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AlfaTrade: All You Need To Know About Tunnel Trading

AlfaTrade explains tunnel tradingin ForexTunnel trades are a type of binary trades that allow a trader to make money by predicting whether an underlying asset’s price will remain within a given price range or break out from that range. These trades derive their name from the resemblance of the given price range to a tunnel. They are also called In/Out binary options or Boundary options. Tunnel trading provides traders already familiar with binary options opportunity to achieve more returns from their trades. Thanks to these potential high returns, tunnel trading is increasingly becoming popular with traders who want to maximize their returns. Unfortunately, some have lost a lot of money because they started trading without fully understanding tunnel trades and how to make consistent profits trading in them. To help you avoid such unfavorable outcomes here is a simple explanation of the basics of tunnel trading and how you can make lots of money as a tunnel trader.

Variants

A broker usually gives the market price of an asset and specifies its lower and upper price range. These two prices form the ‘boundary’ of the tunnel. These boundaries are the basis of the two main variants of tunnel trading – stays between/goes outside and ends between/ends outside. For the first variant, the trader can choose either ‘stay between’ or ‘goes outside’. When traders choose ‘stay between’ they are predicting that throughout the trade’s duration, the price of the asset will remain in the tunnel without touching the price barriers marking the tunnel’s boundaries. If the trader thinks the price of the asset will touch one of the barriers before the expiration of the trade they select ‘goes outside’. For the second variant, a trader selects the ‘ends between’ option if they believe that upon expiration of the trade the price of the asset will fall within the price range specified by the broker. A choice of ‘ends outside’ shows the trader believes the price of the asset will be outside the trade’s price barriers when the trade expires. Most brokers only provide traders with the second variant where they are required to decide whether the asset’s price ends within the specified price range (in) or outside the price range (out).

How tunnel trading is done

There are 3 key choices that one makes before placing a tunnel trade. These are:

  • Asset to trade in

It is important that the trader chooses an asset they are familiar with or one they can easily access information on. Whether it is a commodity such oil or currencies, the trader should get as much information as possible on the market factors that determine the asset’s value. Choosing an asset you are unfamiliar with is the surest way of losing money in tunnel trading.

  • Dollar amount of the trade

Like all bets the amount of profits you make depends on how much you are willing to risk. Different brokers have a specified minimum amount you can place for a trade. It is always advisable to place an amount you can lose comfortably.

  • Whether you believe the asset’s price will finish within or outside the range of the broker

Brokers usually give the market price of the asset and its price range (the tunnel’s boundaries). You are required to decide whether the price of asset you have chosen to trade in will remain inside the given range upon expiration of the trade’s duration or will break out of that range at the time the trade expires. The broker also specifies the amount of returns (in percentage terms) you should expect to get if the trade’s outcome follows your prediction.

An example of a trade

Assume the EUR/USD trades at 1.32 just before a scheduled announcement by the Federal Reserve Chair announces whether to continue or stop quantitative easing (QE). Suppose your broker is offering a range option of EUR/USD at 1.325 to 1.328. If the Chair of Federal Reserve announces the continuation of quantitative easing the Euro’s value against the dollar will increase and most likely fall within your broker’s price range. If you bet on ‘in range’ you will make profits. If the Federal Reserve Chair announces stoppage of QE, the Euro will weaken against the dollar and the final price is likely to fall outside the range option offered by your broker. In that case you lose money if you had selected ‘in range’ option.

As this example shows, a trader can make a lot of money through tunnel trading. However, it is important that a tunnel trader conducts thorough research before placing a bet on any asset. Only when you are well-informed about an asset and factors that influence movements of its price can you make a successful bet. It is also important that you choose a reliable broker such as AlfaTrade to guide you as you learn and grow into a successful tunnel trader.

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