Managing risk and proper stop placement are probably the most difficult aspects of currency trading to master. Here’s a simple example of how you can use binary options to take advantage of the opportunities that volatility creates while controlling risk.
Even in times of normal market conditions with fundamental announcements, surprise decisions from governments or central banks and the overall volatility of all markets over the last year, it can be very difficult to accurately gauge risk on any trade.
Take for example, the market shock of the March 18, 2009 Federal Open Market Committee (FOMC) announcement, when the FOMC decided to embark on a $1+ trillion dollar quantitative easing program. Upon the release of this news, the market did not just move, but gapped almost 160 pips (1.3130-1.3280) in the EUR/USD pair! Unfortunately, this caused many currency traders, even those that had done everything technically correct by placing a stop, to lose more than they bargained for. In many cases, traders lost more than they had in their account which left them with an outstanding debt owed to their broker.
Currency traders face many obstacles, and one that is especially vexing for a novice trader is how to prevent getting caught by a quick 30-40 pip swing in the opposite direction of the buy or sell order just executed—and getting stopped out. Then, to make matters worse, the market swings back to its original position and you would have profited—had you not been stopped out. Of course, we all know this is how volatility swings markets instantly, but it can be extremely frustrating and damage your bottom line.
Making the Transition: From Spot Forex Trading to Binary Options
For the reasons outlined above, many traders have transitioned into the Binary options market as a compliment to spot Forex Trading activities because it provides them an instrument where they can take advantage of the opportunities volatility creates while controlling their risk to a much better degree.
Some people are mistakenly intimidated by the term “Binary Options”. They are not exotic derivatives or complicated instruments, but are actually rather simple to understand. Binary options are considered “binary” because there are only two potential outcomes at the time of expiration, Zero or 100. It may be easiest to think of them in terms of True/False statements in which, if the event happens (True), the binary option settles at 100, if it does not happen (False), it settles at Zero. A binary option may be phrased as such: “EUR/USD to be above 1.3380 at expiration”. The price of a binary option, between Zero and 100, can be viewed as the probability of that event occurring.
Perhaps the most intriguing and vital component of understanding binary options is that it has value, even before reaching expiry. For example, one can buy a binary option at 35 and if it moves up to 65, one can close the trade and make a 30 point net gain. Also important to keep in mind is that you cannot lose more that the option was bought for. Again using the previous example, if one incorrectly predicted the binary movement and the market moved in the other direction, one’s maximum loss would be the original 35 point buy, regardless of how far in the other direction the underlying market moves against that original position.
A few more benefits trading Binary Options offers are
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• No stops worries: Because the high/low level is already set, traders don’t have to worry about stops or being stopped out on a quick move against their position and there is time to let the trade work.
• Less money at risk: A trader, in many of these cases, can effectively margin risk by placing less capital in a straight spot FX trade, particularly when availing themselves of charting mechanisms.
If you want to learn more about binary options, please visit our website www.igmarkets.com/fx to see what other exciting products we offer along with or binary options.
DISCLAIMER:
These products are not suitable for everyone, so please ensure that you fully understand the risks involved. These products are volatile instruments that involve a high risk of losing all of your investment. Past performance is not always indicative of future results.
