A Hedge to the Dreaded Rally Reversal

Trading volume creating momentum after a market event and causing a breakout rally is great to the traditional Forex trader – so long as it does not rapidly reverse with momentum gaining then behind the reversal.  With leverage used in a traditional Forex trade, if a reversal occurs, any stop losses placed do little to prevent a loss, and potential of a greater loss than originally invested becomes a possibility.  Thankfully, there is a solution available to hedge the dreaded rally reversal.  This solution builds on existing principles of binary options, which use no leverage and allow traders to place two trades on the same instrument.

As an example, let’s say a popular market event that influences USD related instruments happens.  As more traders trade on a USD related instrument in response to the market event, momentum builds and a breakout rally results.  As greater number of traders then experience profits on their trades, many begin selling, and now selling momentum builds, causing the rally to unexpectedly reverse. A traditional Forex trader watches with dread as he/she knows that with the leverage used, any stop loss placed will result in a loss of money.  However, should traditional Forex traders use Binary Options to trade market events, traders have the ability to hedge their risk.  Many are shifting to the use of Binary Options in trading market events because trading a market event using Binary Options decreases a trader’s risk in comparison to using traditional Forex.

With using a Binary Options trade, as the rally on the USD instrument gets under way after the market event, a trader could place a binary option trade in the direction of the rally.  If the rally would then unexpectedly reverse, the trader is covered because the trader can place a trade in the opposite direction when the breakout price is crossed back down. Effectively, placing two trades on the same instrument just cancelled the original trade, but remember, no leverage is used in Binary Options trading, meaning a trader’s loss in this situation using Binary Options is often less than ten percent of the invested amount.  With leverage in a traditional Forex trade of a market event, much greater losses than just ten percent of the invested amount usually occur in a breakout rally reversal.  Hence, using Binary Options is simply the less risky way to trade on market events for all traders, novice and professional.