Hedge Your Position on the Forex Market Using Binary Options

12 Apr 2013, 08:00

There is a simple rule when it comes to trading which you can easily put into practice. Binary options can help you hedge your position on the forex market as long as you use them together with a conventional position on this market.

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Here are the reasons why binary options make perfect hedging tools for your position on the forex market:

1.    There is a fix profit and also a fix risk – on the binary options market both the risk and the return are known in advance, from the moment when you place a trade. This is not possible on the forex market. If you place a winning trade you have a return of 85% and if you finish out of the money, you can only lose the value of the trade or less, depending on your contract.

2.    Inutility of placing stop-losses – on the binary options market you can never lose more than the value of the contract so there is no point in using stop-losses like you would on the forex market.

3.    No need for leverage – you can make profits on the binary options market without making use of leverage because you know from the start the maximum amount of money which you can possibly lose. If you have already used stop-losses on your forex position, you can also take advantage of binary options trading and use them for hedging your position without any leverage.

4.    Hedging in one direction – the binary options market allows you to place trade in only one direction. You either trade high or low depending on the direction you think the asset price will take before the expiry time. You can hedge your position on the forex market by placing a Call or Put option on binary options in the direction opposite to the one of your forex position.

There are plenty of examples of how you can use binary options for hedging your forex position. You can look at one of them for a better understanding.

Let’s take for example a traditional forex USD/JPY position. It can either be a long or short position. You also use a stop-loss for this position. In order to hedge it, you have to trade a Call or Put binary option. This should be in the opposite direction of your forex position. This will be of help in case your forex position fails and doesn’t provide any profit. With the help of the binary options trade you can reduce your losses and still earn some profit. You can have a look at one of the online reviews on how to trade binary options if you are not familiar with this market. Its rules are pretty straightforward and easy to understand.