Preventing British Pound Shockwaves with Binary Options
Author: Gail Mercer / TradersHelpDesk.com
On April 18th, the UK Prime Minister Theresa Mays sent shock waves across the globe when she announced that she would be seeking an early election. One month earlier she had stated that she could not seek an early election. The announcement sent the British Pound crashing down over ninety pips, and then straight up 134 pips. Unfortunately, for Forex traders that were in a long position on the GBP/USD, they were more than likely stopped out, only to watch as the market soared back up to make new highs. Is there a way to prevent these shockwaves from stopping you out? Yes.
Nadex Binary Options are a limited-time based trade that limits risk and provides a settlement payout of $100 per contract if the binary finishes in the money at expiration. When trading binary options, the trader selects a risk level that they can accept using either an Out of the Money (OTM), At the Money (ATM), or In the Money (ITM) binary. Once the trade is executed, the trader cannot lose more than they paid on entry. Plus, since the risk is paid on entry, the trader never has to worry about stops or margins.
From a technical analysis point of view, the 60 minute chart clearly shows that the GBP/USD would continue up prior to the Prime Minister speaking. Using the Trade Station 60-minute chart below, the indications for more upward movement were:
- Red line (Point A) shows that a line of support has formed
- Volume shows that sellers were decreasing as they approach the support line (Point B)
- Stochastics shows hidden divergence (price was making higher lows while Stochastics was making lower lows)
Point D shows where the announcement began. This one 15-minute bar surged down over seventy pips. For traders that had just entered their long position, withstanding a seventy-pip loss would have been quite hard but could have been prevented by simply choosing to utilize binary options.
Below is a list of binaries the GBP/USD 3pm expiration (New York time):
The Indicative Price shows where price is currently trading. Binary Options traders have a lot more choices than when trading spot forex. Here are just a few of the choices:
If the trader believes the GBP/USD will continue up then they could do any of the following long positions:
- A long position at 1.2660 strike for a risk of $57.75 and a profit potential of $42.25 (At the Money option) results in a 73% ROI finishing in the money
- A long position at 1.2680 (or any of the strikes above the current indicative price, considered to be Out of the Money options). The risk for the 1.2680 strike was $39 with a profit potential of $61 has a 156% ROI finishing in the money.
- An In the Money at the 1.2640 strike for a risk of $75 and a profit potential of $25 has a 33% ROI finishing in the money.
If the trader believes the GBP/USD will go down then they could do any of the following short positions:
- A short position at the 1.2660 strike for a risk of $49 and a profit potential of $51 (At the Money Option) has a104% ROI finishing in the money
- A short position at the 1.2640 strike (or any of the strikes below the current indicative price). The 1.2640 strike would incur a risk of $31.50 (maximum payout, $100, minus $68.50, price shown under the bid column) and a profit potential of $68.50 has a 217% ROI finishing in the money.
- An In the Money trade at the 1.2680 strike for a risk of $67.75 and a profit potential of $32.25 has a 48% ROI finishing in the money.
In this example, if the trader held any of the strikes at 1.2660 and above (a total of six), they all expired in the money and the profit would be the maximum payout, $100, minus the risk they paid on entry.
However, the biggest benefit is that, if there is another shockwave, the trader is protected because they paid the risk on entry. In this case, if the shockwave causes the market to turn against the trader for a few bars, it doesn’t matter. As long as the indicative price expires in the money, the trader makes a profit. It’s that simple.
Nadex provides a free demo account for traders to use to learn how to utilize binary options and spreads, as well as free educational resources (including free educational webinars).
Note Exchange fees not included in calculations
Nadex Risk Disclaimer
- Trading on Nadex involves financial risk and may not be appropriate for all investors. The information presented here is for information and educational purposes only and should not be considered an offer or solicitation to buy or sell any financial instrument on Nadex or elsewhere. Any trading decisions that you make are solely your responsibility. Past performance is not indicative of future results. Nadex instruments include forex, stock indexes, commodity futures, and economic events.
- Nadex binary options and spreads can be volatile and investors risk losing their investment on any given transaction. However, the limited-risk nature of Nadex contracts ensures investors cannot lose more than the cost to enter the transaction. Nadex is subject to U.S. regulatory oversight by the CFTC.