Risk or No Risk with Future Option Trading

Finding the right strategies for future option trading depends on whether you are hedging or speculating. Hedgers are relying on investment strategies that will minimize risk of loss. Speculators want to maximize profits and will take risks in order to do so.

Hedging in Future Option Trading Guide

Hedging is a process whereby you offset the risk of a price failing to perform as expected by implementing a position in the option market that is opposite to the original transaction. For example, you may buy calls and puts. When you are working both sides of the price potential the risk is of maximum loss is “hedged” or minimized.

When you hedge in future option trading, you are assuming a balanced investment or a neutral position. A loss on one side is reduced or eliminated by a gain on the other. Obviously it is necessary to maintain the right ratio between the two options by relying on an analysis of the deltas of the options.

Speculating on Profits

Speculators in options try to make as much money as possible and are willing to use riskier strategies to do so. While the hedger is trying to maintain the appropriate ratio between the two options so that risk is minimized, the speculator does not focus on transaction balancing. The future option trading speculator will use strategies that are aggressive and have unlimited risk. On the other hand, the strategy chosen, like the risk reversal spread, can also have unlimited profit potential.

Speculation in future option trading should only be undertaken after you have gained experience in the options market.

THE INTERCONNECTED NATURE OF THE FINANCIAL MARKETS

The financial markets are interconnected. The stock market can go one way and the gold price chart can move in another direction. and if you have traded several markets prior to coming to the binary options markets, you will find out that trading knowledge acquired in one market can give you an edge in trading another market. It doesn’t matter if you are trading the stock market, binary option market or forex; you will find out that there are lots of similarities that tie these markets together. Take a look at these scenarios painted below:

Scenario 1

We will use the boundary trades (In/Out trade variety) to illustrate this point. In the boundary trade, the binary option trader is betting on whether the price of the underlying asset stays within a given range over a time period, or will eventually break out of that range before the date of expiration of the contract. In order to make a correct trade call, he will have to employ different methods of technical analysis. Pivot points analysis, which is also based on whether the price action of the chosen asset (either currencies or stocks) will stay within certain levels of support or resistance or break these levels, is one such analysis that can be used. After performing a pivot point analysis, the results of the analysis can be extended to the boundary trade. If the pivot point analysis was properly done, this binary options trade is likely to succeed. This is one instance where knowledge of a type of analysis that is more commonly used in the forex market can be applied to the binary options market.

Scenario 2

Some currencies correlate well with some of the commodities. The US Dollar, Canadian Dollar and Japanese Yen all have a correlation with crude oil prices. More specifically, we tend to see an upward swing in the EURUSD when oil prices spike. As such, if a trader decides to trade a binary options type such as the Touch/No Touch trade variety on the EURUSD, he can use the price of oil as a guide in deciding where to set a strike price for either a Touch or a No Touch trade.

For example, the price of crude oil spiked on February 27, 2012 on threats by Iran to cut oil supply to parts of Europe. This would impact even junior mining companies, because it could move the gold prices. This led to a rise in the exchange rate of the EURUSD. In order to play this on the binary options market, a trader can set a price barrier for a Touch contract somewhere between the market price and the nearest resistance point, or set a No Touch price barrier somewhere below the nearest support point.

These scenarios typically show how knowledge of how to trade the underlying assets in their respective markets, can lead to positive trade calls in the binary options markets.

As a trader wishing to make money from binary options, it is advised that you study the underlying assets you wish to trade and understand how to analyse them in their respective markets.

A Few Free Tools to Enhance Your Forex Trading

In this article, we will identify three important tools that a trader can use to enhance his forex trading endeavours. If you believe in the saying that the best things in life are free, then these tools fulfill the words of that saying because they are in fact, available for free online. All you need to do is to use the search engines and you will get access to them.

The Candlestick Recognition Tool

Candlesticks are a representation of the price action in the Forex market. Unlike the other representations of price such as the line and bar charts, candlesticks actually tell a trader what other traders are about to do in the market. That is why we have candlestick patterns that indicate price continuation or price reversal. Being able to recognize the various candlestick reversal patterns will help a trader to take the right position in the market for profits, or to exit a position if the candles show that contrarian moves are about to take place.

Many traders will not find it easy to recognize all the candlesticks that there are, but there are tools that will aid a trader’s recognition of important candlestick patterns. Many are using them to trade precious metals and gold stocks. These candlestick recognition tools are available on the internet as custom indicators or trading platform plug-ins. Some are free while others are available for a fee. Now this tool will only highlight the candlesticks for you. You still need to know when to pull the trigger when the candlesticks give you a signal. Generally speaking, bullish reversal candlesticks are used to generate buy signals in oversold market conditions, while bearish reversal candlesticks are used to take positions when the market is overbought.

Pivot Point Calculator

Pivot points are key price levels that indicate when prices may reverse, or stall before continuing their advance. They indicate areas of support and resistance. In the forex market, prices will generally move within the range of the pivot points. As such, knowing the pivot points for a particular currency will serve as a useful visual guide in setting price targets and stops when taking trades.

Pivot points are calculated afresh every day from the previous day’s high, low and closing prices. This makes the job of calculating pivots quite dreary. In addition, the trader is prone to mistakes when calculating pivot points and this can lead to errors in making trading decisions.

This is where the automatic pivot point calculator comes in to save the day. Available as a custom indicator or plug-in, it automatically calculates the pivot points and plots them visually on the chart. Once you have attached this software on the chart, it recalculates the new pivot points for a new trading day and plots them accordingly. This tool is widely available for free on the internet and is a must-have for any trader who is serious about making money in the market.

Fibonacci Retracement Indicator

This is available for free on any MT4 trading platform. This tool is used to show the 5 possible levels of price retracements based on historically calculated number sequences. Retracements and pullbacks always occur in the market as traders take profits. In order to know at which point to re-enter in the direction of the original trend after the pullback, a trader can fall back on the Fibonacci retracement tool for this information. In order to determine which of the Fibo levels prices will most likely retrace to, the Fibo tool can be combined with the Stochastics oscillator to make this determination.