Trading Market Events with Little Risk Using Binary Options
Many traders use market events to time their trades. The reasoning behind this is that trading volumes are greater during these events and the ensuing momentum usually creates a breakout rally. But breakout rallies can be very tricky and are sometimes referred to as the ‘siren’s call for the novice trader’ because they can quickly reverse. Binary options actually allow you to trade with more confidence because, unlike conventional Forex, binary options can be hedged to reduce risk. So now you can trade rallies with less risk.
So how does this work? Let’s take an example. This coming Thursday the US unemployment claims report will be published. Due to the popularity of this report among market-event traders, trading volume is likely to be very high on USD related instruments. As more investors join the rally it is likely to be reinforced and successful. However rallies tend to reverse unexpectedly when traders take profit and selling momentum builds. A conventional Forex trader can take little comfort in the fact that placing stop-loss will prevent losses. Any stop-loss will result in a loss of money because conventional Forex is always traded with leverage.
Enter the binary option. Unlike conventional Forex, with binary options you trade without leverage and you can place trades in both directions so you can hedge your trade if the rally reverses. So for example as the rally gets under way you can place a binary option CALL trade and if it reverses you can place a PUT when the breakout price is crossed back down. By buying both sides of the trade if the rally reverses you are basically cancelling your original trade. Naturally a small premium is involved, but since no leverage is involved your loss is usually less than 10% of your investment.
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