Binary Options Hedging
Binary options can be very convenient when used as a hedging instrument.
Hedging is done as follows:
1) A short position is opened on the spot market – for example EUR / USD – 0.05 lots, $ 50 investment on my part with a 1:100 leverage ,EUR / USD exchange rate was 1.28344
2) I put a stop order that limits my losses on the spot market at the previous highest maximum (fractal), in this case – 1.28984. The difference is 0.0064 pips X $ 5,000 = $ 32 potential loss.
3) With the use of the Option Builder, a binary option is designed to meet my specific requirements: Call option with a return of 80% and an expiry of 5 hours. The profit I need is $ 32, that’s why I adjust my investment to $ 40.
What happens next?
The binary option expired with a profit of $ 32. In case that the stop loss had been activated I would have broken even on that transaction (investment). Since the stop loss was not activated, and consequently the price went below the price at which I opened the position, I was already winning and decided to move the stop loss at the level at which I had initially opened the position – in this case 1.28344.
Once I moved the stop loss at this level, I had already guaranteed a minimum payout of $ 32 and even if I had decided to close the position, it would have remained profitable. The pictures show that the price continued to fall, which suggests that I can put a trailing stop to move the stop loss automatically. Look at the photos below in the sequence Figure 1, Figure 2, Figure 3 and Figure 4. You can also read the technical analysis for the particular date
This Trading Strategy is provided by Dimitar Petkov
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