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.
People are often confused or misinterpret terms like “Binary Options.” They are rather simple concepts to understand, and are not complicated or far-fetched. These options are named “binary” because much like the mathematical term, there are only two options at expiration time, Zero or 100—in essence an all-or-nothing proposition. They can also be thought of as True/False statements where if True, the binary settles at 100, and if False, the binary settles at zero. An example of how this looks is “GDP/USD to be below 1.4223 at expiration.” Which means that one can view the binary option’s price, between Zero and 100, as a gauge of the probability of the occurrence of that event.
An important characteristic of a binary option is that a trader does not have to wait for expiration to close out the trade. For example, if one were to buy a binary option at 25 and it moves up to 60, one would be able to close the trade out at that level for a 35 point gain. Another important benefit of trading binary options is that a trader cannot lose more than the option is purchased for. Using the same example, if one’s opinion were wrong, and the market moved against that position, the maximum loss one would incur is the original 25 point buy, no matter how far the underlying market moves against that position.
A few more benefits trading Binary Options offers are
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• No need for placing stops: Since the maximum/minimum level is already set at purchase, traders never face being stopped out by a quick market move allowing for more time to gauge the true value proposition of their trade.
• 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.
