Binary options traders are always on the lookout for strategies that will enable them to make a profit from their trades. One way of doing this is to try hedging the news. This is a relatively new and innovative method of trading and can often be extremely successful.
The market is always sure to make a significant move following a major economic news announcement, and the hedging strategy is especially useful if a trader expects an increase in price action on a specific asset but as yet is unsure as to which direction it will move. This is often the case when a major piece of economic news is about to be released as usually, the market will anticipate the rough proximity of the news to the forecasted figures but then again, it may also be taken by surprise. This makes the hedging strategy ideal when trading with binary options brokers as it involves an investor taking two opposite positions.
For example, a trader may lock in both a Call and a Put trade before the news release and then, once the information has been put out, they will then place a second trade based on the released figures – so in the case that the figures were lower than anticipated, the trader could lock in a second Put trade with the same expiry time to negate the loss of their Call trade and thus improve their profit.
A hedging trade can only work if an investor has sufficient time to execute the necessary trade to balance the incurred loss. This means that they must set an expiry period that is long enough to give them time to play out their hedging strategy effectively. Although some people consider hedging to be counterproductive due to the loss of investment capital, a trader can get a better deal on strike price by entering into the trade early on both sides.
Effective Hedging Strategies for Trading the News
When trading the news, such as the NFP, there are a number of effective strategies which have been proven to be successful.
Traders who wish to capitalise on the volatility of a news announcement should try the slingshot strategy. This involves looking to scale out of the winning positions as trading moves in favour of the investor, and there are a range of entry strategies which can be put into play to trigger the initial position. Before opening a position, the investor must identify support and resistance and determine any trends that exist before the announcement takes place on the hourly charts. Resistance and support is vital as these are the “cut point” at which the trader is able to close off his position should the price go too far against them. The stop for a long position can be placed below the support while stops for the short positions is able to go above the resistance to minimise losses should either level be broken.
While this can be a risky strategy to employ, a trader may want to try this if they have good risk and money management in place. The investor should always go into the news release having identified the levels of support and resistance and following the announcement, the prices should be watched to observe whether the long term resistance or support levels come into play. Should this be the case, the investor should watch to gain an idea whether these levels will hold. Price action is key here as the trader needs to see the support coming to the market at the long term support level before putting in place a long position with a stop placed below support. Should the support level hold, an investor can start scaling out when the position begins to move in their favour, thus capturing as much upside as they can.
Long Term Use the News Strategy
Sometimes, when a news announcement is released there will be a lot of volatility around the time of the release and then market trends will once more resume their original trajectory. This means that long term traders are able to add positions at a more favourable price than they otherwise could. For example, an investor is able to look at a long term chart in order to establish a resistance level in which they can sell should market prices reach this level. Once the asset price moves into this resistance area, the investor can start to look to sell, placing a stop above the zone of resistance. By looking at a short term chart for bearish or bullish reversal patterns in price action, a trader can even improve his chances of executing this strategy effectively.
Of course, it is important to remember that using binaries for hedging can be a risky strategy due to the erratic nature of high impact news releases, and therefore any of these strategies should be enacted with care.