If you’ve been involved with online trading you no doubt know just how much of a euphoric experience it can be. But the thrill, the excitement and the buzz that comes with trading on the financial markets can be all too enjoyable for some, and if allowed to run out of control, online trading can become an addiction just like real life gambling or drugs. The destructive behaviour that follows the formation of an addiction can cause those affected to lose their jobs, relationships. Not to mention the damage it can do to their finances.
Binary Option Vs Gambling
Unfortunately, or fortunately, Binary Options have a lot in common with gambling. That is why Binary Options get so much flak from the mainstream investment world. The thing is, whenever you point your finger at someone else you have three fingers pointing back at you. Traders can gamble on stocks, bonds and commodities. Gambling, like beauty, is in the eye of the beholder. It all comes down to how you approach your trading, what drives you to trade, how you make your decisions and if you are able to sleep at night. The difference between gambling and trading has nothing to do with the vehicle. A desperate person can make a risky as hell gamble on market direction using stocks, options, futures or forex just as easily as he can by using Binary Options. What the media won’t tell you is that when you trade with Binary Options, your potential losses are way way less than if you were gambling in a $25,000 minimum margin account trading spot futures.
How Gambling Relates to Trading?
Before I begin to expound on why Binary Options are and are not gambling, lets dig a little deeper into what gambling is, and how it relates to investing, trading and speculating. By definition, gambling is the wagering of money on an event of uncertain outcome for the purposes of material gain. In order for gambling to occur three conditions must be met. First, there must be some consideration, i.e., the money you put down. Second, there must be some form of chance involved, IE the toss of the dice, turn of a card or direction of market movement. Third, there must be some reward or prize given, otherwise there is no point in the activity. To extend this definition to gaming, gaming is gambling allowed by law. The key word in this definition I think is uncertain, the wager is on an event with an uncertain outcome. There is some uncertainty with Binary Options so they have that in common.
Moving on to investing, the definition here is an item or asset purchased with the intent of making wealth or creating income. When you invest you are actually buying something such as a stock that pays a dividend, goods or inventory for future sale or a factory where you produce something of value. In the financial sense investments include stocks, bonds, mutual funds and other tangible assets that provide income or have a reasonable expectation of appreciation such as real estate. The key is that an investment has tangible, inherent, value, whereas a gamble has no value. Binary Options are not an asset in the sense of investing. When you buy a binary position you gain no inherent value, you do not control the underlying asset, so binary also has that in common with gambling.
Trading is the actual exchange of money for assets or positions. This can be for bonds, gold, oil, stocks, indices or Binary Options. When you give money for a position, or accept money for a position, you are trading. Everyone who participates in the market is a trader. An investor makes a trade when he buys shares of stock XYZ. A speculator makes a trade when he shorts oil or buys a call option on the Dow Jones Industrial Average. The big difference between the two is expectations. The investor knows that it will take time for his investment to pay off and it is the pay off over time that he is looking for. The speculator is looking for a quicker buck and will get out of a position if it doesn’t move fast enough When you make a binary trade you are putting money down for a position, this position can be a short or long term speculation but is not an investment. In this case Binary Options are like trading, but at the same time also, like gambling, because a gambler will also “trade” money in exchange for his “position”.
Speculating is where the lines between trading, Binary Options and gambling get really confused. Speculation is the act of trading or investing in the market in such a manner as to appear to be gambling. Speculators use derivative investment vehicles like options to try for big gains while limiting losses. This can be as simple as opening a position with a tight stop loss or as complicated as in depth fundamental and technical analysis couple with sound money management techniques. It can also be very risky, or very safe, it all depends on how you approach it. A gambler can make no analysis of his market. You may say he could count cards or use some other such mathematical probability, but the gaming houses frown upon that. I never heard of any trader, investor or speculator getting his fingers broken for counting a moving average or trading on a support break. So, in terms of Binary Options, a speculator will use analysis to make a trade whilst the gambler will just make a trade.
Connection between gambling and trading
Research has shown that there isn’t much of a difference between the mind-set of a compulsive gambler and an online trader, both of them deal with high-risk products that have the potential to make or break their lives and careers. The ways of thinking and deriving pleasure in both of these addictions is also very similar, but while the former is easy to identify and convince for rehab due to the stigma attached to it, the latter largely goes unnoticed until it’s too late.
The treatment of investment addicts is more complicated than usual. This is because while a an obsessive gambler or a drug user might at least think that he is addicted to his habit, convincing an online trading addict that he has a problem remains the biggest challenge. As per their logic, they see their trades 00 no matter how consistently detrimental they’ve been in the past — as an investment. In fact, they’re told that suffering heavy losses is a part of their education. As their losses grow, their appetite increases and the situation goes from bad to worse.
In 2006, the Institute for Social Research at York University conducted a survey and found that 2.8 per cent of Canadian gamblers had also engaged in high-risk trading over the Internet in the past 12 months.
Robert Williams, a professor at the University of Lethbridge, is of the opinion that problem trading among investors has existed for a long time but technological advancements have facilitated it and made it worse than ever. Online traders today feel they are smarter and more capable of beating the market than others. What leads them into taking such a high opinion of their own intelligence? The easy availability of a vast variety of market information is what gives traders the feeling that they have an edge over their peers. Add this to the constant advertisements and marketing on the Internet by trading companies and the traders’ confidence grows even higher. There are absolutely no barriers to entering the market these days. Brokerage houses lure traders of any age, experience and capital into the market under the false pretences of an easy profit. While they lose, chase and develop an addiction, the big companies grow richer.
How Is Binary Options Like Gambling
Binary Options is like gambling in a couple of ways. It is, however, also a form of trading that can be used for speculating the markets, which is not gambling. Like gambling you are putting down your money on an event of chance. Like gambling you are doing this for the purpose of gaining a payout and like gambling you are not creating wealth, merely profiting from an outcome. Like gambling, Binary Options can be approached with risk and without a plan. It can also be approached as a speculation using analysis and management. Management is the key to successful Binary Options trading and speculating and it comes in a couple of forms.
What do you need to manage risk? Going back to the definition of gambling and the word uncertain. Uncertainty creates risk for you as a trader. The very best trades and traders are not betting on events of uncertain outcome. They are speculating on the direction of market movement using years of experience, scientific and mathematically derived analysis as well as an understanding of market mechanics, business and the economy. This is a far cry from a gambling junkie trying to Martingale himself out of a hole on the spin of a roulette wheel or turn of a card on the blackjack table. Risk management is also not betting your whole account, or a large portion of your account, on one trade. Only the rankest gambler would bet their whole stake, or a large enough portion of their stake to wipe them out, on one trade.
In the end it is not what gambling has in common with Binary Options, but what Binary Options have in common with gambling? Or rather, how Binary Options, like any other speculative trading vehicle, can be used for gambling. If I have said it once, I have said it a hundred times, it all comes down to your approach. If you are randomly trading on super short time frames without using technical or fundamental analysis and making trades of variable size, then you are most probably a gambler, or at least gambling. If you are making informed decisions based on sound analysis techniques and managing your losses then you just might be a market speculator.
Destructive Behavior of Traders, as it can be seen in Gamblers
Meanwhile, the losing trader’s mind justifies every bad trade, terms it as a misstep and an anomaly, with the promise that the luck would soon change and profitability will follow. Don’t get us wrong, if you know what you’re doing then this is an industry through which you can make a lot of money, but it’s not easy and not everyone knows what they are doing. Also, whilst normal trading can make a very healthy profit and can create a comfortable livelihood, a trading addiction usually always leads to a downfall.
Some early success or sporadic profits further solidifies the illusion that beating the market is easy. No matter how few and far between the success is, it overshadows the accruing losses in a trading addict’s mind. The addiction reaches a point where trading becomes the primary source of excitement, and instead of long-term profitability, the trader seeks action and multiple trades in a short span of time. This is despite the fact that historically successful traders have always made well thought out, long-term investments in reputable companies. But the addiction clouds the judgement and a previously prudent trader turns a blind eye towards the most basic of market rules and finds solace in a flurry of short-term trades to satisfy his lust for action. In other words, their online trading platforms become their slot machines. Products like mutual funds, which offer steady and almost guaranteed profits, are snubbed in favour of the excitement of buying low and selling high or vice versa.
So the question is how should people addicted to online trading be treated? Any behavioural disorder of the Internet age is already difficult enough to treat on its own due to a lack of precedents and research. But kicking an online trading addiction is even harder than usual because unlike in other cases a trader can’t be expected to give up trading altogether. After all, this is what they know.
Trying to beat trading addiction on your own probably isn’t a wise choice, because if an individual had that sort of control over his behaviour, he wouldn’t even be trading so much in the first place. Fortunately, there are addiction and counselling centres that specialise in dealing with compulsive traders. Several Internet boards offer online group therapy as well to help individuals who are caught up in a cycle and struggle to get out. But the first thing that an addict needs to realise is that he has a serious problem over which he has no control. It may be difficult, but talking to immediate family members and owning up your losses always help in letting the situation go out of hand.
Even if in some cases monetary losses are minimal or the individual has pockets deep enough to cover any setback, an obsession with online trading could sometimes cost much more than just money in the bank. From an economic standpoint, the time spent obsessing over trading success or failure could have been better spent on cultivating relationships, bettering personal health or developing a steady source of income. Hence, the downside of trading obsession is manifold.
It is pertinent to mention here that it is extremely difficult for an addict to understand that he is an addict. In most such cases, the affected person has a set story in his mind that gives him an assurance that even though he has a problem, it isn’t that bad and he can stop it any time he wants. Unfortunately, by the time the extent of the addiction dawns at him, the damage is beyond disastrous. Hence, experts suggests that if an individual is spending 12 hours a day sweating over his trades, it’s time to close all the trading accounts and seek professional help.
How to separate Binary Options from Gambling
Anyone who trades binary options or is thinking about it has probably heard many times now that binary options trading is nothing more than gambling. When you search for information on binary options online, you will inevitably get back results like this one over at Forbes that may cause you to wonder if you are doing the right thing trading options. Odds are that you’ve also had friends or family members who have lost money trading online who will try and talk you out of trading, saying that it is no different from going to a casino and risking it all on roulette.
Is binary options really gambling? The answer to this question is not so black and white. It is neither a “yes” nor a “no.” It is more like a spectrum, and where you fall on that spectrum depends on your approach to trading. Some binary options traders really are gamblers, trusting entirely to luck for profit or loss. Other traders are on the opposite end of the spectrum, doing all they can to reduce their exposure to risk and profit from patterns in the markets. These traders treat binary options like a business. Many traders fall somewhere in between. Here are 5 ways to spot dangerous and addictive gambling behavior. If you find yourself doing any of these 5 things, it’s time to step back and take a break.
Trying to “win it all back.”
This is one of the most common gambling patterns you can engage in. When you lose a trade, how do you feel? Most people will experience depression, confusion, or even anger. It is common in these situations to feel a need to get revenge on the market. You may think you need to make up for the loss as quickly as possible. So you might find yourself trading outside your rules, maybe jumping into trades based on setups that do not really meet your criteria. You may invest more than you should, and when you lose another trade, you become even more determined to get revenge. You can dig yourself into a deep hole very quickly this way, and, sometimes, you can lose everything and not be able to dig your way back out.
This is a form of addictive behavior. If you feel angry or desperate, it is not the right time to be trading. Take a break, look over the trade you lost, and try to understand why you lost it. Once you know, you will not make the same mistake twice. When you are levelheaded, you are less likely to accept poor setups and lose even more money. Remember, the market is not a conscious organism. You cannot really get revenge on it, and it does not care whether you win or lose. But it is hungry for your money, along with everyone else’s. Respect the market, but try not to fear the market. A calm, collected trader will become profitable, while a desperate, angry trader will lose it all.
Pulling money away from other obligations
This is another sign that you are addicted to gambling on the binary options markets. Do you find yourself siphoning money you would spend paying bills, buying groceries, or taking care of other necessities into your binary options account? What about money you would normally set aside in a savings account for the future, money you would not touch for any reason? You have other obligations and priorities you should not violate in order to trade binary options. Your binary options account and your other accounts should be kept separate at all times. Once you start moving money into your trading account that does not belong there, you are not leading a balanced life anymore, and you are allowing your addiction to trading to harm other aspects of your life. If other people depend on you, like a spouse or children, you have an obligation to take care of those people first.
You also should not pull money from your savings account to add to your trading account to counteract trading losses. That is like treating the symptom and not the disease. Figure out why you are losing trades and make changes to the way you trade that reduce your losses. Don’t just add money to your account and pretend nothing is happening.
You can move money into your binary options account, but you need to do so in a controlled fashion. Once you have paid all your bills for the month and met your savings quota, then you can consider transferring leftover, additional money, to your trading account to finance your trading activities. If you haven’t paid your bills or met your quota, you cannot add funds to your trading account.
Wagering arbitrary amounts of money on trades.
When you see a really, really great trade, do you wager more money on it? Do you maybe risk 10% instead of 5%, even though you wager 5% on the rest of your trades? This is a form of gambling behavior which can have disastrous results. First off, you are not trading consistently. When you do not set appropriate rules for yourself, you may find yourself doing more and more random things. Next, you might trade 20%, maybe 30%. Imagine losing a third of your account on a single trade. Secondly, it implies you are taking trades you do not consider to be really, really great. You should only take the best trades, and you should always wager consistently on them.
Breaking your trading rules.
Just as you should not be breaking your money management rules, you also should take care not to violate other trading rules. Those include the rules of your trading system and other rules you set up for yourself involving scheduling and other aspects of trading. These rules keep you focused and reduce randomness. When you break them, it is like opening the door and inviting chaos inside. Chaos produces losses more often than wins. Remember, entropy is the law, and disorder causes loss. Your trading method is a little sphere of order in which to conduct your affairs. When you start putting chinks in the walls, that sphere collapses, and with it, your trading account.
Avoiding talking to family members or accountability partners about trading.
This is one of the biggest signs that you have a problem. It is wise when you are trading to make yourself accountable to someone. If others depend on you, you are always accountable to those people. It is your moral obligation to ensure you are taking care of them first. If you do not have any dependents, an accountability partner might be a mentor or a fellow trader, or just a friend who takes an active interest in your trading and wants to help you stay focused and on track.
If you are avoiding your accountability partner, or not being honest and upfront with family members about where your money is going and how you are conducting your trading affairs, you probably have a guilty conscience. You are worried about letting those people down, which means you have already let yourself down. Come clean with your accountability partners, and let them help you work through your problem and stay honest. That is what they are there for.
Note that even if you approach trading like a business, you are still engaged in a business of risk, and you still can and will lose money while trading. There is no trading method that can give you a 100% win rate. In fact, recognizing your risk can actually reduce your losses, because it gives you a realistic perspective and keeps you honest and involved in your trading. In that sense, even traders at the far, far end of the spectrum who are not engaged in dangerous gambling behavior are still, to a limited degree, gambling.
But that is the case with everything in life. Life itself is a business of risk, and you can never completely predict what is coming or understand what is happening. Any time you invest money in a new business venture, you are facing a level of unpredictability. Binary options trading does tend to tempt participants into addictive behaviors and othermistakes, but if you stay alert for changes in your own behavior, you can avoid falling into gambling traps while trading. Acknowledge your risk, but do everything in your power to reduce it, and you will be on the path that leads to success.
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