Hedging Forex positions with binary options

While binary options already offer many advantages as a trading method, when combined with Forex, they can offer real protection, provided of course that you know how to do it. As trading in the currency market is associated with many risks, the use of a specific tactic will allow traders to hedge themselves. But how do you use binary options as a cover? Update on a particularly interesting strategy:

The principle of binary option coverage

The Forex market is particularly popular with retail traders, especially because of its high liquidity and the different possibilities it offers. However, investing in the world’s largest market is not without risk, as it is also a very volatile market. Also, in order to cover these loss risks, traders use the binary option strategy.

This consists, in fact, in opening a binary option position parallel to its Forex position. This position will then take the opposite direction from the first position, in order to cover losses in the event of a false estimate. For example, if the trader bets on the rise of a currency pair in Forex, he will bet on the fall of the binary option asset. Thus, whatever the evolution of the prices, it is safe.

In addition, it is perfectly possible to make significant gains with this combination of Forex and Binary Options. All you have to do is identify the key moments and determine the values to bet on to make a profit. These sums, which, to be specified, are often larger than for traditional trades.

When to use this strategy?

Since this hedging tactic is mainly aimed at reducing or even completely eliminating risks, it must be used when the risks are most important. Experts advise in particular to use them following the publication of financial and economic results or official public announcements. At these times, the market can be shaken up and it is necessary to hedge yourself well in trading.

How to do it in practice?

Before practicing the binary option hedging method, it is first necessary to master the basics of Forex trading and to have a good understanding of how binary options work.

  • Open the position on Forex

We therefore start by opening a position on Forex, making sure that the Take Profit is further away than the Stop Loss from the beginning.

Example: An upward position, with Take profit at 50 € and Stop Loss at 30 €

In case of a win, the trader pockets 50 € and in case of a loss, he loses 30 €. His expectation of gain is then 50 – 30 = 20 €.

  • Place a position on the binary option

By hedging the Forex position, these €30 losses will be minimized to the maximum or even fully hedged. To do this, we open an inverse position on the binary option, therefore a low position.

In the example, we will choose a 30-minute time limit, because it is the average time of a movement of this type. And we will bet 36 € (for a return of 83%, or 30 € of profits that will exactly cover the Stop Loss).

Here are the main scenarios:

  • Scenario 1: The price drops, so the trader loses the €30 Stop Loss and earns €30 as a binary option. Result: there is no loss.
  • Scenario 2: The price rises and touches the Take profit. The trader earns €50 in Forex and loses the €36 in binary option. He then makes a profit of €14.

In both cases, the trader is a winner.