Trading Binary Options During Key Market Events

Posted on March 23, 2010 by Yohay
Filed Under Forex Opinions | 1 Comment

Guest post by the StartOptions team.

This week will prove to be a good week for trading, with many market moving events coming up. The most notable, when it comes to moving the EURUSD pair, are probably these releases: American Existing Home Sales: Published on Tuesday at 14:00 GMT. American New Home Sales: Published on Wednesday at 14:00 GMT, American Unemployment Claims: Published on Thursday at 12:30 GMT, American Final GDP: Published on Friday at 12:30 GMT.

As you can see, not a week to miss out on. Lately I have been writing about my experiences in hedging my EURUSD Forex trades. I have tried various techniques to limit my risk during these market events, since they can be terrific on the upside but terrifying on the downside. The greatest success I have had so far is hedging using Binary Options.

Hedging your Forex trades using Binary Options is actually straightforward. Right after you have placed your EURUSD trade, hopefully in the direction of a huge market move following these events, now place a Binary Options trade in the exact opposite direction. I like to use www.startoptions.com for my Binary Option trades because of the ease and simplicity with which they have designed their trading platform. Nothing could be faster and easier to start and trade Binary Options.

The reasoning behind placing a Binary Option trade in the opposite direction of the breakout is as follows: if I were to place a stop, say 10 pips below my breakout point, then in the event of a breakout failure I would lose 10 pips. However, by placing a hedge in the form of a Binary Option trade in the opposite direction of the breakout, if the EURUSD trade goes sour and I hit the stop loss, then my gain on my Binary Option trade covers that loss. So in a way we can think of the hedge is transferring the risk from below the breakout point to above it, since we are not rid of the risk completely. If my Binary Option trade expires at a loss, I would then like to cover that loss with my EURUSD trade. However my experiences have shown me that a breakout tends to either win big or lose big, rather than fizzle. In other words, the chances are much greater that the breakout will move one way or the other, rather than stay forever at the breakout point. So the chances of losing this hedge are very low.
The image above illustrates this. Between point A of the breakout and B of my stop loss, the hedge is profitable. Above point C the profitability is theoretically limitless. So this shifted the risk from area A-B to A-C, where the breakout is unlikely to fizzle.

Disclosure: I’m affiliated with StartOptions.

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Comments

One Response to “Trading Binary Options During Key Market Events”

  1. Brian Campbell on March 23rd, 2010 7:27 pm

    This is an exciting week for forex trading. Thanks for the options tips, many forex traders don’t fully understand currency options. I’m always interested in learning more about them myself :)

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