Binary options trading is a new and innovative way to trade financial markets which is also fast becoming one of the most popular. The simplicity of trading with binary options which, at its most basic, allows traders to select options that can expire up to 80% in profit has attracted many traders over the past few years. However, binary options are not only attracting traders looking for a more straightforward trading experience, but also those traders who are looking for new and exciting ways to make money using some of the innovative tools and techniques available exclusively to binary options traders.
What is hedging?
Binary options provide an entire range of potential trading strategies across multiple timeframes. One of the most interesting and potentially profitable strategies used by binary options traders is the ability to hedge binary options positions which many other forms of trading do not allow. Hedging is the practice of opening an opposing position in the same market, effectively meaning the trader will hold a long and a short position open at the same time. Hedging itself is used for a number of reasons by professional traders, although less frequently in the same market where any gains or losses will be cancelled out by the opposing position.
How hedging can reduce losses
So why would anyone bother hedging in the same market if the trade will simply cancel itself out at the very best? For many trading derivatives, it may not be possible to hedge a position due to the fact that an opposing trade will often act to simple close the initial position. However, Binary options are unique in that they simply require the options to only expire higher or lower than the strike price in order to result in a fixed-profit trade. Where predetermined profits are often 85% and losses are 85-90% of the initial investment, hedging acts as a great way to trade high probability setups with minimal or no risk at all. A classic example of this is trading a high-probability break lower on a price chart. Purchasing options lower already has a high probability of success in such trades and for the options closing ‘in the money’, however, the key to using hedging to lower your risk when these breakouts do not work out is to purchase long options as near as possible to your original purchase level. This results in two positions being open and which effectively cancel out the losses and gains of each position.
The benefits can be applied to high probability trades
Hedging binary options in this way means that those times when a trade fails, or even looks as though it may not result in a straightforward profit, the risk of the trade can be neutralised or lowered to just a few percentage points on these trades. This obviously makes the risk-to-reward ratio of trading binary options far more attractive for these high probability trades. Hedging in this way relies on two skills which can be developed by all trades; the first of these is fairly quick reactions to changing situations and also the discipline to effectively cancel the trade. Executing the hedge as near to the original entry price as possible is essential to mitigate any risk of both sets of options expiring out of the money. Master this and you will significantly reduce the losses when a binary options trade begins to go against you.