Low risk hedging strategy.

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Low risk hedging strategy.

Post  ilearn2t on Fri Jul 06, 2012 10:52 pm

Hello Everyone

Many average traders like to hedge because they don’t want to admit that they made a bad trading decision.

Most newbies never like to lose in forex, as it knocks them back a bit and sometimes causes them to give up altogether without giving it a chance.

So lets try a strategy that might help both.

Hedging is when two or more positions on the same pair is opened at the same time in opposite directions, where the purpose is to offset the losses in the first position by the gains received from the other position.

This type of hedging slows down the trader from getting a margin call, as the second position will gain half of what the first loses.

So lets say we open a buy order on EUR/USD using a "Micro" account and a lot size of 0.20, if we set a StopLoss at 20 pips we lose 40 cents at a 1 cent per pip value, if this target is reached, and 9/10 times the swing kicks in shortly thereafter and we panic buy into most trouble as we've confused ourselves about what to do next.

So say we place the same order only we now set our target at a drop of 10 pips before placing a 0.10 sell order to cut possible losses.

If it now hits the target of 20 pips we have a loss of 40 cents and a gain of 10 cents, over all total loss 30 cents.

We could close the winning order and allow the buy to drop another 5 points before our next move, or hopefully the swing occurs and the pair begins to move in the direction you always thought it would, or try to judge the possible close of order if new swing pattern merges.  

If your first order gains then the other will show a loss, you must let the winning trade reach the maximum target you set before closing it in profit. Then wait for the losing trade to improve within a range of profit taken on first order.

You can try a different form of hedging that involves correlated pairs.

Example:

Start your trading with GBP/USD and add AUD/USD if needed.

Both have a strong tendency to move in the same direction.

So if the swing goes against you, use the AUD/USD as a reverse order to the GBP/USD.

Example: GBP/USD 0.20 buy = AUD/USD 0.10 sell.

Once you become most skilled in the art of trading, the fear of losing will good away as you increase your profit trading.

Good luck
ilearn2t
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