Binary Options: Trading or Gambling?

binary-options-tradingTo better answer this question of almost all new binary traders, we should first understand what gambling and trading mean.

Gambling Definition

Different definitions in online dictionaries tell us that gambling is when “you take a risk on something that can give you important benefits”, “to bet on an uncertain outcome” or “to play a game of chance for stakes”.

All in all, there are two crucial aspects that define gambling in the financial world, which are to “risk money” on “uncertain outcome”. Therefore, in a situation that chance is involved and you stake money on it, you are taking part in gambling.

Then when we look at financial market prices, we can see that besides a deterministic component, all of our pricing models include a noise component. This unpredictability, measured by statistical terms such as volatility, standard deviation or variance, is basically the ‘chance’ component. We can find it in every pricing model: Black and Scholes options, balance sheet forecasts, mortgage securities models and many more. So, is chance involved in financial market prices? Definitely, YES.

We can also look back at the history of probability, which is the base of modern financial models, to see that even from the start the ‘chance’ element has been a major influence. Just as the founder of probability, Pascal Blaise, used situations in card games to develop his theories, all asset prices are games of chance.

Trading Definition

What about trading? The definition on dictionary reference.com tells us that trading is ‘the act or process of buying, selling, or exchanging commodities, at either wholesale or retail, within a country or between countries’, which we consider as the most general way to understand this term.

However, in financial assets trading, the act of ‘trading’ should be more specifically understood, as on thefreedictionary.com, as ‘to engage in buying and selling for profit’.

Trading vs gambling

In reality, the definitions above might not completely cover what people really think about gambling and trading in binary options market. As the existence of ‘chance’ and risk is emphasized in gambling, just as when you bet on the result of a game of dice you have no way to know which side will show up, it is considered as a bad way to play with your money. On the other hand, people often associate trading with more thinking and strategy, creating an image of a more professional activity to make earnings.

To put it in another way, the difference between the two activities in both the common sense and specialists’ opinion is best understood as:Binary gambling is making random purchases of binary options as when betting on a coin flip or a game of roulette; while binary trading is also buying binary options but with rational thinking and information-based predictions on future prices while optimizing the returns.

It’s not the same as saying we shouldn’t gamble, but most of the time that’s not what traders do. Because as soon as you enter the binary options market and have an interest in making a profit from these products, you will want to know all about the financial markets and asset pricing so as to invest your money in the right way. And you don’t want to gamble or stake your money on pure luck.

With the availability of digital options, those who are interested in the most recent market news and events and like to evaluate the financial markets situation have a great advantage in binary options trading. By making their own predictions on market prices’ future movements, they also make unique trade decisions. So, what will you do: gamble or trade?

see also Binary Options Or Blackjack?

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