If you are still hesitant whether binary options are gambling or trading, then you should read on.
At this moment, binary options are a hot topic. There are plenty of half truths out there, and conclusions are being made based on a lack of knowledge rather than understanding.
We will cover how you can distinguish gambling from trading and determine whether your trading is a financial instrument.
Gambling or a financial instrument?
The Merriam-Webster dictionary defines gambling as “betting on an uncertain outcome.” Based on that, wouldn’t trading with any financial instrument be considered gambling according to this definition? Well, it is if you are just looking at the outcome of one individual trade in isolation.
On the other hand, if you are trading in a system that has a positive expectation, then the result of a large enough number of trades is not unsure any longer – you will make money!
We would like to offer a different, more novel approach to understand the nature of gambling and trading.
This approach is based on looking at the nature of the “instrument” that you are trading with.
- What are you are trading?If there is no developed system that has a positive expectation, then you are gambling.
- How are you trading?If you trade any financial instrument with no strategy that has a positive expectancy, then you are gambling as well.
Let‘s look at a couple of examples to see whether you are gambling or trading.
You play the slot machines in a casino – this is gambling as the odds favor the slot machines. Play long enough, and you are going to lose. The casino always wins.
Trading an option system that has a positive expectancy – this is trading and not gambling because over time you are going to make money even though you don’t know the outcome of one trade.
Trading a stock system that has a positive expectancy – this is gambling since you are not sure whether you will make money over time. In this example, you can see that while you are “trading” a financial instrument, the act is still considered to be gambling.
The dilemma could be settled with the expectancy type
To deal with the issue as to whether binary options are trading or gambling, you must methodically look at each category of binary options and then make a decision whether you can develop a system that will have a positive expectancy.
Trading binary options through an OTC broker is also gambling because the broker is on the other side of each of your trades. The odds are in the broker’s favor because you can only be the buyer of binary options. You can buy, put or call. If you win, you profit less than what you have risked.
For example, with most binary options brokers, you can make 80% return. This means that you will have to risk $100 to make $80, and if you are right 50% of the time, you will actually have a negative expectancy. On the other hand, the broker will have a positive expectancy.
The only way to make money is to develop a system of trading that will increase the percentage of winning trades to a degree that you will have a positive expectancy, even with less percentage of return.
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