Anyone who trades in currency pairs or speculates by means of binary options always has a considerable risk of loss. This also applies to investors who speculate on indices, stocks or commodities in the short term. Therefore, it is an important question for numerous traders on how to eliminate losses as completely as possible or at least minimize and limit them. We would like to inform you on this subject and, for example, address the ways in which it is most likely or even guaranteed to limit impending losses or, in the best case, to avoid them altogether. However, the respective instruments are not available for every type of trade, so you as a trader have to make a distinction, whether you trade with foreign exchange, binary options or shares.
- Trading instruments
- Loss limitation for binary options
- Loss limitation for Forex and CFDs
- Stop-Loss order
Various Instruments at a Glance
Depending on whether you are trading with binary options, foreign exchange or stocks, there are various ways in which you can limit impending losses. First of all, we would like to mention the most important instruments available to you, namely:
Loss limitation (binary options)
- Additional feature early closure (binary options)
- Stop-loss order (Forex trading, CFD and stock trading)
- The opening of counterpositions (hedging strategy)
Especially in the first listed means, namely in the loss protection as well as in the additional function early closure, it depends on whether the respective binary options broker offers this method at all. We will discuss this in more detail in the following section.
Loss Protection And Early Closure
Binary options work in such a way that the trader can achieve yields in the high double-digit or even triple-digit range on the one hand. On the other hand, however, there is always the risk of losing the stakes completely. In binary options trading, therefore, there is always a total risk of loss, which trader, of course, would like to avoid. For this purpose, some binary options brokers with the so-called loss protection offer the possibility to protect at least a smaller part of the invested capital. Such a loss hedge is not offered by any broker on the one hand, and on the other hand, it usually reaches a maximum of 15 percent. A 15 percent loss hedge means that you will not lose all your capital in a lossy trade, but still 85 percent of the stake. Only the aforementioned 15 percent will be credited to you in spite of a loss-rich trade.
Another way to help you deal with binary options is to use the early closure feature. However, we would like to mention at this point that it is by far not all binary options brokers that provide such additional functions.
Early Closure for Binary Options
The early closure as an additional feature is to be compared in a certain way with a stop-loss in stock trading. With the addition of early closure, the broker gives the trader the opportunity to practically sell back the stock option before it expires to the broker. If, for example, the trader finds that he is speculating on a rising Dax index, but the German stock index has lost significantly since the purchase of the binary option, he could make even greater losses by using the additional function, in this case even Total losses.
Stop-loss Order As A Classic Means Of The Loss Limitation
The so-called stop-loss order is probably the most well-known means by which already opened positions can be hedged and losses minimized.
This special order is used for all financial products belonging to the following groups:
- Forex Trading
The stop-loss order is a very effective way for traders to minimize or limit losses when trading in foreign exchange as well as inequities and CFDs. This tool is offered free of charge by all our well-known forex brokers. An exception here is guaranteed stop-loss orders, where your position is also executed in the case of gaps or massive price slips at the desired stop-loss level. Guaranteed stop-loss orders are therefore usually charged and are not offered by all forex or CFD brokers.
Stop Loss Order
In a simplified manner, a stop-loss order stipulates that a financial product in stock, such as a stock, is automatically sold on condition that a price determined by the investor is reached. This course is typically almost always at a lower level than the cost price at which the investor has purchased a stock, for example. If this trader’s price is reached in a real trade, the stop-loss order is executed immediately. This causes the position in the inventory to be smoothed by selling the corresponding value.
Forex & CFD Hedging
In simplified terms, this hedging strategy works in such a way that you speculate exactly opposite the original position by means of the counter position. So, for example, if you bought 10,000 dollars against the euro at a rate of 1.0556, the counter-position could be to sell US dollars against the euro to the same extent now. Of course, it is important to act on different courses so that these two positions are not completely reversed. In addition, the counter position does not necessarily have to have the same volume as the original position, for example, if you only want to make partial protection.
Minimizing Losses At Daytrading Urgently Required
Investors who wish to trade shares in the medium or long term do not necessarily need the methods mentioned in order to limit losses.
However, anyone who wants to speculate in the short term should use the various methods to at least limit losses and thus to ensure a massive loss. For this purpose, for binary options with the loss protection and the additional function early closure, the corresponding means are available for many brokers.
If you are dealing with Forex, CFDs or shares, you can always use the stop-loss order to limit the risk of capital losses.