Trading 2 Binary Options to Reduce Risk and Increase Profits

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Trading 2 Binary Options to Reduce Risk and Increase Profits

It is a called a straddle or hedged trade, and involves taking two binary option positions in the same asset. It has the potential to reduce risk, and double your gain. Here’s how to do it. Assume call and put options that have an 80% payout.

Step 1. Initial Trade

Like any binary options trade, pick an asset and choose your direction. Say the price just broke above a descending trendline indicating the downtrend is over and the price could begin to trend higher. Buy a call option.

If the price continues to run in your favor you don’t need to do anything. Draw a trendline on the new uptrend, and as long as the price stays above that trendline you have nothing else to do because your option will expire in the money.

If the price drops below the upward trendline though, you need to make another trade.

Step 2. Opposing Trade

You are in a call option because the price is advancing in your favor. Then it breaks the trendline indicating a correction or even a potential downtrend is beginning. We now do not know if our call trade will finish in the money. Therefore, when the price breaks below the trendline we buy a put option. This way if the price continues to decline we will profit from the put option.

Scenarios

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  • If the price continues to advance on the first trade, then there is no second trade. The price ran in your favor and you make $80 on a $100 investment.
  • If the first trade goes out of the money immediately and continues to trend against you, you do nothing. It may reverse course and produce a $80 profit, or if finished out of the money you lose the $100.
  • If there is a reversal then you take a second trade:

o If the price finishes above the strike price of the call, and below the strike price of the put, you win on both trades, netting $160 ($200 invested)

o If the price finishes below the strike of call you lose $100 on the call. But the price will be below the price of the put, resulting in a $80 profit. So you only lose $20 compared to the $100 risked on the original call trade.

o If the price finished above the strike of the put you lose $100 on the put, but the price will be above the strike of the call, resulting in a $80 profit. So you only lose $20 compared $100 if you had only taken a single put trade.

o It would be a pretty rare event, but is feasibly that you could lose on both trades. The price would need to whipsaw and trade below the call strike at the time of the call expiry and then surge above the strike price of the put at that expiry. This is unlikely to occur, but is possible. To avoid this, make sure there is some distance between the price you buy the call at and the price you buy the put at.

Final Thoughts

The strategy pays off if the price settles in between your call price and put price. The larger the area between the call and put price the greater the likelihood this scenario occurs. If your call and put are only 5 pips apart in the EUR/USD, that is a very small area for the price to settle in. But if your call and put are 30 pips apart, that provides a wider area for the price to settle in, more likely to result in a profit on both trades.

If your first trade is very far in the money, and is unlikely to expire out of the money, then there is no real reason to take a second trade. You’re better off just taking your 80% on one trade than taking a second trade which goes against the current momentum.

Only take the second trade if looks like the price is reversing–trendlines can be a useful tool here–because this way you hedge your bets. Due to the reversal it is unknown if the first trade will profitable, so by taking a second trade in the opposite direction you reduce your risk if only one finishes in the money, and you double up if they both finish in the money.

Risk and Money Management: How to Reduce Your Risks in Binary Options Trading

In this article, you will find out how to minimize your risks when trading binary options and earn more with smaller investments. You will also be able to compare brokers based on your risk appetite, as well as download some tips for reducing your risk and maximizing your profits.

You Will Learn:

Read these instructions all the way through, and you will save both your money and nerves. What is even more important, you won’t get disappointed with binary trading from the start and will learn the basic principles for successful trading. Below, you will find the most important info for your future business. Be careful and patient. Good luck!

Alex Ladko Binary options expert, owner of binaryoptionclass.com

Why People Lose Their Money When Trading Binary Options

Beginner traders often put large amounts at risk when investing in binary options. As a result, they lose their initial deposits quickly and get disappointed with online trading.

Most beginners lose their deposits just because they don’t follow the basic risk management or money management rules.

Here’s an example:

Sam learned about binary options on the net. He remembered he had wanted to try Forex trading for a while. However, in case of binary options, everything is much easier, and so he decided to explore binaries.

Sam invested a lot of time in finding a broker that suited his needs, he studied popular strategies, and finally made his first deposit. He selected a broker with a minimum deposit of $200 and a minimum investment of $20. So he just deposited $200 and started trading, investing $20 per trade.

After making 5 trades based on one of the strategies, Sam was twice in the money and three times out of the money. His account balance dropped to $170.

At that point, Sam thought that the strategy just didn’t work. He decided to try a different strategy and went on trading, investing $20 per trade again. After making 8 trades with this new strategy, he was four times ITM and four times OTM. His account balance now dropped to $150.

Sam got a bit bewildered, but then he discovered that his last two trades were profitable, and so he decided to raise his investment amount, this winning his money back. He bought an option at $50 and lost, His account balance lowering to $100.

Sam went on trading without relying on any system, just switch from one strategy to another. He made another six trades, three ITM and three OTM. His account balance dropped to $55, and his net loss was $145. He got disappointed and angry.

Sounds familiar, doesn’t it? Let’s see why Sam was wrong:

    After depositing $200, Sam invested $20 and even $50 in a single trade

By doing this, Sam didn’t even think about risk management, as his risk per trade was 10% to 30% of his account balance. Even the most experienced traders never exceed 2%; otherwise, you may just blow up your account. Later, I’ll explain why. For now, just accept it as the golden rule of money management.

Sam didn’t stick to any system

He made 5 trades based on one strategy, then switch to another, and then, perhaps, to another. This is another serious mistake. In order to decide whether a strategy works for you or not, you need to make 50 or, better, 100 trades. Then you need to analyze the result and conclude whether it fits your goals.

Sam tried to win his money back by raising the investment amount, which was already high

Having made a few profitable trades in a row, which drew him crazy, and he increased the investment to $50. This is a sure way to blowing up one’s account. Keep yourself well in hand and never break the rules you set.

What Risks Are There When Trading With Binary Options?

While there are ways to reduce the risk that is taken on by most financial traders, the truth is that all investments come with at least some form of risk – and this includes trading in binary options. Therefore, investors in this arena are well advised to carefully research the types of risk that can be involved, and only then to proceed in ways that will ensure that risk will be kept to the minimum amount possible.

Types of Risks that Can Be Faced with Trading Binary Options

Although there is no way to completely remove all of the risk in any type of investment, having an acute awareness of the potential risks that may be present can help in reducing some of the uncertainty for traders. This alone can help traders to focus more on the actual investment at hand, knowing where certain pitfalls may lie.
Some of the potential risks that traders may face in the binary options market can include:

Market Risk

Similar to other investments, the trading of binary options can involve overall market risk. In nearly all cases markets can – and oftentimes do – move in various directions without ample warning. Although there are ways to predict potential market movements, even the most thorough of analyses cannot always accurately pinpoint exactly which direction the market will take.

Fixed/Capped Profit Amount

Another risk that binary options traders need to be aware of is fixed profits. In the case of these investments, both losses and gains are capped – meaning that there is no unlimited upside potential with these investments. On the positive side, however, losses are also capped.

Extremely Precise Profit and Loss Points

In addition, unlike many other investment vehicles, binary options are measured by the slightest tick. This means that oftentimes the value for this type of option may be determined by as many as three or four decimal points. With binary option trading, even 0.0001 points may mean the difference between a trader being on the profit or loss side of the investment.

Illiquid

Binary options are also not considered to be a “liquid” type of investment. Therefore, because these vehicles are not able to be exercised at will, traders must wait until the options expiry date before he or she can take their profits or losses.

No Ownership in the Underlying Assets

Because binary options are simply a wager on the direction of an underlying asset, traders are not actually investing in the ownership of any type of tangible asset. While some are comfortable with this type of investing, others may see it as a potential risk.

Sparse Regulation

One of the biggest risks when trading in binary options is the fact that the OTC markets are currently not regulated. This means that even though most binary option trading platforms are as they appear, there is a chance that traders may run into some forms of unscrupulous practices.

How to control risk trading Binary Options

There are several ways to limit your risk trading binary options which many profitable traders employ and are the basis of a solid trading strategy. The first of these is to choose a binary options broker that will enable you to manage your risk effectively, including one which offers both a protection rate and features to limit losses. A ‘protection rate’ is the percentage that a broker offers to pay back to the trader for those binary options closing out of the money. This is usually between 5-15% and is a good way to ensure that even out of the money trades do not result in a total loss of the investment.

The other features offered by brokers which binary options traders can use to reduce risk are ‘close early’ and ‘rollover’ features. In situations where the options appear hopelessly out of the money, t hese provide traders a choice to either close the position early, for a smaller loss of extend the expiry time in hope that the trade recovers. Although using these are not ideal and may also result in losses, including these risk management strategies in a long-term trading plan will certainly reduce total losses over time.

Possibly the most important element of controlling risk in binary options trading is to limit your initial exposure and to trade only with money which can be lost. Many professional traders use the ’2% rule’ which only allows them to risk a maximum of 2% of their trading account on any single trade. Although this may seem like a small amount to begin with, buiding up over time an account value can grow substantially using this small piece of advice.

Do the Advantages of Trading Binary Options Outweigh the Risks?

While there are some risks to be aware of when trading binary options, these financial vehicles can present a number of great benefits as well. In fact, one of the biggest benefits to binary options actually involves that fact that a traders’ risk is known from the beginning of the investment.

This means that it is known by a trader exactly how much he or she stands to gain or to lose prior to even making their investment. Therefore, even though a trader’s gains are fixed, so are the potential losses – and this can make it possible to move forward with the investment without the need to take on an undetermined amount of financial exposure.

The probably best way to get to know Binary Options trading better is by using a demo account. With such an account, you can trade under real market conditions without risking your own money. We highly recommend the only regulated broker in the US where the demo account is 100% free and without limitations.

Our recommendation: Start trading Binary Options with:

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RISK WARNING: YOUR CAPITAL MIGHT BE AT RISK

Best Binary Options Brokers 2020:
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    BINARIUM

    Best Binary Options Broker 2020!
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    Free Demo Account + Free Trading Education!
    Get a Sign-up Bonus:

  • BINOMO
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    2nd place in the ranking!

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