Plain and simple rule of trading: Binary Options are excellent hedging tools in conjunction with conventional Forex positions.
First, let’s look at why Binary Options act as a hedge against traditional Forex:
1) Fixed Risk/Reward: Unlike Traditional Forex, Binary Options have two predetermined and fixed outcomes. Either you are in the money at 85% return, or you are out of the money (out either your invested amount or less depending on the instrument).
2) Capped Risk: Unlike Traditional Forex, with Binary Options you can never lose more than your invested amount. There is no need to place Stop-Losses in Binary Options.
3) No Leverage: Unlike Traditional Forex, Binary Options trading does not require leverage in order to succeed. You can profit without risking a single cent more than your trade amount. As you already have your Stop-Losses on your Traditional Forex positions, you may use your Binary Options trading to hedge against your forex positions without using leverage.
4) Directional Hedging: Unlike Traditional Forex, with Binary Options you are only trading on the direction the asset will close at expiry, either higher or lower. Thus allowing you to place your hedge by trading a CALL or PUT for the opposite direction of your traditional Forex position.
Let’s review an example of implementing your traditional Forex hedge using Binary Options:
Say you take a conventional Forex EUR/JPY (short or long) position combined with a Stop-Loss. To hedge, you would simultaneously buy either a PUT or CALL Binary Option, in the opposite direction of your traditional Forex position. What this did is cover your losses or help you even be profitable in the event that your (short or long) position fails.
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