.
The question of whether binary options trading is an exercise in gambling or not is a difficult one to answer. It will depend on the examination of a number of factors, especially the trader’s bet size. To gamble means to try and achieve an outcome or a result on the basis of pure luck or on the basis of chance.
Binary options trading is not supposed to be an exercising in gambling, but if you carry out bad practices in the binary options market, then what you are doing is sheer gambling and not trading. You don’t want to turn into this guy…
a) Trading Run Bets
Run bets are a kind of trade contract on the trading platform of Betonmarkets. There are four run bet variations on that platform. There is a run bet that promises the trader a payout that is double the invested amount for a correct prediction of the market ending either up or down after 5 ticks. There is another version of the run bet that promises the trader 10 times the invested amount if the price of the asset ends on a particular digit from 0 to 9 after 5 ticks. There is yet another trade that promises a 10% payout if the trader can predict that after 5 ticks, the last digit of the price will not be the selected digit. Now let us examine the run bet very carefully. There is a variation that is essentially paying the trader 10 times the amount invested in the trade for an outcome that can only be correct 1 out of ten times. This means tha the odds of failure in this trade is 90%. Why would a trader decide to trade a bet type where the odds of failure are so heavily stacked against him? If this is not gambling, what is?
b) Trading the 60 Seconds Option
The 60 seconds option is a trade type that promises a payout to the trader if he is able to predict (or “gamble”) accurately on whether the price of the asset will end higher or lower in 60 seconds. In actual trading practice, there is no way for a trader to accurately analyze the behaviour of an asset in 60 seconds. So if a trader is trading the 60 seconds binary options contract, he is actually gambling on the outcome of that trade. Yours truly tried it and never got beyond a 20% success rate, which by trading standards, is low.
Another factor that weighs heavily against the trader is that some brokers actually manipulate prices so that the 60 second bet either ends in a loss or at breakeven point. There have been occasions where the writer has witnessed a trade that should have ended at breakeven point judging from the pricing of the asset on other platforms, but which were tipped into loss territory in the very last second. This is akin to the stop hunting practices which many dealing desk brokers in the forex market have been accused of. If the trader is trading an option type where the outcome is not very transparent most of the time, then trying to profit from such a trade is nothing short of gambling.
c) The High Yield Options
Some of the high yield options include the High Yield Touch and High Yield Boundary bets. These contracts promise very high payouts for correct trades. But the question is: why would brokers seemingly want to pay you up to 500% of your investment as if they have nothing else to do with money? The truth is that the brokers know that the conditions for such trades will never favour the trader, so they use the payouts to tempt greedy traders into parting with their hard earned money. Brokers are in business to make money; they are not charity organizations.
d) Trading Without Analysis
Perhaps the worst trading practice which constitutes gambling in the binary options market is trading without analysis. Most binary options brokers do not provide charts or technical indicators or even news trading tabs for traders to analyze the markets. Traders then have to depend on the rudimentary tick charts that are provided on most platforms. One common mode of trading that seems very widespread is taking a hunch trade based on the tick information seen on the broker platforms. Traders must download interactive charts from trading platforms in the commodity or forex markets and use same for analysis. Any other mode of analysis is simply guesswork and is an exercise in gambling.
So we can see that there are some situations that will present binary options trading as some sort of gambling exercise and not as a pure trading venture that it is supposed to be. But we can also see that if the situations that force traders to gamble as opposed to trade are removed, the gambling element will also be taken off from the equation.
In summary, here are ways to take away the gambling element from binary options trading:
a) Never trade the ultra-short expiry speculative contracts. By this, we mean bets such as the run bets, 60 second options and High Yield options.
b) Always analyze trades with the proper tools before entering the market.
Treat binary options as a financial market and not as a Vegas casino, or else you will be made to part with all your money.
Other useful posts on how to minimize risk:
- Mifune on Money Management
- Mifune on Money Management II
- Mifune on using a hedging strategy when trading binary options
- Lotz of Botz on how to protect yourself from going bust