Trading binary options makes a difference because traders can lock in their risk on entry. Then, if the risk is low enough, there is no panic when the market moves against them. This morning was a great example on the GBPUSD binary option.
Trading Binary Options Makes a Difference
A binary signal was issued at 4:15 am New York time this morning for the GBPUSD. The signal was to buy at or near 1.2520. However, I like to lower my risk so I go out one strike price. In this case, I went out to the 1.2528 strike for 6:00 am New York time expiration. Two bars later, price plummets to 1.2506 and then immediately recovers. While trading this in the spot forex market would have likely resulted in a loss, since I locked in my risk on entry, I stayed in the trade knowing that this was just a reaction to the 4:30 am market report (Manufacturing PMI).
The TradeStation chart below shows the entry signal (blue dot) for trading binary options. Price was trading above the pivot line and the TradersHelpDesk Trend Average True Range indicator has been supporting price. The higher timeframe (60 minute chart) indicates that price should make new highs after testing the ATR with buyers coming in. The green dotted line represents the strike price and the green arrow shows the entry on open (signal is issued on previous bar).
With forty-four minutes remaining until expiration, I opt to take profits at $85. My risk on entry was $30 per contract, resulting in a profit of $55 per contract (excluding exchange fees) by trading binary options.
In this case, the charts clearly identified that price should move up. I was willing to risk $30 per contract on entry, knowing there was a market report coming out. Although price did move against me, it also came right back to where I thought it would go and I was able to remain in the trade because I knew I was not trading with leverage.