Most Forex traders have heard of Stop-Losses and hopefully they employ them as a means of minimizing their losses when their trades go sour. Today’s conventional Forex culture has been educated in terms of minimizing losses. Few Forex traders can tell you that they know anything about hedging their Forex trades. Hedging is simply not a part of the Forex culture. There are at least two primary reasons for that.
First, Forex traders cannot hold the same position in both directions. Second, other hedging instruments like vanilla Forex options are not so well known and liquidity is a problem. Fortunately, Forex Binary Options solve all of these problems and many more. In fact it is quite easy to create efficient and effective hedges to Forex using Binary Options.
As you may already know, a Binary Option is an all-or-nothing fixed payout non-exercisable option with hourly expiration and no spreads or commissions involved. This means that they are ideal for certain situations, particularly hedging. Let’s see how to combine Forex and Binary Options in a simple example:
In the chart above, the EUR/USD breaks out of a base. A typical Forex strategy will involve a long position on the EUR/USD combined with a Stop-Loss. So if forex broker believes that the EUR/USD ’s breakout will succeed you could Buy $100K EUR/USD and then place a Stop-Loss 10 Pips below the breakout point. If this strategy offers an unlimited upside and $100 downside if the breakout fails and the Stop-Loss is hit.
Believe it or not we can now add a Binary Option that would decrease the total downside to $0 if the Stop-Loss is hit. For example if you also buy an 80% payout $125 EUR/USD PUT Binary Option at the breakout point then you would profit $100 from the Binary Option if your Stop-Loss is hit and this would offset your Forex loss completely.
As a final note, make sure to capture more than $100 profit on your long Forex position since this is your downside from the PUT Binary Option. In practical terms this means that you exit your long Forex position after a move up greater than 10 pips. This Forex-Binary Option combo strategy has an unlimited upside and $0 downside.