The binary option is a relatively new financial instrument that was first introduced on the Chicago Board Options Exchange in 2008. This fixed payout derivative enables traders and investors to speculate on the direction an underlying asset such as a stock market index, a share or commodity price or a foreign currency exchange rate will move within a predetermined period of time.

A binary option finishes in-the-money and pays out if the price of the underlying asset has performed as the trader speculated at the end of the option period.

Since binary options are offered as derivatives on forex rates, many forex traders have begun complementing their forex positions with binary option investments.

In this article, we will examine two forex binary option trading strategies that can help forex traders increase their trading profits and minimize their exposure to risk in the financial markets.

Strategies

Hedging a Long Position – One of the most effective uses for a forex binary option is as a hedging tool to limit losses on a long forex position if the currency pair does not perform as expected and decreases in value.

The way to employ this strategy is to execute a put on a forex binary option that expires shortly after you open a long forex position on the same currency pair. That way, if the forex pair declines in value you will close your position at a loss but you will benefit from a net profit once the binary option expires in-the-money. And, if your forex position performs as desired, the profit from the forex trade will cover the loss from the binary option finishing out-of-the-money.

In order for this strategy to result in a profit, it's important to base your investment amount in the binary option upon your forex investment and define your take profit and stop losses orders on the forex positions in a way that if the forex position closes at a loss, you can still end up with a net trading profit once your binary option finishes in-the-money and vice versa.

This strategy can also be employed by investing in a call forex binary option when one is going short on that same currency pair as well.

Stacking Binary Options – An investment in a forex binary option can be a great way to increase trading profits during a breakout in a currency pair that results from market volatility following an influential event that deeply impacts the forex markets. One way to maximize profits during a breakout is to execute several successively expiring forex binary options on the same currency pair at the same time which each expire in increments of 30-minutes after one another.

One example of when this strategy can be employed is following an interest rates change when a currency pair begins increasing or decreasing to a new level in the wake of the implementation of a new national monetary policy.

Stacking forex binary options during a breakout may be more effective than opening forex positions during this period since the volatility in the currency pair as it rises or falls may trigger a stop loss order in the short-term even though the currency pair may continue to rise or fall overall during a period of a few hours. Thus, a forex position may be more susceptible to being closed during the rise or fall, but the value of the successively expiring binary options will only be affected by longer and more pronounced movements in the currency pair's value.

Conclusion

The forex binary option offers investors another tool in their toolbox of financial instruments to apply to varying market climates in an effort to maximize trading profits and minimize risk exposure in the often volatile forex markets.

The two strategies delineated above are examples of when and how to implement binary option investments – alongside or independent of open forex positions – that can greatly increase one's effectiveness at pulling money from the financial markets.

As always, keep in mind that these strategies are not foolproof and can also result in losses. So, bear in mind that one's primary consideration before engaging in any of these strategies should be how much risk one is willing to take when trading.

BinaryOptionsNow.com is the most comprehensive resource for binary options information and options brokers reviews.

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