Not a lot of gemini 2 review traders are aware of this, but binary options can serve a useful role in hedging the risks of a forex trader. Forex traders can use this strategy as a potentially very lucrative alternative to traditional stop loss orders. Binary options present an attractive choice to forex traders because they offer a far better return than stop loss usage. Forex stop losses get risky when trading falls below the breakout point. When this happens – and the trader’s stops are placed at the breakout – losses become virtually inevitable.
In binary option hedging, a winning position is placed in the opposite direction of the forex trade. When done correctly, this will give a trader a better chance of minimizing losses. A failed forex trade using this system will always be accompanied by a win on the hedge option. This strategy can cut losses to zero when employed properly. Using normal gemini 2 review stop loss orders, a forex trader has to confront risk whenever prices get into the zone that lies between the stop and the breakout point. Using binary hedges shifts that risk over the breakout point. The final amount of risk the trader is subject to depends on the difference between the trade’s cost and the breakout point itself.
Binary option hedges are a great way to guard oneself against unexpected breakout failures in heavily-traded pairs of currencies, e.g. AUD/USD or USD/CHF. Historically, both of these currency pairs will start to strain against their breakout points within an hour of their initial breakout. Placing a gemini 2 review traditional stop loss for this sort of trade is nearly impossible because predicting the sheer depths to which the pair’s price will sink is never easy. Volatile assets have an irritating tendency to cross breakout points repeatedly, playing havoc with ordinary stop loss strategies.
These conditions are ideally suited to binary option hedging. As soon as a trader sets up Forex deals at the breakout points, he or she then places a USD100 hedge. If the breakouts are tested, the trader can rest easy knowing that the first USD70 of their losses (assuming a 70 percent return on the option) are covered. Complete breakout failure will actually put the binary trade in, resulting in zero losses for the trader. If a breakout goes on to succeed after flirting with the breakout points, the trader’s Forex positions can still turn out profitable as long as they earn more than USD85, the amount forfeited by the failure of the binary option.
This sort of hedge is not allowed by all brokers. OptionFair is one example of a broker that has a well-established policy of allowing traders to invest in both sides of an asset simultaneously, i.e. to hedge.
This form of hedging needs strong momentum in order to realize its full potential. Because of the sheer number of traders who set up stop losses underneath a breakout point, testing it becomes risky. Continued gemini 2 review trading underneath the point will trigger more and more stop orders and build further momentum. The same effect appears in reverse following a breakout test. Once it’s clear that failure has been averted, a lot of investors will rush back into trading, accelerating the pace even further. This sudden speedy movement makes it easy to earn back the $85 expended on the hedging option. Refer to the attached image to see an example of this kind of binary hedging in action. You can also get a good look at this process in my earlier posts on GBP/USD trading.
To summarize, hedging with binary options is an effective way to move risk around the breakout, shifting over the point from where it normally lies beneath it. Trading momentum, which is usually a bad thing with conventional stop loss orders, turns into a potential asset when binary options are used to hedge.