Binary Options and Inflation
The word “inflation” is one that has become a very familiar one in the vocabulary of traders and everyday people, especially since the global financial crisis of 2008. The reason why inflation strikes fear into the minds of people is that it is a phenomenon that reduces the purchasing power of individuals.
Typically, salaries and wages do not increase commiserate with level of reduction of the purchasing power of the currency, and fixed investment vehicles such as the money market do not provide enough earning power as to cushion the effects of inflation. That is why it is important that people are made aware of other forms of investments that can overcome inflationary pressures on the money they have. This is why we are discussing the concept of using binary option to hedge against inflation.
How do we use binary options to hedge against inflation?
The whole concept of using binary options as a hedge against inflation is to ensure that the trader gets enough returns to surpass the inflation rate of the country he resides in, while at the same time, minimizing the risk factor. The returns on an investment on a savings or fixed deposit market instrument are usually secure, because the financial institution that pays the interest to the owner of the capital has agreed contractually to do so. However, the banks pool deposits together and trade financial instruments that are high-risk but high-yield instruments. It is from the proceeds of such trades that they make a profit and are able to pay the owners of this capital. That is why banks try as much as possible to keep these rates very low.
However, if you live in a country where interest rates are very low, or are at near zero levels (e.g. US and Japan), chances are that you will definitely not make money with this form of investment. This is because no financial institution will ever pay interest of deposits beyond the prevailing lending rates. In contrast, the investor can decide to use binary options to beat inflation.
In terms of risk, binary options has more risk than money market instruments, but lesser risk than capital, currency or commodity market instruments But if the trader finds himself in a situation where banks are not paying enough interest to beat inflation, then he can do what the banks do, go to where the banks go, but with lesser risk by trading binary options.
A table of compounded returns reveals that is possible to use a 10% monthly return rate to turn a $5,000 investment into $15,620 by the end of the year, and the monthly profit at that time will be $1,562. The same amount will return more than $49,000, with a monthly return of $4,924 by the second year. Aiming for a monthly return rate of 10% is quite achievable and is an acceptable risk to take. This simple means that you are aiming to make 0.5% daily on your trading account or $25 from a capital of $5,000 a day. This is truly within reach of an average investor.
If this is achievable, then why are we not there yet? This is because many traders do the following:
- Live for today. They approach trading as if the day was the last trading day, and just want to max out returns. This leads to assumption of too much risk with undesired results.
- Lack of a trade plan.
- Greed.
If traders can use a long-term approach to binary options trading, backed up with a three to five-year trading plan, this will constitute an effective strategy in using binary options to hedge against inflation.
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About the Author:
This article was written by Adam Green, who has more then 10 years experience trading in the Forex, binary options and commodities markets. He also runs a number of his own financial trading websites with trading strategies and analysis.
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