With binary options currently occupying the weird interstitial space that they do between trading and gambling, we thought it important to create this article in order to highlight some of the risks, as well as some of the ways in which binary options differ from traditional investment vehicles.
Now of course market traders will tell you that the essential difference between trading and gambling is that the future price action of an asset is not a random walk. In other words where the price has been contributes towards where the price is due to go. This is especially true for traders who focus on technical analysis. But even fundamental analysts will accept that there definite connections between historical and future price movements.
Nevertheless, with the markets being so complex, with such a bewildering number of cofactors converging every time a security moves up or down by a pip, for all intents and purposes, on the traders end at least, despite whatever type of analysis is being employed and regardless of the trader’s “system”, a trader can never be certain of the outcome of a trade. If traders could do this then, for all intents and purposes, there would be no markets. This is why trading is such a tricky territory; there are factors that prevent the outcome of a trade being solely determined by random chance, but there are so many of them and the relationships between then are so complicated that it may as well be random.
There’s an interesting correlation here between trading and games like poker. Any poker player worth his salt will tell you that poker is completely different from other random walk type gambling pursuits such as roulette. Of course randomness comes into play and figures heavily, but it is what you do with that randomness that actually determines how a hand of poker turns out for you. Similarly traders are constantly dealing with a moving price that may seem random, but is actually determined by the collective sentiment of all the traders who are participating in that certain market. The way a trader locks in a trade (i.e the moment of entry and exit, the investment amount, the technical indicators used and the overall reading of market sentiment) amounts to a very peculiar similarity between what is typically regarded gambling (e.g poker) and what is given more credibility as financial trading.
With binary option this is exacerbated even further by the necessary disconnect between the trade itself and the asset being traded on. Binary options are derivative instruments, meaning there is no connection between the trade you place and what is taking place at the exchanges. You are not purchasing units of the asset you are trading on, you are merely speculating on where they will go. While this provides a level of security in that you are not as connected to the fortunes of a given asset beyond the amount of time that has been set for your trade, it also means you are completely separate from them. A simple way to explain this would be to explain that no-matter how much money you invest in a binary trade, your trade does not influence the value of that asset as it would if you were actually purchasing it. So even though it’s certainly not a random walk as explained above, when you’re sat in front of your screen deciding on whether to Call or Put, there is not a tremendous difference between doing this or choosing Red or Black on a roll of the roulette wheel.
Also the perceived respectability of trading as opposed to gambling can work as a kind of false sense of security for traders who are clearly addicted, but are prevented from acknowledging this fact because as far as they are concerned they are making educated trades rather than gambling. Generally we have found that traders are far harder to convince that they have a problem than gamblers who, in many ways go in with their eyes open. Binary traders, for the reasons explained above, are particularly at risk. Especially with things like 60 Second options that provide feedback so quickly and can become extremely addictive over time. We’ve personally seen entire trading accounts wiped out in one 60 Second trading session by traders going in over and over again. And with a trade time that is so short it is far harder to make a convincing case for these types of options being anything other than gambling and down to random chance.
Whatever your position on the above you would do well to keep close tabs on your psychology while trading. Excessive trading should be a phrase that is constantly on your mind.
Are you trading excessively?
Are you running after losses, trying to claw them back by risking progressively more of your risk capital?
Do you find yourself attributing your successes to your own proficiency and blaming your losses on external factors? (This, by the way, is known as self-deluding attribution bias, learn all about it!).
Are you less than honest about your success rate and profits when discussing your trading activities with friends and family?
Do you feel a nagging sense that you are missing out if you fail to trade on a certain event?
Have you gone any days recently without placing at least one trade?
All of the above suggest a nascent addiction to trading binary options that should be addressed immediately. This may sound a little overly dramatic to some people but in the interests of full disclosure and accountability to our readers we feel it is incumbent on us to address this issue. We’ve heard too many stories and seen too many cases ourselves to overlook this darker side of the trading game. To this end we provide you with the following lists of further resources if you are at all concerned that your trading activities may be getting out of hand.
If you need to talk to someone about any concerns you may have with your gambling then contact one of the appropriate organisations, whose details are listed below:
- Gamblers Anonymous: www.gamblersanonymous.org
- GamCare: www.gamcare.org.uk
Also with the newly added blog section of the site we encourage you to share some of your experiences with us, all posts will be fully credited and shared with binaryoptionswire readers.
Thanks for taking the time to read this article.
