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Stop Loss and Options with Forex Australia

Forex Australia Options

When you start trading on the forex Australia market you will be told to use stop loss orders.  In fact, all new traders are told that they should never open a position without having a stop loss order.  There are some traders who do not use stop loss orders when they trade.  Some of these traders will use options trades instead.  Of course, you do not have to choose one or the other as it is possible to combine the stop loss and options.

What is a Stop Loss Order?

Before you consider using options instead of a stop loss you should look at what a stop loss order is.  A stop loss order is a set position on the forex Australia spot market that closes the trade.  This position is always below the entry price and will only be hit when the trade is making a loss.  This is a great tool for limiting risks and limiting the impact of losing trades.

However, many people find that stop loss order do have flaws and are sometimes not as helpful as they should be.  In volatile markets stop loss orders are often a hindrance as they are hit just before the price movement retraces and makes a profit.  The fact that most stop loss orders are set at pre-determined levels means that they do not follow the market.  There are some stop loss orders that do follow the market, but expert traders do not recommend using them very often.

Using Forex Australia Options Instead

There are some traders who look at using options instead of stop loss order to hedge their risks and trading losses.  This is a route that not all traders can look at.  Most traders feel that this is better for long-term traders because short-term traders do not hold position long enough for the options to help.

Using options instead of stop loss orders offers a number of benefits and better rates.  With stop loss orders you are subject to slippage when the order executes.  However, this is not something you have to worry about with options as you generally do not have any slippage.

The Benefits of Options

Stop loss orders are free to use and you have to pay for the options.  However, there are a number of benefits that outweigh the costs of the options.  If you use an out-of-money option you will usually pay less for it than any other type of option.

While stop loss orders are absolute the options allow for the behaviour of the market.  If you place the option at the same point as the stop loss order you are able to hold onto a losing position for longer.  Of course, this is often ill-advised because this can be adding to your losses.  However, if you are confident that the market is going to turn and a profit realised then this is ideal.

The Drawbacks of Options

One of the biggest drawbacks that traders have with the options method is the obtaining of options.  It is very rare that you find an online broker that is willing to open this trade.  You also have to wait for business hours to open an options trade because they are completed on an exchange.

 

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