Introduction to Fence Trading
The strategy involves placing a call and put option on the asset. The sequence will depend on whether the trader expects the price of the asset to go higher and then lower, or vice versa. If the trader places a call and then a put option at two different strike prices, the price of the asset must end in between the two strike prices (the fence) for the trade to profit.
Asset A is currently priced at $15.00. Trader expects price to rise in the next hour. As a result, trader places a call option for $100 that expires in 2 hours. Price starts to rise as expected, but a market event occurs and the price of Asset A is likely to fall back as a result. Trader purchases a put option for $100 when the price is $15.50, which expires 30 minutes after the first trade.
– If the price ends between $15 and $15.50 for both trades, and payout is 75%, trader wins both trades and gets $350 total ($175 per trade).
– If final price is above $15.50, the call trade wins and the put is a loser. Trader gets $175 back against the $200 he staked in the trade. Loss is $25.
– If price ends below $15, call loses and put wins, giving the same payout of $175 against $200 staked. Loss is $25.
– If price ends below $15 on call and above $15.50 on put, both trades lose and trader loses $200.
Why Binary Fence Trading Strategy Sucks
There is simply no way of knowing that a trade will behave as predicted within the expiry time. Indeed, the success rate for each trade is theoretically 25% as illustrated in this example. The trader must be spot-on with his analysis or else he will end up losing money 3 times out of 4.
Why Binary Fence Trading Strategy Does Not Suck
There is one scenario where this strategy works, and that is in selected news trades. One such trade is the Non-Farm Payrolls report traded on the EURUSD. A supposedly USD positive report typically spikes in the favour of the US, then retraces and extends beyond the pre-release levels as traders analyze the figures. This trade is not for the inexperienced and does not work all the time. The biggest advantage of Fence trading is that traders who use this strategy could minimize their losses but on the other hand could generate higher profits. Fence trading is simple and very basic risk management strategy which is always important for succesfull binary options trading.
It will take a lot of practice on the part of the trader to get consistently good results on this trade. Traders who do not have the experience are better off trading simpler binary option types with greater chances of success than such a complex strategy with a 25% success rate. Nevertheless, this strategy could generate you some high profits and moreover, and that’s very important for beginners, fence strategy trading could minimize losses and improve risk management.