In many ways, this is perhaps the most difficult chapter to write, as the world of betting and trading move ever closer with a consequent blurring of the boundaries. And indeed may be one of the reasons you have purchased this book, as you would like to understand and clarify the differences between these two worlds. However, understanding the differences and where these boundaries are drawn, is paramount in having a clear view of where one stops, and the other starts.
Binary options now seems to be the battlefield on which these two opposing forces face one another.
My purpose in writing this book is not to come down on one side or the other. My aim is to try to highlight what I believe are the pros and cons of these instruments. To consider both sides, and from there to draw conclusions on the best trading strategies to adopt.
By the end of the book, I hope you will have a balanced view with which to make your own decision. We are all different, with varying risk tolerances. What is high risk for one person, may be low risk for another. All I can do here is to present the case, both for and against binary options, and to consider the alternative ways to use them, of which as you will see there are many.
But as with any new approach to financial trading, if we can understand the instrument’s strength and weakness, then we can make balanced decisions on the best way to use them.Understanding the odds and probabilities will also help you to assess and quantify the risk in using binary options, as well as other instruments. Speculating and investing, by their very nature carry risk.
It is for us as traders, to quantify these risks and to make our own decisions, according to our own risk appetite. The issue with the world of binary options, and here let me refer to them in the broader context of ‘binary trading’, is the boundaries between sports betting and financial trading are now very blurred indeed. To the extent that even those involved in the financial world, including the media, seem to be confused.
The forums too reflect this confusion with strongly held views, similar to those between technical and fundamental traders, with neither able to see the other’s point of view. The same is true here. Mention the word ‘binary’ in a trading forum, and instantly a heated debate will ensue. One side will label it betting, short and simple. The other will argue it is trading, and never the twain shall meet.
So, in order to bring some clarity to this debate let me start with the word binary itself, which seems to be the catalyst for so much argument and confusion. In the nineteenth century the word ‘gay’ simply meant happy, joyful, carefree, and was an adjective. During the course of the twentieth century the meaning of the word changed completely, not only in the context of everyday language, but also in its use as a noun.
And this example, in many ways highlights the issues surrounding the term ‘binary option’. It is, after all just a term with which to describe a trading instrument, and in many respects we are simply arguing about semantics.Therefore, let me draw a line in the sand.
Whether the instruments are referred to as binary options, binary bets, fixed odds bets, fixed odds, binary betting, binary trading, fixed odds trading, or digital options, all of these ‘definitions’ have two things in common:Your risk is always limited and can never be exceeded Your profit is always limited and can never be exceeded The above statements are not to be confused with percentage returns.
These are the numbers you will often find quoted as part of the marketing message. Whilst the percentage returns can vary, and do, the underlying risk/reward profile remains constant. Could the definition above be considered radical or innovative? Any trader or investor worth their salt will limit their risk. Only a fool or gambler will trade with unlimited risk.
But risk can be limited in many ways. In the financial world, a stop loss is perhaps the most obvious, taking us out of the market if a position moves against us, thereby protecting our greatest asset, namely our trading capital. We can limit loss by hedging in other markets. We can also limit loss with conservative trading strategies using options, and finally one could even consider limiting loss as the maximum invested in a share or stock.In the sports betting world, limited loss is as old as the hills.
Bet on a race or a sports event of any kind, and your loss is limited. It is limited to the amount of your bet. Go to the casino and bet on the roulette wheel, your risk is limited again and is simply the amount you bet. Once your wager or bet is placed that’s it. You cannot lose any more than the amount bet. In other words, your downside risk is limited.It is this aspect of the ‘limited risk’ of these instruments which is marketed most vigorously by the binary brokers.