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Friday, February 18, 2011

Forex Binary Options – An Upgraded Stop Loss

The forex industry continues to evolve with additional resources for knowledge, and now with additional resources for trading. Binary options can be used as an alternative for the traditional stop loss, and for hedging. Here are a few examples for this.



Let’s say that your trade plan is buy EUR/USD  in case of a breakout or to short it if it fails to do so. The level can be 1.4720, you invest $100 on a binary PUT option promising a 170$ return in case the pair will close below that level.
In case of a bullish break out, you need to cover the hedging cost, which is $100 – $10 in return = $90. So, I need to anticipate a relevant breakout that will give me enough pips in order to return at least $90. Now there are two scenarios:
  1. If the breakout is real, you win in the forex trade and lose the hedging in th binary option – this is like paying a small premium to the insurance compan, when everything is OK. The win on the trade should be much more than the hedging cost.
  2. If the breakout was false, you lose the forex trade, but the binary option covers the losses since I get back the $100 + $70. This 70% win should cover the loss (and sometimes even more) in the forex trade.
After getting used to this method, the stop loss point can be moved to a better place. Although there are premiums involved, binary options, if used wisely, can be the sweet dream scalpers were waiting for.
Apart from breakouts, these binary forex options can be used for trading news events. For example, if we take American CPI, and it comes out stronger than expected, the dollar would normally rise on anticipation for a rate hike. The trader would go short on EUR/USD and defend this position by a CALL binary option.


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3 comments:

Rill said...

Both new & experienced traders seeking valuable information on binary options.

Binary Options

Michael lewis said...

Trading binary options is becoming more popular because of the unique advantages not found in other forms of trading
Binary Options

Patricia Elliott said...

Forex Binary Options offers various strategies. In simple explanation, the investor who observes throughout a trade that the choice they choose will end up buying and selling out-of-the-money.

By selecting to opt for a subsequent trade in the other means, buyers can purchase a choice that is the reverse to their first trade.
Even first time buyers can use the call or put option methodology as a simple tactic within the binary options market.

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