Hedging Trading Strategy


The binary option hedging strategy can be an excellent way of reducing risk and increase the successfulness of your trades. Whilst the initial reaction is to use this type of strategy on standard high and low type trades, it can be exceptionally successful when applied to one touch trading techniques. In general a one touch trade will have a higher rate of return simply because it is a much higher risk strategy. Many traders will choose to avoid this type of trade, however, with the right approach and the binary options hedging strategy; you should be able to successful trade in the high risk areas and generate returns as high as four hundred percent!

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One Touch

You are probably already familiar with the principle of one touch trading. Put simply, you choose a price that you feel the asset will reach; if it does you gain the rate of return; if it does not you lose your investment. You can also specify a price that the asset will not reach. To understand when to trade and when not to, it is essential to use good analytical tools and study market movements as well as your specific asset. This is not a process which should be rushed, as emphasized by the fact that most of these types of trades have weeklong expiry dates. By undertaking a longer term trade you have more opportunity for the asset to reach your designated price.

Adding Hedging into the Equation

The basic principle behind binary options hedging strategy is to place two trades in opposing directions. Usually the second trade is placed after the first trade has already moved in the right direction but you are wary that it will remain in the right place by the end of your trade. The second trade assumes the asset price will move back; whichever direction the price moves in you will have one successful trade; the return from this trade will cover the cost of both trades and still leave you a small profit.

However, this approach is not viable when undertaking one touch trades. In this type of trade you should have completed your homework and be confident that the trade will move in one specific direction. Placing a trade which goes against this view suggests that you have not completed your research properly. Instead, this type of binary options hedging strategy involves placing two trades in the same direction. The best outcome is that both trades are successful, the most likely is that one is successful and covers the costs of both trades; the least desirable outcome is when neither of the trades finishes in the money.

It is easy to understand this principle by following an example:

You invest $100 in a one touch trade which is offering a four hundred percent rate of return. Once the trade is in progress and the price is moving in the right direction you place a second $100 trade with the same rate of return. If both trades finish successfully you will have an $800 profit! If only one trade completed successfully you will have $400; less the cost of the two trades still leaves a profit of $200. Of course, if both trades are unsuccessful you will lose $200.

The secret to successful employing the binary options hedging strategy is to avoid placing the second trade until the first trade is well underway; the second trade can use a lower one touch price which will increase the chance of it being successful and you receiving some of your initial funds back. There are only three possible results; two of these will give you successful trades whilst one will give you a loss; this means your risk has been reduced and your chance of success increased.

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