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Forex Hedging Strategies When A Breakout Point Is Tested
A breakout is most likely to fail below the breakout point with Forex trading, yet thankfully there is a simple way to hedge the failure by shifting the risk to above the breakout point. It entails the use of a humble trading tool: placing a Binary Options trade for the opposite direction when the breakout is tested.
For example, let’s look at this Thursday’s Swiss Consumer Price Index (CPI), which will impact the USDCHF. You’ve placed a traditional Forex USDCHF long trade in anticipation of the Swiss CPI. If the Swiss CPI report is better than expected, then a breakout will likely occur. Without using a Binary Options hedging strategy, you could be shaken out if the breakout fails and hits your stop-loss. However, you instead employ a Binary Options trading hedge and place a binary options trade at the moment of your breakout point for the opposite direction. The risk-management effect is similar to a stop-loss, except that you are now profitable as long as a failure of the USDCHF breakout point does not leave your Forex account with a greater loss than your binary options trading profit (profits with Binary Options tend to be high – around 80-85%). If you incur more loss in your Forex account than the profit received from your Binary Options trade, you would then immediately exit your USDCHF position.
Now compare this with your stop-loss risk management. A stop-loss hit always means losing money. However a Binary Options trading hedge is profitable both ways. It simply switches the risk to above the breakout point, where you are profitable anyway.
Understanding this hedging strategy means that you no longer have to fear the instrument’s testing of your stop-loss point in a traditional Forex trade. You can now calmly face the test’s that come, knowing you have a handy tool ready to strengthen your Forex position. As profiting with Binary Options occurs when you get the direction of the instrument’s price at the expiry price correct, and not the exact price at expiry, you can use it as an excellent hedge when your Forex breakout fails.
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Forex Trading Strategies With Binary Options
Binary Options can be ideal for Forex strategy trading. The primary advantages, which we will summarize below, are related to leverage, risk/reward and momentum trading.
Expiration is the most obvious difference between conventional Forex trading and Binary Options. Hourly Forex Binary Options expire at the end of the hour, and pay out a fixed return of 85% even if the expiration price is just a fraction of a pip in the direction speculated. Binary Options do not use leverage, so you cannot lose more than you bet. And since no leverage is required then the risk / reward is much greater during momentum trading. For example using a breakout strategy a $100 trade will profit $85 if it is just a fraction of pip “in the right direction” at expiration, which happens at the end of the hour.
These advantages come together when using a Forex trading strategy such as momentum trading. In the chart above, a breakout from the base formed by the GBP/JPY causes momentum in one direction, but of unknown duration and size. On the other hand, Binary Options offer simple directional trading so they are basically a perfect fit for momentum traders. As long as you accurately predict direction of the breakout, you can make 85% profits by being right even if the pip moves a fraction in the direction speculated. This would have required huge leverages with conventional Forex with incomparable risk / reward.
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