Is Binary Options Gambling?

Any form of trading can be gambling for those with a careless approach, and binary options are no different. In fact, this straightforward derivative has developed such a reputation as a game of chance that in the UK it is often considered a form of fixed-odds betting. This is an easy-to-understand financial product in which profit is made or lost depending on the trader’s answer to a simple, binary question: will the price of an asset rise or fall by the end of the contract? As such – and with some turbo contracts lasting only a few seconds – many liken binary options to betting on red or green at the roulette table. But it is key market forces, and not the luck of a spinning ball, that determine the outcome.

This article will cover both sides of the binary options gambling debate, providing an analysis of their legal status, and detailing strategies you can use to minimise risk when trading binaries. Read on to find out whether binary options trading is gambling or not.

Binary Options Basics

To understand whether binary options trading is gambling, you first need to understand how a binary trade works…

A binary option is a contract where a trader predicts whether the value of an asset will rise or fall by a predetermined time. If the prediction is correct when the contract expires, the option is said to be ‘in the money’, and the investor will earn a payout that equals a percentage of their stake. If the trader predicts the price movement incorrectly, they lose their entire stake.

For example, if a trader feels sure that the FTSE index will fall over the course of a day, they could stake £100 on a put binary option with a 4-hour expiry time and a 60% payout.

When the contract begins at 12:00, the FTSE is at 6937.25 – this is the strike price. At the expiry time at 16:00, the price has fallen to 6937.10.

Since the trader predicted the price movement correctly, they will get their £100 stake back plus £60 profit. If the price had risen, the entire stake would be lost.

This is a straightforward trade that hinges on a yes or no question. But there is a great deal of variety to the types of binary options contracts on offer, including ‘one touch’ contracts that require the asset’s price to reach a certain level at any time by the expiry, ‘boundary’ contracts in which the price must remain within a certain range for the trader to earn a payout, and more.

Likewise, expiry times range between seconds and months, and each contract length will require a distinct strategy. And since binary options trading and gambling is available on a wide range of asset classes, including stocks, commodities, indices, forex and cryptocurrency, traders must also take into account the different dynamics at play in different markets.

In other words, binary options may seem simple, but there is a great deal of sophistication to be found under the bonnet.

So, why do many consider binary options a form of gambling?

Is Trading With Binary Options Gambling?

Some say that the business of trading binary options is indistinguishable from gambling, as you are essentially placing a fixed odd bet on a certain outcome. You are not buying the underlying asset, and you will lose your entire stake if your prediction is incorrect. Additionally, since binary options brokers are unlikely to offer a 100% payout, the statistical likelihood of making money through binary options over a long period of time is arguably low.

To turn a profit trading binary options with a 70% payout, a trader will need a 59% success rate in their trades in the long run. Since some binary options brokers charge additional fees, that rate could be even higher.

One danger with binary options is that their simplicity can attract inexperienced traders who have not developed risk management and technical analysis skills. If someone opens a binary options trade based simply on their feeling, and not on an informed view of market movements, then this is no different from gambling.

Those who stake excessive amounts on each trade are similarly leaving their fortunes to fate, since risk management is a necessity if you are to make a sustainable profit.

Binary options have also been associated with unscrupulous brokers who profit from losing trades and either set traders up for failure or perpetrate outright scams. This is why many regulators such as the UK’s FCA department and board consider this derivative to be a form of gambling, and many have banned local brokers from offering it to retail clients.

However, a binary options trade is not a simple roll of the dice. Some traders consistently make a profit from this derivative, and knowledge, analysis and strategy play a role in even 30-second turbo trades. In this regard, risk management is crucial, and when you are making a prediction on the price of an asset, it is important to have deep knowledge of that asset in particular, and how it tends to behave. If you can combine this knowledge with a killer investment strategy you can make winning binary options trades consistently enough to make a profit.

And in a sense, any trade is a form of gambling. No investment – even in the bluest of blue-chip stocks – is guaranteed to pay out, and in any derivatives contract, the trader is placing a bet that a market will move a certain way. What sets binary options apart from gambling is that market knowledge, technical analysis and risk management techniques allow disciplined and careful investors to make money in the long run.

Binary Options UK Regulation

As mentioned above, a number of regulators in major jurisdictions take a dim view of binary options, and in recent years the promotion and sale of binary options by locally-based, regulated brokers has been banned in the UK by the Financial Conduct Authority (FCA).

The ‘by the book’ view of the FCA is that the short-term nature of investments in binary options can produce a similarly addictive response to that of engaging in gambling, while there have also been concerns raised about fraudulent activity in the binary options market.

Binary options have also been prohibited or face upcoming bans from the European Markets and Securities Authority, Australia’s ASIC, Germany’s BaFin, and many others. These regulators have blacklists of brands plus key binary definitions explained.

As a result, traders in the UK should take great care when choosing binary options brokers and thoroughly research all their options. They can still sign up with offshore brokers, and some of these may be regulated by an alternative financial authority. At the same time, reviews by users and reliable market websites will also help traders find trustworthy and reputable brokers.

Pocket Option, IQCent, and Focus Option are among the most popular and reputable binary options brokers available to UK traders. Choosing a trustworthy brand with reliable tools will help you approach binary options as a legitimate form of trading versus gambling or betting.

Note, avoid firms that promise guru winnings without investments, an easy to use, zero-lose strategy or that offer to make you millionaires by playing a simply binary options game. Brands with a quick registration and unclear withdrawal structures may also be red flags. The top firms will allow you to ask questions about key rules, terms, problems, and taxes. They will also provide free pro signals, profit calculators, reviews of robot downloads, investing rooms, asset picks, rich exchange data with graph analysis, plus a help hotline in case you get hacked, meaning hopefully prompt recourse.

Binary Options Strategies

To avoid gambling behaviour, it is also important when trading binary options to make use of careful and thought-out strategies to boost your chances of beating the odds and making money from your investments.

A useful first step for anyone looking to start trading binary options is to download a demo account and test your strategies with paper trades. With a demo account, investors can get a feel for the assets, test their understanding of signals, and fine-tune strategies to place accurate and profitable predictions. They can practice and modify their approach as much as needed and track their success rate to see whether it is working.

Many traders also spend time learning methods for technical analysis which they feel gives them an edge when predicting price movements. Some, such as Keltner channels, use volatility to assist in predicting price movements. Other methods, such as the ZigZag strategy, use the price history on charts to define support and resistance areas, which can be useful for understanding when a trend is likely to reverse.

Some binary traders also use wallet management strategies to preserve their capital. One example of this is the ‘martingale’ approach, in which investors double their stake after losing a trade in an effort to recoup losses.

Traders should spend time researching different approaches and practice all such strategies in a demo account until they are confident they can use them effectively in real-life trades.

Verdict – Is Binary Options Trading Gambling?

Whether you see binary options as gambling or not depends on how you approach it. Binary options ask traders a question with only two possible answers, but since the payout is lower than the money staked, this doesn’t mean you will break even in the long run. If you staked £1 on a coin toss and only earned £0.85 for a correct answer, this wouldn’t be a wise trade as you would certainly lose money in the long run. In the same way, while there are only two possible outcomes from a binary options trade, staking money on a price movement at random or based on weak analysis will lose you money in the long run, as it allows the broker or platform to take home most of your money.

But fortunately, a binary options trade is not the same as a coin toss. You can even the odds by learning technical analysis skills, having a deep knowledge of the assets and markets traded, closely following current news events and implementing a carefully researched strategy with discipline. Thus, even though regulators may class binary options as gambling, traders with a clear strategy and the discipline to carry it through are not leaving their fate to chance.

Use our guide for binary options beginners to get started.

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