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.
Trying to understand the movements of the markets, particularly in an age of immediate reaction to government and central bank economic factor announcements—and the ensuing volatility that they can produce—can be very difficult, even for the most savvy trader.
A perfect example of this kind of economic maelstrom occurred on March 18th, 2009 with an announcement by the Federal Open Market Committee (FOMC) that they had decided to put into play a quantitative easing program topping out over $1 trillion dollars. This news caused the market to literally spasm, jumping almost 160 pips (1.3130-1.3280) in the EUR/USD pair! Seasoned currency traders, even those that had been precautious and used a stop loss order, lost far more than they had bargained for—some even into negative numbers. Many found themselves owing their broker, realizing they had lost more than they had in their accounts.
Another example of a problem currency traders face and one that can be particularly frustrating to new traders, is just after clicking the buy/sell button, the market makes a quick 30 or 40 pip move against the position and stops you out. Then, of course, the market moves back in the original direction of your trade which would have created profit, but that doesn’t matter because you were stopped out and the trade is over. This is a natural aspect in any volatile market but is frustrating nonetheless and costly over time.
Making the Transition: From Spot Forex Trading to Binary Options
Given the scenario just outlined, traders have learned to transition into Binary options in order to compliment their positions in spot Forex Trading activities providing a working instrument that helps them manage—during volatile times—the opportunities that are created by that movement thereby exerting control over their risk management.
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
• A fully margined instrument: Traders can never lose more than they have in their account. Traders are responsible for the full amount of risk as soon as the trade is placed and therefore the balance can never go upside-down on an adverse market move.
• 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 capital risk: In many cases, traders can enter a trade with much less capital at risk than with a straight spot FX trade, particularly, when utilizing longer term charts.
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.
