Think about all or nothing gamble and add some trading knowledge and you have binary options. They are also called exotic options, and they offer two options to a trader, a fixed return or a full loss of the investment. As it is stated in the term, these options give two options to the merchant (in last few years some new options were presented to the traders, but the rules remained the same, win a fixed amount of money or lose the money you invested).
The simplicity of the trading is the main reason behind the high popularity of the binary options. A trader who deals in binary options doesn’t need years and years of buying experience to earn money. That trader has to follow only two things, expiry time and the direction in which the price is moving. To generate the profit a dealer has to guess two things, the direction in which the price of an asset will move and the expiry date on which the price will be over the chosen number.
Traditional option trading utilizes the amount of the movement of the price, which affects the possible return. In the case of the binary options, this is irrelevant. The most important thing is that the price goes over a chosen number at the time of expiry date. This sounds simple because it is simple. But it is important to understand the risk this form of trading has.
Many online articles define binary options as just another form of gambling. And they are partially right. We say somewhat only because some binary options brokers reduce this trading form to gambling as they remove or break the most important factor of the binary options which is the underlying asset. The underlying asset and its price are the backbones of the binary options trading. A trader has to guess, based on gathered information, where and when will the price move. This is the difference between the gambling and the binary options trading.
Binary options become gambling only when the broker removes the underlying asset from the play. This is done by not aligning the price movement of the property on the broker site and in the real time. In that case, the trader can’t use the information to guess the direction or the time of the price movement. Every “trade” over a broker like that is nothing more than a flip of a coin.
Some traders tend to get carried away. They do that due to the simplicity of the binary options. Once they lose a considerable amount of money they go around telling people how they lost the money through gambling with binary options. The best way to prevent this situation is education. General knowledge about binary options is optional, but extensive education about the market and the underlying assets is a must. Every trader should pick few assets and learn everything about them, how they move, what affects them and so on. Traders also need to grasp the existence of the “butterfly effect” in the world of trading (One small event may cause big ripples all over the market).