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Hedging binary trading strategy - How to limit loss

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One currency pair hedging

Hedging is another binary options trading strategy. It allows traders to reduce risks to a minimum due to a wrong decision in the past, together with a decrease of potential profits.

The best broker for hedging strategy is the one offering you 10% refund in case of unsuccessful trade.

The hedging strategy allows traders to correct their own errors caused by bad forecasts whether to buy Call or Put option. This strategy uses one of the most common money management methods.

How Hedging Strategy works

For example, at 7:00 GMT you buy Call option on the EUR/JPY currency pair at 137.00 strike with a price of $100 and an expiration at 8.00 GMT the same day. Payment in the case of successful outcome (the price at midnight will be higher than 137.00 for any value) will be 75%, or $75, otherwise you will receive a refund of 10% or $10.

At 7:30 GMT the price of EUR/JPY reaches 137.10.

Buying of Call or Put option depends on the market situation and on the strategy you use in trading.

If you suspect that further progress can be changed in the opposite direction, now is the time to buy a Put option of the same amount and with the same period of expiry at the new strike price. Thus, we are putting the corridor in which, according to our assumption, the price will move.

This action is called one currency pair hedging.

Three possible outcomes on the Hedging Strategy

As a result, in this situation, there are three possible outcomes at 8:00 GMT.

First

The price of EUR/JPY is lower than 137.00 – first Call option lost, the Put option – win. The total net profit will be $85 ($75 for profit trade + $10 refund of loss). You have invested $200 and as a result – net loss from the two deals is $15.

Second

The price of EUR/JPY is between 137.00 and 137.10 – both deals are successful. The total payment will be $350 ($175 per every trade of 2). You have invested $200 and as a result – net payout is $150!

Third

The price of EUR/JPY continues to grow and by the time of expiration was above 137.10 – the first Call option is in the money, while the Put option – out. The total payment is $185 ($175 for profit trade + $10 refund of loss). You have invested $200 and as a result – a net loss from two operations is $15.

How can we hedge with lower risk

You see that both example can cause damage and one profit. But let's look at it from another angle. Before any deal, you should look at the behavior of the market and not trade at inappropriate time.

Buying the second option should takes place only if the price reached a certain level of support or resistance, or an abrupt change due to a certain event or news publication.

In most cases, such a situation of price adjustment in the opposite direction occurs. That’s why it is more likely to make a profit rather than loss.

Also we can hedge by opening the option for an asset other than the main one, over which insured transaction is done. There is a large number of assets for which the price movement is synchronized or goes in opposite directions.

In other words, if you have bought a Call option on EURUSD, it is possible to reduce the risks by buying a Put option on USDCHF, as these pairs move synchronously enough.

We recommend this strategy only to traders who have at least 2-3 years of experience in the financial markets. Before trading the second option you should wait the price to reach a certain level of support or resistance, or a drastic change due to a publication of an important economic data.