Monday August 22, 2016 - 11:26:17 GMT
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How can one use binaries to excel in NFP trading?
Every Forex trader has heard of NFP, an abbreviation from Non-Farm Payroll. Some of the FX traders love trading it, others hate it. The reason for this is very simple. When NFP occurs every last third week of each month and it is, essentially, an announcement of how well US employment is doing. It is called Non-farm as the payroll omits all of the farm workers and also non-profit employees and private household staff.
The reason that some traders hate NFP is simple too - the volatility. Usually before, during and even after the NFP data release the market might start to behave like crazy. It is often possible to observe the movements of 100 pips or even more. This, generally, tells us that the potential profits can be large too. Even though most of the traders prefer currency pairs and treat binary options like gambling, there is still a useful way for the one to use binaries when trading NFPs.
What are binaries?
When you trade FX, you choose the size of your order, the direct and the boundaries of the maximum loss and profit and then you start gaining or losing based on how many pips the price of the currency pair has moved. With binary options the trading is even more simplified. Once you signed up with one of the honest binary options brokers, you simply choose the amount of funds you want to commit, the direction of your trade and the expiration time. Example: $50 on that the EUR/USD (currently priced at 1.12345) will go up at 6pm GMT. In case you are right, you will gain about 90% from your trade size.If you are wrong, you will lose the amount you decided to commit.
How to hedge with binaries?
Hedging with binaries during NFP releases can actually be done using not a regular (up / down) type of a binary option, but rather going for another type - touch / no touch options. This way your expected payout will always be above 100%. It is certainly possible to estimate the possible strength of the NFP’s impact and it is quite likely to have some vision about its direction. This is where you will need to open a regular position on EUR/USD or any other pair that contains USD. Say you are committing $1000 as your margin and you trade with a leverage of 100:1. This means that every gained pips will give you $10. A price move of 50 pips (less than NFPs average), will result in a profit of $500.
If you open a reversal position, you will simply lose due to the spreads and commissions. This is why the reversed position is opened with a binary option that is half the size of your potential return - $250. You simply mark a touch possibility at the level of 50 pips above and expect the return of over $500. Hence, if your stop loss triggers on the currency pair, you will still get a minor profit. Otherwise you will earn big and will lose the value of the option.
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