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Note:- I will try to use simple forex vocab so that everyone can understand it. I hate using complex trading vocab because I remember when I was a novice, I didn't understand a single word written in "guru articles". There was a time, when I used to call Elliott waves idiot waves. For me, I have learnt a few powerful (at least for me) hedging techniques. These aren't developed or made by me but by learning and practicing, I came to know that these techniques can increase ur potential gains as well reduce ur losses (this is actually an objective of hedging technique). Lets start with simpler one. 1- Breakout failure. This hedging strategy is not specifically for binary but can be used in almost all forms of trading. I will discuss it in binary option scenario. Many traders wait for the breakout and as soon as it happens, they purchase an option. Now there is a probability of breakout failure. What if this happens? I am not here to explain breakout strategies so it doesn't really matter which strategy is being used to identify a breakout. Probability of successful breakout can be high or it can be low. Lets take a look at the "breakout" image. (made by an expert painter). You were expecting bullish trend with a conqueror look on ur face. You might succeed but what if the breakout fails? Do u accept that u lost the trade and the entire option money? Incase of forex or any other market where u have control to limit losses by closing trade early, u can close it. But incase of binary option, u define ur risk before u enter a trade. The reality is u do have control over ur binary options even after u purchase them in the form of hedging. You can limit losses by hedging techniques. Simply buy another option in favor of "breakout failure" (in my example it will be put"). Now u will have two options:- one in favor of call (which is most probably loosing) and another option (after breakout failure) in favor of put (which will most probably win). Maximum loss will be the difference between what u gain and what u loose which is much less than what u were loosing before hedging. If u want numbers to be involved in this hedging game then best way is to try it out. As an example if both options r of $100 and payout is $75 then loss would be $25 (considering u get nothing when u loose) instead of $100 which u were loosing without hedging. You can use this technique in many other scenarios where u analysis about trend fails. But be cautious and do not fall into "Greed Trap". For example u hedge ur loss with bigger amount considering that breakout failure will continue and "why not gain instead of loosing" So u buy another option with bigger amount (say $200). There can be another breakout failure waiting for this opportunity (breakout really enjoys failing especially when u r novice). Worst Case scenario is both options fail to end in the money. You loose all invested money (if broker offers no payment incase of loss. Some offer 10% to 15% of invested amount incase of loss). 2- Hedging with alternative binary options This technique is also used to increase ur gains. Example: You purchase a standard binary option in favor of call because u r expecting the market to move upwards. Assuming ur analysis is correct, u will win and thats all. Hey!!!!.. it was just an assumption which can be wrong. If it goes wrong, then u need to think of some strategy which can protect ur money and why not pocket a little gains. Experienced traders here will be thinking of 100s of strategies but I am with YOU (poor novice). You might have heard about one touch options. These options pay u upto 500% of ur investment (take a break folks, I can see mouth-watering). Conditions r really strict in case of these options and if u r not good analyst, u will loose most of the time. Think with ur brain that if they r paying upto 500%, it will not be an easy analysis. There r lower payouts too on one touch options with lesser strict conditions and where ur analysis has higher probability of success. I know at this time most of u have forgotten about "we have bought a standard binary option and we r finding something to hedge it". Now ur analysis leads u to assume that next week, market will move like ......... (whatever is the most speedy thing in the universe). This analysis further leads u to assume that market will touch a certain level at least once in a week. You have already purchased a standard binary option which will only be profitable if the expiry price is above (incase of call) the purchase price. To hedge it and to gain more profit, u buy another one-touch option (coz ur analysis led u to do so). Worst case scenario is, again, if both options loose. (Scenario 1 in "one touch hedge" image) In "one touch hedge" image, best case scenario would be scenario 2 which will result in high profits which can offset looses caused by more than 1 trade. A mixed scenario of one loss and one win can either result in lower loss or a little gain. Any thoughts and comments r welcome. Critics... dun stay away.
I trade futures pairs using a mean reversion strategy called Statistical Arbitrage (StatArb). And the processes is highly dependent upon divergences from an equilibrium that is usually caused by some market event or interruption. This energy has the effect of reverberating through through price correlations and causing a divergence, which I wait until that divergence has statistical significance and then bet on its reversion to the equilibrium. During times of low volatility, like now, with the VIX below or near 20, these divergences, let's call them bumps, are much smaller than when in higher volatile markets. The other problem is runaway markets, like the Nasdaq, which complicates matters even more, by skewing these bumps and reducing opportunity. How do you adjust your strategy to accommodate these aberrations?