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Risk/reward Ratio In Forex Binary Options Trading

Written by Futures Options Trading
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The risk to reward ratio is a whole new game in binary options trading
In this modern fast moving world, many individuals are seeking quick ways to make money. Though the share market and the real estate market offer fast ways to earn money in a short time, but the risk/reward ratio is very high in these markets. Investors run the risk of losing their entire capital within no time, if the market moves unfavorably. In such a situation, binary option trading is the best alternative to earn quick money. Moreover, the binary options risk to reward ratio is favorable. Let us understand the risk to reward ratio in the binary option market.

Put simply, a ratio is used by an investor to assess expected returns of an investment in comparison to the extent of risk undertaken to earn those returns. Calculating the ratio is very simple. It is calculated by dividing the amount of money an investor expects to lose when the price of the asset moves unfavorably (the risk) by the amount of money (profit) the trader anticipates to have made on closing the trading position.

For example, a trader buys 100 shares of ABC Company at a price of 40 dollars, and puts a stop loss order at 30 dollars to ensure that his loss will not cross 1000 dollars. Let us say that the trader anticipates the share price to reach 60 dollars in the next couple of months. In this situation, the trader is ready to accept the risk of 10 dollars on each share of the company in order to make a profit of 20 dollars per share when he closes his position.

In this particular example, the trader is in a position to make double the amount of profit as opposed to the amount of loss which is limited by the stop loss order. As a result, the risk/reward ratio in this case is 1:2. The optimal risk reward ratio varies greatly among trading strategies. You have to work out certain trial and errors to find out which ratio will deliver higher returns at minimum amount of risk.

However, the risk/reward ratio in forex binary trading is calculated taking into account the time factor. The simple reason is binaries are meant for a short time, even for hours. Hence, you have to make proper calculation to make quick profits. Let us say that you took a trading position in the EUR/USD currency pair. After a few minutes, you find that your trade fetches 70 pips of profits, but you observe that the pair is overbought at that price and the market is poised to retract.

Here you can lose all the profits, if the market moves unfavorably in the given time frame. Luckily, you can cut short your losses and improve your risk/reward ratio by opening a new "put option" based on the EUR/USD and pair the position with the original one. In this way, you could receive money from both the option. Additionally, your losses will be reduced since the profits of one option will neutralize the loss of other option, and your risk to reward ratio will be highly favorable. Thus, you can certainly make quick money in binary trading, and enhance the binary options risk to reward ratio by employing smart strategies in accordance with market signals.

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Posted: June 17th, 2014
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