Binary Options Trading: It’s Not a Gamble

What is Trading?

Trading, at least for those who are successful at it, means working within a system that has been proven profitable over time.

Successful traders take an idea and form it into a strategy. The strategy tells them when they are going to enter trades and how much they can invest in each trade. ou can also check out the secrets of successful binary options trading.

• The strategy outlines what conditions must be present in order to buy or sell a binary option.
• How much a trader can invest in each trade is often a percentage of their total account, such as 1% or 3% of the total account balance. That way, when losses do occur, the account value doesn’t drop much.

The strategy is then tested by looking through prior trades and adding up profits and losses. Knowing how much you invest in each trade makes this process more accurate, since you can add up exactly how much you would have made over the last week, month, or year.

This is called backtesting, and is the cornerstone of successful trading. While not every system that worked in the past will continue working in the future, if a strategy has never worked in the past we can be pretty sure it won’t work in the future. In other words, successful traders “know” that their strategy works. They know this because they have verified that it is successful.

Anyone, including you, can do this. Come up with criteria (or use a strategy discussed on this site) that tells you when to enter a trade. Then, pull up a chart and look for when those criteria occurred in the past. Look back at least 50 trades, 100 is better. Add up all your profits and losses on those trades.

You now have a pretty good idea if that strategy works or not. If it didn’t produce a profit, look for ways to improve the criteria. Keep refining it until it produces a nice profit. This is essentially how all strategies are developed.

With trading, you may not know whether each trade will be profitable, but if you have tested your system, you have a pretty good idea that it is likely to be profitable over the next 10 or 20 trades.  This is called expectancy; it means that for each trade we know the odds are in our favor for making a profit. This varies drastically from gambling, which has a negative expectancy!

What is Gambling?

Gambling is when we don’t know the financial outcome over multiple trades, or the odds are against us but we play anyway hoping to get lucky.

If you step into a casino, your odds of winning at blackjack are 42.22% on a given hand. The dealer has a 49.1% chance of winning, and there is a 8.48% chance of a tie. If you play a strategy, some of the house edge (their advantage over you) can be reduced.

For most people, going into a casino and playing blackjack will result in an overall loss if you do it multiple times. You may win every once and awhile, but the more hands you play the greater the odds that the casino will eventually win your money.

Gambling is when you know the odds are against you, and that the casino has a higher chance of winning – but you do it anyway. This may be either for fun or because you hope to get lucky on the first few hands and then cash out your winnings.

Gambling can also be when someone trades or plays a game without knowing the odds. Taking a random trade because you think the price will go up is a gamble. The idea isn’t based on something tested. Above, I talked about how a strategy is tested, so that we know it is profitable over multiple trades. Random trades which aren’t based on a strategy are untestable. Thus, they are gambles.

How to Make Sure Your Trading Isn’t Gambling

Hopefully you now know how to make sure your trading isn’t gambling. Create a strategy and then test it before trading.

If you’re unsure how to create a strategy, you don’t need to create your own. There are loads of strategies out there that you can try for yourself. Many are shared on this website:

• Long Island Pattern
• 3 Rising Valleys/Peaks
• Fractal Reversal
• Price Channel

Before trading any strategy, check to see if it is profitable. You can do this by looking for the signals on historical charts. For example, if you are trading binary options, open up a chart on the time frame you want to trade on. If you’re trading 1-minute options, use a 1-minute chart. If you are using 5-minute options, use a 5-minute chart.

Then, mark on the chart each time the strategy produces a trade signal, and mark where the price is when your option expires. If you are trading 5-minute options, note the price five minutes later and record your result.

You can decide how much you will risk on each trade, and you know how much the broker pays out for winning trades.  When you add it all up, the result may look something like this if you’re investing $20 per trade and the payout is 85%.

• +$17
• -$20
• +$17
• $17
• -$20
• +$17
• -$20
• +$17
• +$17
• +$17

Over 10 trades the strategy won 7 trades (70% win rate) and the overall profit was $59. That’s a good strategy. Ideally, test the strategy over 50 trades or more to get a good sense of how it performs. See how this is very different from gambling?

You are trading with a strategy that you already know performs well. That’s the exact opposite of gambling, where you don’t know the odds or the odds are poor but you hope to get lucky.