How to hedge using binary options?

The binary options industry has grown in popularity since it was introduced in the online trading world. Quite often the markets display certain behaviors that make it necessary for traders to arm themselves with different strategies, if only to reduce trading risks of all levels. Among the more unique methods that you can use is the hedging strategy. This method has been around and is used mainly by seasoned traders.

Hedging strategies are extremely useful when you are expecting a huge movement in asset prices, yet you are not certain on its directional movement. This usually happens when financial information is scheduled to be released any time soon. This economic news may influence the value of underlying assets, where asset prices may take surprising turns.

Binary options hedging strategy involves putting both CALL or PUT options on one trade at the same time. This is done to reduce the chances of losing out to a trade, while increasing your chance of a profitable return. Despite unstable market conditions, this allows for a continuous flow of profits for the trader.

For example, well before the British Manufacturing PMI was released for the day, you place a CALL position for the GBP currency an hour before it was due out. When the data hit the news wire, you feel that it will have exerted a downward pressure on the asset. You then place a PUT position on the same GBP currency, for the same expiration time. This is an attempt to balance potential losses and hopefully maximize profits from the trade.

What to Consider Before Hedging

A certain level of fundamental analysis skills will come into play when using the hedging strategy. Before this method is utilized, try to identify the factors that may cause your trades not to end in your favor. Learn the difference between pure guesswork and using information from various indicators, such as trading charts, which can paint a picture where price directions may end up.
As there are trading risks involved, the hedging strategy will work well with various trading strategies. This will boost your chances for winning trades, as well as keep the risks to a minimum. Not only that, should you incur losses, hedging is a fail-safe for recouping any amount you may have lost in the trade.

How Hedging Works for Your Trades

So, now you understand that this strategy involves placing both CALL and PUT options on the same asset, what now?

Keep in mind that hedging only works when there is enough time to negate potential losses that may be incurred from an initial trade. To do this, select a contract expiry that will give you enough leeway to enter a second trade. And since you will now have enough time to enact your hedging strategy, you may confidently place a larger sum, and therefore increase your margin for profits. Hedging may be considered as a useful tool to cushion the effects of a losing trade. Besides, it is better to win one or two trades than losing all three.

When faced with uncertain market situations, try not to place your trades quite close to each other. As you are unsure where the market is headed, you would want to get a good strike price before the market starts to move. Waiting for any discernible trend, with your expiry times so close together, you are losing valuable time already before the trade expires.

Binary option trades are straightforward and exact. It’s either you will receive a profit or a loss. It is necessary to take measures in preventing more losses and increase your chances of profitable returns, which can happen by using the hedging strategy for your binary trades.

If you want to have the best binary options trading experience then it is best to choose a licensed brokerage like HighLow. You may click here to access their website.

*Please remember that trading binary options can be a risk so always remember to trade with what you can afford.

Leave a Reply