Along with hedging, one of the most popular strategies that Binary Options traders use is called stop-loss strategy. In options trading, most brokers use what is known as a two-dimensional stop-loss strategy.
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This method, developed by brokers originally was developed as a way for investors to prevent a specific amount of loss from happening, (virtually stopping the trade if it reaches a certain point). This point in time is known as the stop-loss time.
For brokers, this meant that clients would specify a price at which they wish to trade a specific Binary Options asset, and as such they would be sure to trade that asset when that value is reached.
For South Africans interested in getting involved with Binary Options trading, who may not have a clearer understanding of what Hedging is, developing a stop-loss strategy is key.
How to Develop your Stop-Loss Strategy
Done correctly, a strict or loose stop-loss strategy can be an effective way to manage the profit of your Binary Options trades.
In order to create an efficient Binary Options stop-loss strategy, you must consider four separate factors together. With an understanding of these four factors, the application of your stop-loss strategy and its subsequent improvements can commence.
Understand your Risk Tolerance
After you are able to build your risk management strategy, it is key for you to understand what will happen if the risk that you are fearing will happen. In smart trading, investors consider the leverage of risk by determining in what amount they would be willing to lose on their investment.
This means deciding whether or not to hold a specific Binary Options asset that has its price drop drastically, but may stabilize in the long-term future. Or it could also mean determining the length of time you wish to trade a binary option platform.
Understand the platform you’re trading on
As you grow to understand the platform that you’ve chosen more it become necessary for you to recognize the length of time it takes for you to place your trades. Despite you wanting to trade a certain Binary Options asset at a specific point in time it may take a second or two to actually place – this couple seconds could mean a price variance.
To avoid this, understand the terms and conditions of your platforms to maximize your success.
Understand the style of your trades
With the different volumes of trades different Binary Options traders are making it become important to recognize which style fits yours. As a beginner you may not be placing a lot of trades, so the details inside of your stop-loss strategy will not need to be as extensive as others.
A trader making only a few trades per day for instance will not need as much of an encompassing stop-loss strategy as opposed to one who makes many trades per day, and needs to cut down on all loss.
Understand the market your asset is in
Perhaps one of the least looked at aspects of developing an effective stop-loss strategy is a clear understanding of the market that it’s being used in. Many traders, simply trading their Binary Options with research focused on their assets, do not make as much of an effort to learn about the markets their assets are located in.
Things such as the details of other assets within your market, or similar assets to the specific Binary Option you are trading, can help you understand the direction of price that your asset is going to be moving in.