Many binary options brokers give you the ability to end a trade early at a partial loss. This can be an attractive feature, but it is almost never the correct choice to make. Still, it can be a useful tool once in a while, so it is worth looking at to see if and when you should use this strategy within your own binary options trading.
When to End a Trade Early
This is a risk management strategy, and it cannot be applied until after a trade has already been made. First of all, you cannot use this method on trades shorter than five minutes in length because of the guidelines that most brokers have in place, and although you can use it on trades between 15 minutes and 5 minutes at many brokers, you shouldn’t. This is for trades that have an expiry of more than 15 minutes.
Now that we have that out of the way, we can look at some of the more specific rules for using this. It can be used on both call and put options, as long as they fit the general criteria. It is assumed here that you put thorough research into your original trading position, but despite your best efforts, something has changed now that you’ve opened up a position. Let’s say that you took out a call option on the EUR/USD pair with an expiry of 4 hours. Now that you are an hour into your trade, there’s been a major announcement coming out of Europe, and the euro is beginning to plummet. You see a trade that had great potential suddenly coming unraveled before your eyes. You were on pace to finish well in the money, but now your option is about to become a losing one. This is when you should execute this strategy.
The sooner you act with this particular strategy, the better. Many brokers will pay out partial losses on a scale. If you are half a pip out of the money, they will pay you twice as much as if you were a whole pip out of the money. If you move too far out of the money, or if the amount of time before expiration is too short, they might not even offer to buyback your option at all. The amount that you can recover then, depends on how off you are in your prediction, how much time is left, and the amount that you risked. If unforeseen circumstances make your original interpretation of price action moot, then this can be used so that you don’t lose as much money as you originally would have. If you had originally risk $50 on a trade, and with an hour left, you see that there is absolutely no way that you are going to finish in the money, and that things are just going to get worse, you can use this to change your loss of $50 to a loss of $47 or so.
Drawbacks Will Occur with All Strategies
You will never make money ending trades early. Instead, this is a way to offset your losses. These are ways to recover a few dollars here and there. Brokers have no incentive to offer these, other than as a courtesy to traders, and the reality is that the majority of traders misuse this method by using it too much. Do not fall into this category. You made your original trading decision for a reason, and as long as the factors behind that decision exist, then you shouldn’t use this method. However, if something occurs that makes the basis for that decision no longer meaningful, then it is acceptable to end your trade early. Just know that you will never recover much doing this, but rather prevent the all or nothing nature of binary options from taking over.
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