A lot of traders know what hedging is–it’s the act of somehow protecting your investment from losses–but more than 90 percent of them probably have no idea how to go about doing so correctly. This is because hedging is an extremely advanced trading strategy and the vast majority of traders should not attempt to do so in most instances. However, this does not mean that you should never attempt it. In a few rare cases, hedging is exactly the right thing to do, even if you don’t consider yourself to be a big time professional binary options trader. Luckily, with binaries, hedging is extremely easy. It’s still a semi-dangerous thing to do in many cases, but with this type of trading, that risk is alleviated because of the ease of access that you have to this marketplace. Let’s take a brief look at how you can hedge with binary options, and in what instances it might be a good idea to do so.
First, hedging usually–but not always–entails taking an opposite position from one you have already committed to. So this might mean going long on an asset that you have already sold short. With binary options, this is really easy to do, especially if you are using call/put options. If you buy a 24 hour call option on Apple, and then the price begins to drop, you can simply buy a few 15 minute put options and recoup some of your perceived losses. There’s no extra fee for taking a contrary position here as there is in many other types of trading, so it’s pretty simple. You might even find that you can make more money by doing this than if your original trade had been successful! This is rare, but it is possible.
However, just going against an existing trade isn’t always the best idea. You made that trade for a reason, remember? You wouldn’t commit to something like this if you hadn’t done your research and created an informed opinion on what you were doing. For example, many binary brokers will now allow you to cancel a longer term trade before the expiry if you act within a certain timeframe for a very small penalty. If you can do this, do it, but only if you are very certain that it is a losing trade no matter what you do. Canceling a trade that has the potential to make you a profit is an awful idea, even if the potential is not great. You can rebuild your bankroll in other ways, so if you have a chance to make money, take it.
Next, look at your broker’s insurance policy. Many brokers allow you to still keep some of your cash even if your trade is on the losing end of things. Some even allow you to customize this. So, if you can have a 10 percent refund for slightly less of a profit and you have the reason to believe that this is worthwhile thing for you to do, do it. It’s preemptive in a way that traditional hedging is not, but it could save you a lot of money in the long run.
These are alternatives to hedging that are pretty unique to binary options. But if you must hedge a position, you don’t have to look at the same exact trade. For example, let’s go back to Apple. You’ve taken out a 24 hour put position on it, but the price seems to be rising quickly now with no hope of going back down. So do you take out another 24 hour option, this time a call? You don’t need to. Look at shorter timeframes. Look at other types of options, namely, exotics such as one touch or boundaries. Be creative. Doing so will not only help you to better protect yourself from losing trades, but will teach you alternative ways of making money with successful trading in the future.