Controlling risks using binary options makes the trader’s job a lot easier. In fact, controlling risk is critical for traders, yet can be very hard if trading futures and forex because price can literally jump over their hard stops. The perfect example was the Brexit vote.
Controlling Risk Using Binary Options
This was a historical vote with extreme volatility. Major concerns when entering the markets was trade risk because it was feasible that a trader could get “stuck” in a trade. Prior to the results coming out, the polls showed that the “Remain” side would win. On this news, the GBP/USD surged upwards almost 200 pips. However, once the results started trickling in, the “Leave” campaign began pulling ahead and one 15-minute bar revealed over a 500 pip drop on the GBP/USD, especially since volatility was high but volume was low — prime conditions for getting “stuck” in a trade.
Binary Options allow a trader to choose their risk level when they enter the trade. For example, here are the first three trades, with risk identified, that were executed at the beginning of the week:
- Gold, Long weekly expiration for $20.50 in risk per contract
- US 500, Short weekly expiration for $25.50 in risk per contract
- Wall St 30, Short weekly expiration for $20.75 in risk per contract
Once the votes started coming in and the “Leave” side started winning, another three trades were entered:
- GBP/USD, short 11pm expiration for $26 in risk per contract
- USD/JPY, short 3am expiration for $30.75 in risk per contract
- EUR/GBP, long 7am expiration for $45.75 in risk per contract
The green check marks on the image below indicate that the trades expired “In the Money”.
The last three trades are set for expiration during the US session. Using the Nadex Binary Options, traders could exit these trades prior to the US session thus locking in profits or they could take a wait and see approach.
Futures, options and swaps trading involve risk and may not be appropriate for all investors. Past performance is not necessarily indicative of future results.