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Hedging is a common term in the world of trading, especially for forex traders who often use it to cover losses when trading positions are contrary to market conditions. Hedging action can be said as anticipation to overcome or even reverse loss from the current position. Not only in the forex spot, binary options traders can also implement this strategy, if the ongoing order is not in line with the price situation on the market. As long as expiry time has not been exhausted, hedging can still be done to overcome fears of trading that is likely to end out-of-the-money.
A brief example of a hedging strategy that can be applied in binary options can be seen from the following situations:
Si Upin chose the USD / JPY pair to open the "put" position in binary options. This action is based on NFP data that will drop within a few minutes, and is predicted to show worse than expected results. However, some time after placing the option, the downward trend has not yet been formed, and the price chart shows the market being ranging. Apparently, the data that was released a few moments later showed results that were inversely proportional to predictions. The value of USD also goes up and Upin decides to add a "call" order with a different strike price from the previous trading. When expiry time is up, the price is at the level estimated by Upin in the "call" option. Thus, Upin managed to prevent the loss of capital that he used in trading before, because the profit from the second trading can cover the funds lost in the failed trading.
From this example, Upin can only increase the percentage of return or increase the amount of capital in the second order to increase the trading profit. Other ways such as opening the "call" option can also be taken to increase profit opportunities. However, if you are the type of trader who does not like to take risks, placing options with the same level of return or capital amount can also be done as a solution to overcome losses.
How to perform Binary Options Hedging
Because of the many features available such as options for expiry times and types of trading, hedging in binary options can be done in various ways, including:
Adding Options with the same Expiry Time Limit
The most basic way of hedging is to open a trading position that is opposite from the previous position to cover losses. There are special requirements that must be considered in implementing the hedging strategy in binary options. This provision is to ensure the expiry of the second time option is the same as the previous trading option. So if the first trading has an hourly expiry time, at an interval of 30 minutes later you can open a trading position in the opposite direction and set an expiry time of 30 minutes to ensure both options will expire at the same time. This method is certainly done after you are sure that the price trend will be sustainable at least within the next 1 hour. In this way, the worst possibility that can occur is not getting any profit at all. If you are able to take risks to increase profit opportunities, you can increase the amount of trading capital and the level of profit for more transactions you believe will work.
An example of this hedging method can be seen in the following picture:
In the picture, traders who trade GBP / USD pairs place the "call" option with a total capital of $ 250 before the UK Manufacturing PMI data is released. However, the results of the economic report which subsequently released showed a decline in the manufacturing sector, and finally GBP was also pushed down. To overcome the risk of loss that is certain to occur, the trader then places the "put" option with the same expiry time limit from the previous trading position.
One of the things that is very important to note in the use of this strategy is the determination of expiry time. Make sure that you have enough remaining time to hedge, so that the estimated price direction is also more measurable before the expiry time expires.
Combining Binary Options Trading with Forex Spot
This method can also be one of the promising hedging alternatives. To apply hedging with this technique, you can place options and open positions in ordinary forex trading. For example, you place the "call" option for GBP / USD pair. However, for some reasons, you are not sure if the price of the pair will be at a level higher than the strike price when the expiry time arrives. Therefore, you then open a "sell" position on the spot forex with the same pair. Thus, the loss of one of the failed trades will be able to be covered or even offset by a greater profit from other trades.
Take advantage of Double Touch Options Trading Types
Double Touch Options is a type of trading that estimates the price will touch 2 certain price levels before the expiry time expires. For example, for trading USD / JPY which is currently at 109.395, you place an option with price levels at 109.415 and 109.490. If during the trading period the pair has touched these levels, then your trading can be called in-the-money.
To use it as a hedging strategy, you can choose levels that are higher and lower than the strike price at that time. For example, to trade USD / JPY like the case above, you can specify one level at 109.415, and the other level is at 109.380. This can benefit you if the movement of USD / JPY does not experience a certain trend (sideways).
One of the drawbacks of Double Touch Options is the lack of brokers who provide this type of trading. Many choices of binary options brokers whose quality is determined from various things, starting from regulation, including the presence or absence of Double Touch Options as one of the types of trading options. Therefore, it is important for you to really consider the priorities of the broker's components in order to get trading facilities to your liking.
Important Things in Binary Options Hedging
One thing that traders must always watch out for is that no one can really predict market movements accurately. In this case, greater profit opportunities thanks to hedging can also lead to greater risk. In addition to following binary options trading tips in general, traders also need to determine their initial goals in conducting a hedging strategy. Whether hedging is done only as a way to overcome loss, or also applied to increase the likelihood of profit. Some things that need to be considered before hedging include:
1. Recognizing Hedging Risks
Before deciding to hedge, you should calculate the risks that occur if hedging is really going to be done. These considerations can help you to analyze the best possibilities, whether the losses that can be experienced will increase or decrease if the hedging is actually applied.
2. Taking into account the amount of risk that can be borne
This is one of the core methods for securing your hedging position. As we know, there is no one type of trading that is safe from risk. If the risk can be managed well, the losses will be minimized and not burden your psychology.
This calculation can be done by determining the trading size. In binary options, the trading size can be interpreted as the amount of capital and the level of profit to be taken. If it is only functioned to overcome loss, the trading positions that you will execute can be opened with the same amount of capital and profit level as the previous order. If your hedging goal is to double profits, the level of profit and trading capital for each binary options can be distinguished by the small size. This distinction is made with the assumption that the option position with a larger trading size is a more confident estimate, so that the loss on the first trading option can be offset by the profit gain from the second option trading.
3. Conduct a Hedging Trial
If you are not experienced in hedging and are interested in trying it out, you can test this strategy via backtest or trade in a demo account first. Hedging risk is greater than ordinary trading, so it requires you to stabilize the results of analysis and trading methods. You will not know whether this strategy will have a good or bad effect on your trading system before trying it. Therefore, it is important for you to know how to work and the hedging system as a whole before actually using it in a real account. This will narrow the chances of hedging failure, because you will understand the things to watch out for from the hedging strategy.
4. Analyzing Hedging Results
The process of learning in forex or binary options never stops and continues as long as the trader is still trading. New things can happen at any time, and every trading result always produces special lessons that can be drawn from the benefits. Every trading position, whether it ends in-the-money or out-of-the-money, has ideas that can be learned to be able to develop the next trading position. Therefore, making notes about trading results with hedging can help you ensure the success of your strategy and understand aspects that need to be considered so as not to repeat the same mistakes if trading fails.
Conclusion
Hedging can be a profitable strategy for binary options traders. There are several ways that can be applied to minimize risk and increase profit opportunities. For beginner traders, it is recommended to test the use of this hedging strategy in a demo account first. This is because the possibility of risk can be doubled if the trader is less able to utilize the hedging strategy. If a trader cannot do the right analysis or determine the appropriate trading size, the loss can be greater than the initial loss that might occur before hedging.
For this reason, hedging is considered risky and too complicated for some traders. But for those who like to take risks, hedging is an attractive strategy choice and can increase the likelihood of profit. Many traders do not know that the more they close themselves to possible risks, the more they are less prepared to face the possibility of loss that can occur at any time. Therefore, dealing with risk with measurable management can help traders overcome their fear of risk. In this case, using a hedging strategy by applying a trading measure to the destination can be one way to deal with this risk.
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