Friday, December 7, 2018

Binary Options Hedging Strategy

Hedging is a general term in the world of trading, especially for forex traders who often use it to cover losses when trading positions are contrary to market conditions. Hedging actions can be said as an anticipation to overcome or even reverse loss from the current position. Not only in spot forex, binary options traders can also apply this strategy, if the current order is not in line with the market situation. As long as the expiry time has not run out, hedging can still be done to overcome the trading worries that might end out-of-the-money.

A brief example of a hedging strategy that can be applied in binary options can be seen from the following situations:

Si Upin chose the USD / JPY pair to open the "put" position in binary options. This action is based on the NFP data which will drop in a few minutes later, and is predicted to show worse-than-expected results. However, some time after placing an option, the downward trend has not yet been formed, and the price chart instead shows markets that are being ranging. Apparently, the data released a few moments later showed results that were inversely proportional to predictions. The USD value shot up and Upin decided to add a "call" order with a strike price different from the previous trade. When expiry time Up, the price is at the level expected by Upin the "call" option. Thus, Upin managed to prevent the loss of capital that he used in previous trading, because profit from the second trading could cover the lost funds in the failed trading.

From this example, Upin can increase the percentage of return or increase the amount of capital in the second order to increase its trading profit. Other ways such as opening the "call" option can also be taken to further increase the profit opportunities. However, if you are the type of trader who does not like to take risks, placing options with the same level of return or the amount of capital can also be done as a solution to overcome loss.

How to do Binary Options Hedging
Because of the many features available such as the choice of expiry times and types of trading, hedging in binary options can be done in various ways, including:

Adding Options with the Same Expiry Time Limit
The most basic way of hedging is to open a trading position opposite from the previous position to cover loss. There are special requirements that must be considered in implementing hedging strategies in binary options. The provision is to ensure the second expiry time option is the same as the previous trading option. So if the first trade has an expiry time of 1 hour, at an interval of 30 minutes then you can open a trading position in the opposite direction and set an expiry time of 30 minutes to make sure both options will expire at the same time. This method is certainly done after you are sure that the price trend will be sustainable for at least the next 1 hour. In this way, the worst possibility that can occur is not getting any profit at all. If you are able to take risks to increase profit opportunities, you can increase the amount of capital trading and the profit level for transactions that you believe will succeed.

Examples of this hedging method can be seen in the following picture

In this picture, traders who trade GBP / USD pairs place a "call" option with a capital of $ 250 before the UK Manufacturing PMI data is released. However, the results of the economic report released later showed a decline in the manufacturing sector, and finally GBP also fell. To overcome the risk of loss that is certain to occur, the trader then places the option "put" with the same expiry time limit from the previous trading position.

One of the most important things to consider in using this strategy is expiry time. Make sure that you have enough time left to hedge, so that the estimated direction of the price is also more measurable before the expiry time expires.

  • Combining Binary Options Trading with Spot Forex

This method can also be a promising alternative to hedging. To apply hedging with this technique, you can place options and open positions in ordinary forex trading. For example, you put a "call" option for the GBP / USD pair. But for some reasons, you feel unsure if the price of the pair will be at a level higher than the strike price when the expiry time arrives. Therefore, you then open a "sell" position on the forex spot with the same pair. Thus, losses from one of the failed trades will be able to be covered or even offset by greater profits from other trades.

  • Utilizing the Type of Trading Double Touch Options

Double Touch Options is a type of trading that estimates the price will touch 2 specific price levels before the expiry time expires. For example, for trading USD / JPY which is currently at 109,395, you place options with price levels at 109,415 and 109,490. If as long as the trading pair touches these levels, your trading can be called in-the-money.

To use it as a hedging strategy, you can choose higher levels and lower than the current strike price. For example, for trading USD / JPY like the case above, you can specify one level at 109,415, and another level at 109,380. This can benefit you if at that time the USD / JPY movement did not experience a certain trend (being sideways).

One disadvantage of Double Touch Options is that it is rare for brokers to provide this type of trading. Many choices of binary options brokers whose quality is determined by a variety of things, starting from regulations, including the presence or absence of Double Touch Options as one type of trading option. Therefore, it is important for you to really consider the priority of the broker's components in order to obtain trading facilities as you wish.

READ TO Fundamental Analysis in Binary Options

  • Important Things in Binary Options Hedging

One thing traders must always watch out for is that no one can really predict market movements accurately. In this case, the chances of greater profits due to hedging can also lead to greater risks. Aside from following general binary options trading tips, traders also need to determine their initial goals in carrying out a hedging strategy. Whether hedging is done only as a way to overcome loss, or also applied to increase the likelihood of profit. Some things to consider before doing hedging include:

1. Recognizing Hedging Risk
Before deciding to do a hedging, you should do the calculation of the risks that occur if hedging is really going to be done. These considerations can help you to analyze the best possibilities, whether the losses that can be experienced will increase or decrease if hedging is really implemented.

2. Taking into account the amount of risk that can be borne
This is one of the core methods for securing your hedging position. As we know, no type of trading is safe from risk. If the risk can be managed properly, the losses will be minimized and not burden your psychology.

This calculation can be done by determining the size of the trade. In binary options, the size of the trade can be interpreted as the amount of capital and the level of profit to be taken. If it is only used to overcome loss, the trading positions that you will execute can be opened with the same amount of capital and profit level as the previous order. If the purpose of your hedging is to double profits, the profit level and trading capital for each binary options order can be distinguished by the small size. This distinction is made with the assumption that the option position with a larger size of trading is a more believed estimate, so that the loss on the first option trading can be covered by the profit from the second option trading.

3. Conduct a Hedging Test
If you are not experienced in hedging and are interested in trying it, you can test this strategy via backtest or trade on a demo account first. The risk of hedging is greater than ordinary trading, so it requires you to establish the results of analysis and how to trade. You will not know whether this strategy will have a good or bad effect on your trading system before trying it. Therefore, it is important for you to know how to work and the hedging system as a whole before actually using it on a real account. This will narrow down the chances of hedging failure, because you will understand things to watch out for from hedging strategies.

4. Analyzing Hedging Results
The process of learning in forex or binary options never stops and continues as long as the trader is still trading. New things can happen at any time, and every trading result always produces special lessons that can be drawn benefits. Every trading position, whether that ends in-the-money or out-of-the-money has ideas that can be learned to be able to develop the next trading position. Therefore, making notes about the results of trading with hedging can help you ensure the success of your strategy and understand the aspects that need to be considered so as not to repeat the same mistakes if the trading fails.

Hedging can be a profitable strategy for binary options traders. There are several ways that can be applied to minimize risk and increase profit opportunities. For beginner traders, it is recommended to test the use of this hedging strategy on a demo account first. This is because the risk may be multiplied if the trader is less able to take advantage of the hedging strategy. If a trader cannot do the right analysis or determine the appropriate size of the trade, the loss can be greater than the initial loss that might occur before hedging.

For this reason, hedging is considered risky and too complicated for some traders. But for those who like to take risks, hedging is an attractive strategy choice and can increase the possibility of profit. Many traders do not know that the more they close themselves to the possibility of risk, the more they are less prepared to face possible losses that can occur at any time. Therefore, dealing with risk with measurable management can help traders overcome their fear of risk. In this case, using a hedging strategy by applying the size of trading to the destination can be one way to deal with these risks.


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