Attractive Hedging Strategy for Forex Trading Using Binary Options

We Forex Traders are all too familiar with the dreaded stop-loss zone and the testing of the breakout point that results in us being shaken out of our trade and forced to choose lower and lower stop-loss points. We get tested to the point of exhaustion of these tiring stop-loss point shake-outs when we re-enter the same breakout point. It is in this dreaded stop-loss zone and encountering stop-loss shake-outs that we often encounter failure in our Forex trading strategies. We know the breakout is most likely to fail below the breakout point, but is there a way to cover ourselves from this failure? The answer lies in using a Binary Options Hedging Strategy.

Hedging using Binary Options shifts the risk from the stop-loss zone to the area above the breakout point, where the prices are more likely to rise and where the breakout is less likely to fail (attributed to the properties of trader momentum). And it is relatively simple to do:

To exemplify a hedging strategy, Trader Smith places a trade of 1 mini lot EURJPY long, when its price crosses his breakout point of $1.36. Should the EURJPY test this breakout point before he exits this trade, Trader Smith will place a $100 binary option trade in the opposite direction. What this does is shift his original breakout point lower, similar to a stop-loss, such that Trader Smith is now profitable as long as a failure of the EURJPY breakout point does not leave Trader Smith’s Forex account with greater than a $70 loss. If Trader Smith incurs more than a $70 loss in his Forex account, then he immediately would exit the EURJPY position.

What this hedging strategy just did is effectively shift the risk of breakout failure from the point below the breakout to the point above the breakout. The nice part about this hedging strategy is that most breakouts are often tested slightly below the breakout point, yet with this hedging strategy we protect ourselves right in the area below the breakout point. The result is that we are then not getting worn out relying on the use of stop-loss points lower and lower than the breakout point, as we all too commonly do as Forex traders. And the best part of this strategy is that the risk has been shifted to the area above the breakout point (our Forex trade must make at least $85 profit in order to cover the binary option loss). So long as the breakout has not failed, we will more than likely cover this hedge. The golden rule that the breakout is most likely to fail below the breakout point has now been hedged against: