Most retail forex traders only know how to place directional trades, and miss the chance to profit on volatility.
Everyday there are economic data from US, UK or Europe, namely Non-farm payroll, New Homes Sales, Unemployment, Personal Income, CPI, PPI etc; some of these datas can move the forex market rather wildly. So to trade volatility is the best strategy for days like that.
Two ways you can profit from volatility:
1. Long strangle
Long strangle involves going long (buying) both a call option and a put option of the same underlying security. The owner of a long strangle makes a profit if the underlying price moves a long way from the current price, either above or below.
2. Buy Out in binary option trading
Buy Out in binary option trading is similar to long strangle. In the binary trading platform, traders can choose to bet that a particular currency pair is going to close of the range by the expiration time of the contract. Sounds complicated?
Here is a real example:
On 2nd June 08, there were 3 economics data announcements:
ISM Manufacturing
Construction Spending MoM
ISM Prices Paid
So that day would be a good opportunity to trade volatility.
I placed US$300 bet on OUT trade, betting that USD/CAD will close out of the 0.9921-0.9951 range by 5am China time. The odds is 0.565; if I win I profit US$169.50, if I lose I lost US$300.
Eventually USD/CAD closed at 1.0012 at 5am China time, so it was out of the 0.9921-0.9951 range. So this trade I profited US$169.50.
Full details of the transactions here.
There are many binary trading platforms available in the market, just search for "binary trading" in Google you will be able to find a varieties of trading platform. The one that I have been using is www.mansion118.com.
So what are the pros and cons of trading volatility using strangle and binary options?
For binary option trading the odds are predetermined, so even though that particular currency pair that you are betting moves very far out of the range, your profit is limited to the odds of the trade. But for strangle, your profit will not be limited; The further the currency pair moves, the more profit the trader will gain.
To create a strangle can be quite expensive for a retail trader. 1 lot of currency option usually costs more than US1000. Some financial institutions are only willing to sell a strangle to you only if your strangle makes up of 4 options (not 2 optios). So this means a strangle can easily cost more than US$4000 for 1 trade. But for binary option trading, retail trader can place a bet as small as US1.
For more of the forex trading ideas, you can go to: http://binarytrading.blogspot.com/
Economics calendar can be found at the bottom of the mentioned website, this is a good reference for volatility traders. The important of the data is shown in the bar.
And the most important point is that this website is free for viewing.
About the Author:Currently I'm working as a trader in a hedge fund. Previously I was working as a commodity specialist in a bank, advising high net worth individuals and institutions on commodities trading.
Aspires to be a fund manager. In 2007, I had participated in a 1 year stock-pick competition organized by Zacks.com in America. At the end of the competition, I was ranked 407th out of 27,700 participants, hence this makes me top 1.47% of the competition. I had achieved 32.67% return on the competition portfolio, for the same period S&P was only up 6.99%, and Dow Jones was only up 4.16%, hence I had outperformed the broad market by a wide margin.
I share my trading / investment ideas in my websites:
http://Basemetal-Trading.blogspot.com/
http://Investment-News-Update.blogspot.com/
http://AllAboutOil.blogspot.com/
http://BinaryTrading.blogspot.com/
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