CHARTING
Managing Risk
Using Binary Options In Forex
Managing risk and proper stop placement may be the most difficult aspects of currency trading to master. Here’s how you can use binary options to take advantage of the opportunities that volatility creates while controlling risk.
Even during times of normal market conditions with fundamental announcements, surprise decisions from governments or central banks, and the overall volatility of all markets over the last year, it can be difficult to accurately gauge risk on any trade.
Take, for example, the market shock of the March 2009 Federal Open Market Committee (Fomc) announcement, when the Fomc decided to embark on a $1 trillion—plus quantitative easing program. Upon this news, the market did not just move, but gapped almost 160 pips (1.3130—1.3280) in the euro—US dollar (Eur/Usd) pair! Unfortunately, this caused many currency traders, even those who had done everything technically correct by placing a stop, to lose more than they bargained for. In many cases, traders lost more than they had in their account, which left them with an outstanding debt to their brokers.
Another example of a problem that currency traders face, one that can be particularly frustrating to new traders, is just after clicking the buy/sell button, the market makes a quick 30- or 40-pip move against the position and stops you out. Then, of course, the market moves back in the original direction of your trade, which would have created profit, but that doesn’t matter because you were stopped out. This is a natural aspect in any volatile market but is frustrating nonetheless, and costly.
Figure 1: SPOT FX OR BINARY OPTION? On this five-minute chart of the EUR/USD, had you made the spot FX trade, you would have risked 57 pips or $570 on one standard contract. If you take the binary option trade, your risk would be about $310 on the equivalent of a standard FX contract.
From spot forex to binary options
For these reasons, many traders have transitioned into the binary options market as a complement to spot forex trading activities because doing so provides them with an instrument with which they can take advantage of the opportunities that volatility creates while controlling risk.