I need some assistance from the smart people in this forum

I have been working on a better way to mitigate risk combining my Spot transactions and Binary options.

Currently it has serve to either increase my risk and increase my profit.

taking a binary put in the direction of my analysis either

1= increases my reward by 80% payout over the premium
2) increases my risk by both loss in spot and loss of 100% of premium.

now using binaries alone has -20% probability expectation meaning worse case scenario inflicts 20% more damage than the reward at best case scenario...this is unacceptable as I do not currently have the ability to predict the market in such a way that i come out on top by win:loss ratio alone.

I might be doing an error in calculation but with a 60:40 win:loss i would deplete 100% of my capital....this is unacceptable.

now as a tool to mitigate risk on my spot transaction appeared to be promising but i am stuck at -16.3% negative probability expectation no matter how i permute my strike put/call to hedge my long/short.






to explain the illustration: if i hedge with a binary put at the same place i initiate a long i get negative expectation of 16.3%, due to (best out come/ worst outcome)-1 in other words the difference between best case scenario vs worst case scenario

if i play sort spread or do a range with a long position below the put if i am immediately wrong still -16.3%

if i initiate a put below my stop still -16.3% as my stop would have to be 19pips to even be a conceivable strategy.This makes it susceptible to volatility.

now keep in mind i am not interested in HOW TO ANALYSE THE MARKET CORRECTLY, my question is WHAT IF I AM WRONG? HOW DO I MITIGATE THE RISK?

any thoughts on this?

seems to me at least for now that the simple stop away from volatility or capped risk threshold continues to be the best strategy with 20% positive expectation

lose 50 gain 60. However I would like to see if any smart trader out there has sort of worked out a way.

in effect a touch option at a stop loss area is the only way i found to have 0 net loss. however most binary brokers touch/no touch binaries are at an expiry of 1 hour at the most, the time constraint takes away all benefits in my opinion.

by the way we are working under the assumption of

1) 1$ per pip movement
2) 100.00 balance to simplify things on the binary, otherwise we would calculate % of capital risk per contract premium and quite frankly it is unnecessary and irrelevant, due to still -20% expectation no matter if my contract premiums are the min of 24 or 1000, then the win:loss ratio to blow out would be adjusted to % of capital at risk but as i stated before due to the negativity of expectation blow out none the less.

I was thinking to use binary option to reduce the risk too but I instantly gave up when I notice that the best payout is usually 85% only. I think I may got better chance playing single zero roulette where the house edge is about 3% only.

Your answer lies therein. You seem to be looking for the perfect trade. Like the gambler at the casino, the successful gambler wants the odds stacked in his/her favor. You say you don't need help to analyze the market. Your main question is "what if I'm wrong"?

Would that be a brand new experience for you? How do you mitigate the risk? Like everyone else. By taking the amount of risk that you're comfortable with.

We all want our cake and to eat it to. I'm just STILL studying what that means.

OOOPS !! I guess only smart people were allowed here. All apologies.

That's true if you are using one of those bucketshops based in Cyprus. I use Nadex. Their binaries are different than those. I have risked as little as 10 and made 90. Even if you close early when price is at the strike, around 50, you make 4 to 1. Their bull spreads work nicely to hedge spot positions. You'll end up paying basically a "premium" in the form of the distance from your average price and the floor or ceiling of the spread but that's the cost of doing business especially when I can on average knock out many times my risk than I give up in profit for that protection. You of course need volatility and with that volatility there are ways to create non directional trades, kinda a straddle, with both the binaries and bull spreads. Great for trading news announcements.

I'm sure you'll pardon me but does your reply have anything to do with TRL question.
I'm sort of skimming over material here so just wondering.

I sooooo seek your knowledge.

actually it does.

i will look into building a model from bull spreads to hedge spot see if it works out thanks

ok preliminary results on bull spread hedge of spot position.

the current market price of the bull spread with ceiling 1.3160 and floor of 1.2910 is 1.3144, with my average price of 1.3141

Taking a long position at 1.31576, and a put on the bull spread at 1.3141

that is a discrepancy in price of 16.6 pips, however if the derivative rate moves in tandem with the underlying at current distance then i would be looking at a expectation of 38% which is incredibly good.

my max gain would be 60-16.6 = $43.4
my max loss would be $16.6

16.6/43.4= 38.2%

I would have to continue to experiment with this and see how i can tweak it, to reduce my risk but so far it seems promising.

the straddle idea is very interesting indeed... that would be my next research project.

I see one problem with a bull spread which is inherently present on option contract to hedge underlying, not only is the pricing model unknown to me for now, but i need to figure out the implied volatility and i have the expiry to work against.


although i will continue to explore the bull spread hedge as it looks promising, i just had an idea that can be probably corroborated, destroyed or expanded by any willing trader here.

would it be the same, if i open a limit order on a pair with high correlation coefficient to cap a loss on the underlying? the a priori seems to be that my cost of business will bet he double spread but that is cheaper than a premium i think.............

so for example a limit on the usd/chf to correlate mathematically to act as a stop loss for my eur/usd position (the cost of insurance would be the double spread) but it would act as a flexible stop loss......then the swap would also have to be calculated to see if the mathematical expectation is (+ ) or (-)


the reason why i am doing this is more like a project to empirically find out if a limit stop (conventional stop) that acts as a no touch option would be better to cap off risk or if a flexible bull spread via correlated instrument ( i am not talking about the popular negative neutral position of opening a long and short simultaneously but on the same pair (nedge) of correlated instrument (retail hedge).
i am talking about a limit at an area of where my stop would be on the desired instrument by a limit order on a correlated one.

for the traders that think i need to research how to trade or use price action, s/r, or s/d . that is not the point of this i DO NOT NEED TO ANALYSE THE MARKET, I am building rudimentary risk management models ( i am sure there are smarter and more experience traders out there with more knowledge on the subject and i would really appreciate their in put)