The Easy 3 Trading Strategies
The most typical method of trading forex is simply to open spot positions
. That is when you use MT4, or your brokers platform, to open the regular long or short on a specific currency pair.
Of course there is some advantages to doing it that way; however, the various forums are jam-packed with people looking for workable information on hedging. That gives you just one example that many traders are not satisfied with the elementary way of trading. The thing is, thanks to US NFA rules, few brokers (even those not in the US) permit hedging, and those few that do, the implementation is inferior at best.
So allow me to describe how to hedge your forex trades, without reducing almost all of your profits.
Forex Trading Strategy #1 - The Option Cover
To use this tactic, start by opening your position like usual.
What you do differently is that you then buy a call or put option on the same currency that is "close to in the money" ... but for the other direction. Now, you are dealing with an option, so while the risk is lower, so is the profit.
The "hedging" nature of this method can allow you to reduce a loss should the market move against you.
The Back Spread - Forex Trading Strategy #2
This technique also uses options. These strategies are very similar. In the first one, you used "close to the money" options. In this one, you want to use "far out of the money" options. Otherwise, they are both very much the same. Don't let the similarity of these two methods fool you. While in operation they are the same, their uses are wildly different.
This technique is most useful during highly volatile conditions. When the market is volatile and moves quickly against you, it is possible to find yourself in a position of winning no matter what happens.
A far out of the money option will have a significant payout if a volatile market suddenly shifts against your spot trade quickly enough to get the option close to the money, or in it. You can literally find that because the market shot strongly against your spot trade (hopefully you see that and exit out of the losing spot trade before too long) that the option payout is quite significant.
The ideal times to trade this method are right BEFORE a news release that you believe will significantly cause market volatility. Given that you are opening the position before the release of the news, you have no way of knowing what the news will say and therefore no sure way of knowing which way the market will move. However, if you are correct and the release does drive huge activity, you can cover yourself simply by opening a spot trade in one direction and a far out of the money option for the other direction.
Now you wait for the release to come out, see what the market does, and you exit one of the positions depending on actual price action.
Forex Trading Strategy #3 - The All Option Play
I am shocked at how few traders consider options when they trade. You can reduce your risk and improve your trading profits simply by including options in your trading strategies.
The fact is that you can profitably trade, with lower risk, without opening the normal spot trade at all. You see, many of the most successful traders I know trade that way.
When you learn more about options and the power they can give to your trading, it can revolutionize your success.
by: Brian Sidwell
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