When Is a Good Time for Early Close?

Professional traders know for sure that no trading strategy is 100% perfect. Success follows those traders who have the innate ability to close loss making trades early, while riding on profits. However, not long ago, a binary options trader had no choice to exit a trade early even after understanding the fact that price movement is not as predicted prior to entering a trade. Even though smart traders resorted to hedging, still, the lack of early closure facility discouraged many traders to operate binary options actively. The brokers were quick to realize the handicap and brought the early close facility, albeit with some restrictions. These often include:

  • Stripping down the reward percentage.
  • Allowing exits only during certain hours of a day.
  • Disallowing exits in high reward option trades.
  • Allowing exits only when a certain amount of time passes after entering a trade.

The reason for the restriction is that when a binary options trade is closed early, it is the broker who buys back the contract by acting as a market maker. Thus, to compensate for the decrease in the profit and avoid misuse, certain criteria, mentioned above, should be fulfilled for the early exit icon to get activated.

From a trader’s point of view, frequent use of early exit will ultimately hamper the performance. Thus, the use of early exit facility should be a well thought out decision.

Scenarios for early closure

Professionals suggest an early exit only when a trader faces any of the following situations:

  • Price moves against the prediction. This is arguably the most important reason for a trader to exit early from a trade. Even a well laid trading strategy can result in a loss. Thus, after taking a position, if a trader feels that price is not moving as anticipated, then the early exit option can be used. Since the trade is out-of-money, only a portion of the investment will be paid back to the trader. The paid back amount largely depends on the time remaining for expiry and the distance between the price of the underlying asset and the target price.
  • Trend reversal. When the price of an asset approaches a support or resistance, there may be visual indications of trend reversal through candle patterns such as doji, bearish engulfing or three black crows. In such cases, a binary options trader who is already in-the-money would like to preserve the capital and realize some profit from the trade. Since innumerable opportunities await a binary options trader, it is wise to exit with a small gain and look for the next setup instead of pondering on a stagnant trade, which might end out-of-money at the last minute.
  • News. Unexpected news can quickly turn the tides against a trader in binary options trading. Since a difference of one pip decides the end result, it is better to close the position early in case the trader suspects that a particular announcement has the potential to alter the current trend of an underlying asset in a drastic manner. Once the prevailing position is closed early, a new position can be taken after studying the news thoroughly.
  • Increase in volatility. Rumors and geo-political changes can increase the implied volatility of an asset in no time. In such a case, a trader should consider making a quick exit and wait for the dust to settle. It is a well-known fact that unlike traditional options, volatility is an enemy to a binary options trader. Thus, during heightened volatility, early exit would prove highly beneficial to a binary options trader.

    When volatility changes, a trader should consider making an exit from the following forms of binary option trades:

    • One touch and double one touch option. While trading a one touch and double one touch option, a trader can exit the trade early if the implied volatility decreases. A decrease in volatility will restrict the price movement. Thus, it is wiser to exit early and save at least a portion of the investment made in the losing trade. Once an exit is done, the money can be invested in a no-touch or double no-touch option after reviewing the support and resistance levels.
    • No-touch and double no-touch option. As discussed above, if the volatility increases suddenly due to some reason or the other, then an early exit can be made from a no-touch and double no-touch options trade. Since a rise in volatility increases the range of price movement, the probability of losing the trade increases. Thus, it is smarter to exit the trade early and re-invest the capital in a one touch or double one touch option contract after looking at the entire scenario once again.

Reasons for Premature Closing of Binary Option Trades

Merits

  • Early exit facility allows a trader to keep the draw down rate lower. This is vital for trading in general.
  • Keeps the morale of a trader high.
  • Opens up more opportunities for digital-vanilla combo trades.

Demerits

  • Tough rules for early exit.

The provision of an early exit undoubtedly benefits smart binary options traders. However, a trader should think twice before using the facility. Frequent use of the facility puts a serious question mark on the strategy applied to trade binary options. You can use our list of brokers with early close option to find a broker that fits your requirements and has the feature.

Read more articles on Strategy.

Binary options trading involve risk. Although the risk of executing a binary options open is fixed for each individual trade, it is possible to lose all of the initial investment in a course of several trades or in a single trade if the entire capital is used to place it. It is not recommended to base your investment decisions on any information presented on or originating from BinaryTrading.com. By browsing this website you express your acceptance of the terms of this disclaimer and that BinaryTrading.com cannot be deemed responsible for any losses that may occur as a result of your binary option trading. BinaryTrading.com is not licensed or registered as a financial consultant or adviser. BinaryTrading.com is neither a broker, nor funds manager. The website does not provide any paid services. All content of BinaryTrading.com is presented for educational or entertainment purposes only.

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