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Binary options - gambling or investment?

Binary options - gambling or investment?

created Paweł Mosionek18 February 2018

Is binary options an interesting instrument? It is said that every investment carries a risk, and you can make gambling out of every investment. So what's the case with binary options? Can this financial product be called an investment instrument at all or is it closer to a casino-like game? The answer is not clear.

Gambling or investing?

The construction of binary options partly suggests the second answer, because mainly our actions are limited to the up / down direction, and the scale of the movement itself is no longer significant. So it's like betting on black / red. But it's worth defining what gambling is first.

Hazard - all cash games where the win is to a greater or lesser extent determined by chance. The word "hazard" comes from the Arabic language: "az-zahr" means "dice", "game of dice". In English, it literally translated means "danger", "risk". - source: Wikipedia.

Simplification of this definition to state that "Everything that comes with risk is gambling" would be an abuse because it would mean that we've been growing it since birth. However, if we translate this into a statement that it is a game of chance in which mainly the case decides about the profit or loss, it turns out that it is only up to us whether we should call trading on gambling options.

If we launch the platform and without thinking for a long moment, without using any strategy (which of course has been tested to some extent before) and even without analysis, we choose the rate, and then click Call or Put, then without a doubt - we're gambling.

However, if we are guided by a certain, well-thought-out scheme of action and we make informed decisions based on certain logical premises using risk management, this is this is an investment.

After all, exchange rates depend on the decisions of investors around the world. Algorithms, exporters and other enterprises are also added to this. So it's hard to say that the moves on forex are dependent on randomness and compare the exchange rate change with the dealer's throw roulette ball. Of course, it is not a simple task to figure out what will happen on the market but it is not a coincidence.

Capital management and binary options

Binary options allow for very good capital management and effective risk reduction. In the end, we can lose the rate we set, which can start from just PLN 1 per transaction. This gives you the opportunity to make effective Money Management even with a small deposit. We also don't have to worry about ours Stop Loss will not be implemented or it will be implemented with a slippage. This inevitably excludes the creation of an overdraft on the account. Sum up, we will not lose more than "we want".

Nevertheless, our profit is also limited (70-90% of profit), and additionally there is an option premium, so you should approach it with your head.

Depending on the probability assessment of the success of our transaction, we should choose a given profit / loss ratio. It is equally important to stick to the principle of not risking in a single position more than X% of our total capital. With the binary options assuming that we are investing a fixed rate all the time, we must have over 50% efficiency, therefore, making it more flexible, determining the maximum loss and assessing the probability of a profit from a particular position may be decisive in terms of our earnings.

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About the Author
Paweł Mosionek
An active trader on the Forex market since 2006. Editor of the Forex Nawigator portal and editor-in-chief and co-creator of the website. Speaker at the "Focus on Forex" conference at the Warsaw School of Economics, "NetVision" at the Gdańsk University of Technology and "Financial Intelligence" at the University of Gdańsk. Twice winner of "Junior Trader" - investment game for students organized by DM XTB. Addicted to travel, motorbikes and parachuting.