Binary Options Trading – Is it Gambling?
The Binary Options Craze
The most recent craze in the trading world for a while now is with Binary Options, I see and hear about them all the time and am forever getting emails promoting them. The first thing that stood out to me when I looked in to them years ago was that, beyond trading, you had to assign a time to your trade. The next thing that stood out to me was that the risk:reward on them was absolutely terrible. Adding these extra elements to the already challenging job of trading makes Binary Options as close to gambling as you can get. In this article I want to help you understand all the pros and cons, then explain my Binary Options Strategy that is proving to be profitable regardless of these extra additions of time and bad risk:reward.
The Binary Options Attraction
Firstly I would like to address the attraction that Binary Options have for many newbies. When it comes to executing trades there is no question that Binary Options are the easy solution. The trading platforms that come with a Binary Options account provide you with 1-click actions to place trades and then they just expire after X minutes, or hours, and that’s it, very easy and not much to learn. This is much easier than learning the ins and outs of MetaTrader4, or NinjaTrader, and all the tools that you are going to use with them. This unfortunately makes people think that trading will be easy and makes it very easy to be a pure gambler. The reality is that no matter if you wanted to trade SpotFX or Binary Options you will still need to learn how to read price action. Don’t get all excited about how easy it is to execute trades before you learn how to pick them!
The Forex Trading Basics and Forex Trading Strategies sections of this website are still a must read for anyone wanting to attempt Binary Options. Knowledge is your weapon here so don’t try and fast track. Although the trading platforms of Binary Options trading are easier to learn and use than something like MetaTrader 4, I strongly believe that if you can’t trade SpotFX profitably then you probably can’t read price action very well and you will be just another Binary Options gambler about to lose his/her money.
The Binary Options Downfalls
When it comes to trading professionally you won’t find many traders that don’t implement a good risk:reward strategy in their plan. This brings us to our first problem with Binary options because most Binary Options brokers will only offer you a well below a 1:1 risk:reward, usually a 65-75% return. So if your risk is 100% of your investment, and when you win you only get 100% + 65-75% back, then you are clearly below 1:1 on the risk:reward scale. This fact was enough to originally turn me away completely but I have since found a Binary Options Broker that offers up to 100% returns, sometimes even more, sometimes less. All in all though it is a better average return than any other Binary Options Broker I have seen, visit them using the link just below.
The next problem with Binary Options is having to predict how long a trade will take. When trading SpotFX I don’t even care about how long the trade will take AND I can often get much better risk:reward than just 1:1. You can see how these first two problems with Binary Options start to make them more and more like gambling when compared to standard trading.
Where Binary Options Make Sense
As a professional trader of the Forex Market, without the limitations of assigning time to my trades and having to accept bad risk:reward, I can tell you that anything from the 5 minute chart up to the daily chart can be traded more effectively without Binary Options. Furthermore trading with a higher than 1:1 risk:reward is quite common and the better the risk:reward the lower your winning percentage can be to still be profitable. I mean, if you can predict a market move on the 5 minute chart or higher then you will often be presented with 1:2, 1:3 and even 1:4 risk:reward trades. This fact alone makes Binary Options a completely illogical way to do things. Now, the 5 minute chart will be pushing it for most people as it requires a high skill level, but even the best of traders will have a hard time trading any faster than that due to the spread which is usually 1-3 pips. This spread is non existent on Binary Options which makes its only use, in my eyes, to be for really fast trading. Unfortunately the faster you trade the more skill and experience is required so you are still not going to get any fast tracks here. Make sure you learn how to trade and read price action before you even consider Binary Options, it’s the smart thing to do.
A Simple Binary Options Strategy
A quick bit of my history to get this started; I used to play black jack at the casino in a very controlled methodical way and was very successful with it, I’m sure no one will agree with me that black jack is not gambling so let’s just call it gambling. We will also need to call Binary Options gambling though because my approach is not that different from what I did with black jack. With black jack you can use simple math by applying a martingale approach starting at the table minimum until you reach the table maximum. That will show you how many times in a row you need to lose in order to really lose, every time you win you reset back the table minimum and start again. It is that table minimum that you will always profit every time you win even if you win after losing 4 in a row.
For example, risk $5 = loss, risk $10 = loss, risk $20 = loss, risk $40 = loss, risk $80 = win.
Total lost is $5+$10+$20+$40 = $75, total won = $80, profit = $5, and then you start again. Boring but simple.
The fact that the dealer must draw at 16, hold at 17, and show you his first card along with a little counting, gives you a way to put the odds in your favor and keeps the odds of losing too many in row very slim, this is your advantage. Casinos don’t like this though and they will kick you out if they see you doing it too many days in a row so be warned.
Now with Binary Options the same idea can be used on the math side and the advantage comes from your ability to read price action. If you don’t know how to trade yet or how to read price action then I suggest you learn or you will only be able to use the math and not the advantage. With the Binary Options Broker I am using I just select what payout I would like and that number has the risk and the return all included in it. If you use any other Binary Options Broker then they all seem to just have you put in how much you wish to risk so I will explain in that way for now. The math side of my Binary Options Strategy is to have an initial risk of $25, if lost it goes to $61, if lost it goes to $148, if lost it goes to $360, and if lost then it is game over for the day (This is like setting your own table minimum and maximum).
Since the returns with my current Binary Options Broker are always fluctuating the other part of the strategy is to make sure you only place trades when the returns are 70-100% in order to make this work. When using a Broker with a fixed return percentage then just make sure that number is 70% or higher. If the trades were all based on the worst case 70% minimum payouts then this is how it will all play out. $360+$148+$61+$25=$594 and that is your maximum risk per day. It is more common that the payouts are in the 90-95% range but we need to base everything on the worst case scenarios. Now, if it is possible to lose $594 on a losing day then you need to make sure you win around that same amount on a winning day. Without boring you with more math you need to win 30-35 trades per day to do that, sounds like too many but I have been doing this with 1-3 minute options and 30-35 trades is 3 focused hours. Now remember, you have to lose 4 in a row to lose and if you lose a day then you need to win a day to be around $0 again. This means that you need to win 4 days out of 5 each week for a profit of roughly $1782 per week, if you win 5 days out of 5 then you have a profit of roughly $2970, and it you win 3 days out of 5 then you will only have a profit of $594.
With the correct education on how to read price action you will find it quite hard to lose 4 in a row, I have not yet done so but I don’t assume that it won’t happen. Once you prove to yourself what you can do and have results to act upon you can move your numbers up a notch and use $61, $148, $360, $813. This would put a full losing day up to $1382. Your weekly salary winning 5 days out of 5 would now be $6910, winning 4 days out of 5 would now be $4146, and winning 3 days out of 5 would be $1382. The payouts are higher but the risk amount is also higher. Only you can decide where you want to start on this ladder.
The Numbers With and Without Return Included
As I mentioned above; most Binary Options Brokers just require you to input your risk on any given trade and so that is represented in the “Risk Size Only” column below. If you are using the Binary Options Broker that I recommend in this post then you will need to use the “Risk+Return Size” column. Furthermore when using this type of Broker you will need to make sure that you never take a trade with a below 70% return. Most of the time you will get an 80-95% return and this is all bonus money that lowers the “Wins Needed” row.
|Min. 70% Return||Risk Size Only||Risk+Return Size|
|Losses to Lose||4||4|
Get a Binary Options Demo Account First!
Most Binary Options Brokers don’t even offer a demo account. That to me is unacceptable and a big red flag to their practice as a company, do these people really just expect you to put your hard earned money in and deal with any learning curve at a cost to you? You should have your own rule of “no demo account, no customer” when choosing your Binary Options Broker. My recommendation for your Binary Options Broker is just below.
Is Your Binary Options Broker Regulated?
As I dove deeper in to the world of Binary Options I found more scams than I could count, so many of these companies are not even regulated and scam reports are high. You owe it to yourself to make sure that the Binary Options Broker you choose is at least regulated and your funds are as safe as they can be. Once again I have my recommendation for a regulated Binary Options Broker that also offers a demo account just below.
If I am able to see consistent profit with Binary Options for several months and have no issues withdrawing funds every week I will report further. This will probably result in a whole new section of this website to explain everything I have outlined here in extreme detail. Just remember that without the ability to read price action correctly you will be losing the amount of probability you can have in your favor. The Forex Trading Basics and Forex Trading Strategies sections of this website are still your start point if you want to minimize the gambling.