• Category: Expert

How to use Triangulation (or Trading Crosses) to Trade Binary Options

Triangulation is an advanced strategy that can be used to minimize risk exposure and increase the number of winning trades. At the heart of this strategy is the requirement that a trader participates in several markets at once.

How to use Triangulation (or Trading Crosses) to Trade Binary Options


How triangulation works

To really understand the trading crosses strategy you need to consider the nature of binary options. When trading binary options, you expect to either win or lose; you also know the amount of investment you are placing and the anticipated amount of profit is known beforehand. On the other hand, when trading currency pairs, the value of each currency will increase or decrease autonomously based on the economic factors that influence each of the currencies. Due to arbitrage, the value of two currency pairs sharing a similar currency are almost always synchronized or aligned. Arbitrage occurs when investors trade a certain currency using its different exchange rates.

So for example, say you were trading the USD/JYP currency pair. If interest rates in Japan rise, it would cause the value of the Yen to rise as well, triggering a spike in the value of this currency pair. The increased value of the Yen would impact its other crosses in the same way. So that if you were trading the USD/JPY currency pair, its value would increase alongside an increase in the value of the Yen. At the same time, the increased interest rates will not have any impact on the Dollar or the Euro, so a currency combination of USD/EURO will not be affected at all.

Typically, you would buy calls in Dollars if you thought that the value of the Dollar would increase. However, due to arbitrage, the exchange rate of the Dollar, Yen and the Euro, for example, usually remain relatively the same over a period of time. Therefore, in the event that the value of the Dollar against the Sterling Pound does not increase, the value of the Dollar and the Euro are equally strong.

Given that the anticipated payout when trading binary options is usually lower than the returns, it is not possible to protect your trade against the same currency pair. As such, using crosses comes in handy to allow you to hedge your risky trades against possible loss.

So, going with the previous example, you would be monitoring to see whether the value of the USD/JPY would increase and the you can cross or triangulate this currency pair with a third currency such as the Euro by buying calls in dollars and others in Yens. Ideally, all three currencies should be bought almost at the same time and should have a similar expiry time.

Essentially, if the value of the underlying currencies increases, you will have two out of three options to trade the payout thereby increasing your chances of success. The bottom line is that if the Yen increases in value, then the USD/JPY and your EUR/JPY trades will end in the money. At the same time, if the dollar increases in value, the USD/EUR and EUR/USD will also end in the money.

triangulation

How triangulation with binary options works

For example, if you are tracking the USD, and your analysis shows that the USD will be higher against the Euro, but stay the same against the Yen, you can estimate that the Euro is getting weaker. In this case, you can apply your analysis between the Euro and Yen and confirm your prediction. In other words, when you get a prediction or signal for a pair, you can triangulate it by analysing a third pair and confirming the market movements.

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