Hedging strategies are very commonly used by experienced binary options traders in order to mitigate losses and minimise risk when executing a trade. If you’ve ever heard of “hedging your bets” this is exactly what the investor is doing when they put this strategy into action. One way of ensuring that they end up “in the money” hedging may seem counterintuitive to some investors, but it is a good way to increase profits little by little.
The benefit of using a hedging strategy is that an investor descreases their risk and the possible volatility of their investment by reducing the change of losing and locking in current profits. Hedging woorks by moving the risk from the stop-loss zone to the area that is above the breakout point. At the breakout point, the prices are most likely to rise and there is less chance of loss. By placing both a put and a call option, a trader can decrease any risk associated with the high return yet fast paced binary trade contracts.
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The Most Effective Way to Use Hedging Strategies for Trading
One of the best ways to use the hedging strategy in binary options trading is to use it in conjunction with major news announcements relating to finance. For example, should an increase in price action on a chosen asset be expected by the trader is uncertain as to which direction prices will move in, they can employ the hedging strategy before the news is released. In general, there will be some anticipation in the market about the rough proximity of the forecasted figures to the news, however it is always possible for the news to take everyone by surprise. This uncertainty is what makes the hedging strategy so successful in these circumstances, as a trader will take two opposing position, locking in both a put and a call trade before the news announcement, and then once the information has been released, they then execute another trade that is based on the figures that have been released. Say, for example, that the figures were not as high as anticipated, the investor is able to place another Put trade, negating the loss of their already placed Call trade and improving their profit. This type of trading can only work however if the investor has adequate time to execute the trade that is needed to balance the loss they have incurred. In order to do this, they must set an expiry time long enough to allow them enough time to play out this hedging strategy efficiently and effectively. Traders can also get good deals on strike prices by entering early on both sides into the trade.
There are several ways to use hedging strategies in these circumstances:
This strategy involves the trader looking to scale out of winning positions when trading is moving in the investor’s favour and there are a number of entry strategies which can be adopted in order to trigger the initial position. Before opening their position however, the trader has to identify resistance and support, determining existing trends on the hourly chart before the news is released. Their long position stop should be placed below the line of support while the stop for short term positions should be placed above the resistance line in order to minimise their loss if either level is broken.
A trader with good money management and risk minimising strategies in place may want to try this tricky strategy. After identifying the levels of resistance and support, the trader should watch the prices following the news announcement to see if either the long term support or resistance levels will come into play. If this is the case, the trader needs to watch and get a clear idea about whether the levels can hold. If support comes to the market at the long term support level, they can put in place a long term position and place a stop below the level of support. If the support level holds, they can begin scaling out when movement in their favour begins and thus they can capture as much upside as possible.
Long Term Use the News
Often, on the release of major economic news, a lot of volatility will be caused in the market immediately around the release but soon, the market trend resumes its original trajectory. Long term traders can therefore add positions at a better price than they could otherwise by looking at the long term chart and establishing a resistance level in which they are able to sell if the market price reaches this level. Once the price of their chosen asset moves into this area of resistance, they can begin looking to sell and place a stop above the resistance zone. If a trader looks at the short term charts in order to observe bullish or bearish reversal patterns in the price action, they can improve their chances of successfully executing this strategy even more.