To get acquainted with the concept of risk in trading, consider the example of tools that carry a quick profit as well as significant losses in case of wrong decision. We speak about the currency dangers uring speculation. In general, speaking about the currency markets it should be noted that a long time ago effective mechanisms were developed in order to reduce potential losses. At the same time, the methods that are used today by all sorts of the hedge funds (organizations that help foreign trade companies to insure their foreign exchange transactions) can be successfully used for currency speculation either.
Among the methods of hedging (i.e. insurance) currency pairs they allocate transactions for a variety of currency instruments (so-called diversification, a concept that is widely used in investing when a portfolio of assets is created and invested funds in certain proportions are distributed among different instruments).
Also, the foreign trade companies may insure their actions by pre-buying futures in the opposite direction. For example, importers who buy goods for foreign currency can buy a futures contract to sell it, and exporters, on the contrary, can buy foreign currency in order to minimize their risks.
How can it work in the Binary Option trade market? For this purpose a trading strategy “Risk Minimization” was created. First of all, you should look at the possibility of an early bargain sale, i.e. before the date of its expiration.
In order to minimize their risks in trading binary options, traders can buy items for several instruments at the same time. In some cases a trader can buy the opposite contracts, and sometimes the contract in the same direction. For example, a trader sees that there is a possibility of growth of the currency pair Pound Sterling – US Dollar. He decides to buy a binary option Call.
To minimize the danger, as well as to slightly increase the profits, several other instruments can be analyzed and the lot on them can be purchased. As a result, in case of making the right decision the trader is guaranteed to make a big profit. If an error occurs, if one of the tools has grown, and the other did not, the trader’s loss in one position will be covered by profits in another. In addition, the chances that a correct prediction on one of the tools will be made significantly increase.
Thus, the trading strategy “Risk Minimization” allows the trader to insure their deposit against loss and significantly improve their trading performance.
That’s all for now. Got any questions? Just ask the expert!