Binary Options Hedging
Whatever type of business you are involved in, high profits will always be fraught with certain risks. It is no secret to anyone that trading in this regard is no exception, and that is why risk management is given special attention in trading. However, there is another way to reduce the risks in trading binary options and its name is hedging.
The term hedging comes from the English word hedge - fence, fencing. By hedging, it is customary to understand the opening of several transactions in order to block a possible loss. I want to note right away that it is not easy to use hedges in trading (you need to choose the right method, time of entry, size of supporting rate, etc.). In this connection, hedging on binary options remains the prerogative of experienced traders whose deposit allows you to open several transactions within the same time range.
Binary Options Hedging Strategies
Opening bets in the opposite direction
Opening of opposite bets is used if the trader doubts the positive outcome of the transaction. Consider an example:
- The trader makes a forecast for the growth (call) of the pair "euro / dollar" in the next hour (bid $ 100);
- After half an hour, it becomes clear that the uptrend is unstable and there is a chance to close at a loss;
- The trader again selects the "euro / dollar" ($ 100 rate), sets the expiration date for half an hour and opens the deal down (put).
Thus, a hedge appears on the chart, a conditional price corridor, which in the end will bring profit or a slight loss in the sum of both transactions. This binary hedging strategy has three possible outcomes:
- two deals will close positively;
- the first will make a profit, and the second a loss;
- the second rate will be profitable, and the first - unprofitable.
- total rate of $ 200;
- outcome number 1 - ($ 100 + 85% of income) + ($ 100 + 85% of income) = $ 200 return + 170% of profit;
- outcome No. 2/3 - ($ 100 + 85% of income) - $ 100 of loss = $ 100 return + 85% of profit - $ 100 of loss.
Please note that if hedging in binary options, the moment of entry into the transaction is chosen incorrectly (without forming a corridor between each other), then both positions can close in negative.
Opening additional bets in the same direction
For me personally, this strategy of hedging binary options is controversial, but despite this, many traders successfully apply it in practice. Example:
- A trader finds a potentially profitable entry point into the market;
- Makes a bet ($ 100) on a call option until the end of the hour;
- The chart goes in the opposite direction for some time and unfolds much lower than the transaction opening level;
- A trader opens another call option ($ 100 or more) until the end of the same hour.
Also, as in the previous binary options hedging strategy, there may be three possible outcomes:
- two deals will close positively;
- one deal closes positively;
- Both trades will be closed at a loss.
A reasonable question arises: if both bets can close with a minus, what is the point of such a hedging strategy on binary options? According to traders who use "mutually supportive" bets, even an experienced analyst is not always able to accurately predict the reversal signal for binary options. Small deviations are possible, and additional transactions (especially from more profitable levels) help to reduce the resulting losses (or to avoid them at all).
Hedging in binary options is a difficult technique that allows you to protect yourself from poor-quality forecasts and erroneous signals for binary options. If you place hedges wisely, you can achieve a significant reduction in drawdowns. However, in inept hands, and even with a small deposit, this technique can be unprofitable. Should hedging be used in binary options? Definitely worth it, but very carefully, wisely and, of course, without Martingale and not on the OTC charts. By the way, some brokers have already included the possibility of automatic hedging in the functionality of their platform, for example, FinMax and Daweda.