Closing binary options trades early

What is a binary options trade?

Binary options provide a straightforward approach to financial trading, Traders only have to answer one basic question, “Will a chosen market be higher or lower than a certain price at a set time?” This easy yet exciting trading way makes tough financial markets easy, making it accessible to traders of all experience levels. It can be broken down into three core elements

Underlying market
This is where traders make their choice regarding the asset or market they want to speculate on. Options range from conventional ones like Forex, stock indices, and commodities to more unique selections like events or economic indicators.

Strike price
The strike price acts as the single-most important element of the trade. It's the crucial level for which you need to determine whether the market will exceed it or fall short.

Expiration date and time
Binary options contracts come with preset expiration times, which can be as short as fifteen seconds or extend to even a week.

Why might you want to close a binary options trade early?

Closing a binary options trade early can prove to be a smart move in various situations, especially those which call for

Managing risk
Closing a trade prematurely helps you control your risk. If your trade is going south and you fear a bigger loss, ending it early can limit the damage. It's a proactive way to prevent your losses from growing too large.

Securing profits
On the flip side, if your trade is in the green, closing it early ensures you lock in your profits. Markets can be volatile, and what's a profit now might not be in the future. “Early closure” enables you to walk away with gains, though often at a haircut on profits.

Handling surprises
Sudden, unforeseen events can send markets into a frenzy. If you're in a trade and you see something unexpected happening, closing it early can safeguard your investment.

Adapting to changing conditions
Market sentiment can change in the blink of an eye. If you realize your initial predictions are off the mark, closing early allows you to adapt to the new reality. Flexibility can be a noteworthy aspect in trading.

Exploring better opportunities
You might spot a more promising opportunity elsewhere. Closing one trade early to free up your capital for a potentially more lucrative one is a wise

How to close a binary options trade early?

Generally, most binary options trading platforms offer an “early closure” or “sell now” button in their interface which shows a payout value based on the current position of your trade. Using the same, you can close the binary options trade early. However, this is a manual process and might not be the most optimal route. To address this pitfall, some platforms also offer automated tools namely default stop loss, take profit, and trailing stops.

Default Stop Loss and Take Profit

Stop Loss
A stop loss is a point at which a trader decides to exit a position to limit potential losses. It is a risk management tool that ensures that losses do not exceed his predetermined level. Setting a stop loss is a fundamental aspect of responsible trading that helps you to save you from unpredictable losses

Take Profit
Utilizing a take profit level is a crucial aspect of trading. This designated level is chosen by traders to close a position and secure profits, ensuring that market movements do not erode gains. Integrating take profit orders into a trading strategy is essential for safeguarding profits.

Trailing Stops
Trailing stops are a useful and innovative tool for traders, involving the adjustment of stop loss orders as a trade begins to move in a favourable direction. This approach is especially relevant in fast-paced markets where trends can outperform expectations. By implementing trailing stops, traders can capitalize on additional profit by maintaining a position while market conditions remain favourable. The key elements of this approach are centred around exiting a winning trade and extending it beyond its initial success, including

Exiting a winning trade
Trailing stops enable traders to extend the trade beyond its initial expiry time, thereby capitalizing on favorable price movements. This approach aligns with the goal of maximizing profits during sustained trends.

Staying in a losing trade
In some cases, traders may choose to use trailing stops to extend losing trades. However, it is important to exercise caution and consider whether the market conditions warrant such an approach, or if cutting losses is the more prudent decision.

Trailing the stop loss
This involves adjusting the exit point to maintain a position's exposure to favourable price movements. This method is employed as the trade evolves, and traders aim to secure gains while reducing risk.

Pros and cons of closing a binary options trade early

When to close a binary options trade early?

There are instances when it’s wise to close binary options trade early, some of which are summarized as follows

How is binary options trading different from traditional trading?

Binary trading and traditional trading are two separate ways to approach the financial markets, of which binary trading is a newer method that has become more popular in recent years. Here’s how the two approaches differ

Key takeaway

The concept of early closure in the world of binary trading plays a vital role in the overall risk and reward equation. It has a profound impact on this ratio in not just one, but two ways that are crucial to understand. Firstly, choosing to end a trade prematurely could mean missing out on potential profits that could have been gained if the trade had been allowed to run until the end. On the other hand, it also serves as a way to limit potential losses, providing a safety net in case the trade goes against you.

It's worth noting that early closure typically comes at a cost, with an average fee of $25 among various platforms. Therefore, traders must take this fee into consideration when calculating the risk/reward ratio to ensure accuracy.