Wednesday, March 21, 2012

How to trade forex using Hedging Strategy

Forex Hedging Strategy
Before I knew that it was hedging, I was already using it. I use it to protect my account from further loss, but aside from protecting your account from additional loss, you can maximize your profits by using hedging strategy.
What is Hedging? It is opening a buy and sell position at the same time with same lot volume. Sounds fantastic and great trading idea because wherever the market goes, up or down, you have a trading position that will be on profit, and when the position goes on the opposite you will profit again to the other position. But to many who uses hedging position at the first time, This result them to too much floating loss position, and when get out of control, they face margin call.
When to use Hedging Strategy? Most of the traders doesn't know when to use the hedging properly, though they have a good idea because the currency pair are moving in harmonic waves and the price keep on coming back to a certain price, they would really benefit from hedging. But the primary purpose of hedging is to protect the account, profit is only second to it. 
  1. We should use hedging to protect the account from further loss,its like freezing the account. If the market suddenly changes, hedge the position and analyze the market situation, assess if we have to use hedging or close the loosing position early instead of waiting for several years without assurance of good profit.
  2. Hedging can also be use when we think that the price will going to reverse and comes back to our first position, we can use hedging instead of stop loss. 
  3. The best time to use hedging for profit is when the price has reach its peak like highest high, or lowest low, because most of the time it will reverse.
How to properly use hedging strategy? Before entering hedging, we should analyze first the market. Example, the price of AUDUSD reach 1.0400 after buying position of 1.0500, you already loose 100pips, if you think that the price will go lower, its better to hedge the position by selling same lot volume at 1.0400, so that when the price reach even as low as 1.0000, your loss was not increasing and when the price going up again to 1.0300, you may close your selling position at a small profit before it goes back to 1.0400. 
Contrary to common perception about Hedging, it is not recommended for everyone, it should only be used by traders who have several years of experience in trading their chosen currency pair because Hedging will only cause confusion to newbie and starting traders.

2 comments:

  1. Sad that you have stopped updating your blog.

    You're the only understandable person talking about forex trading in the net for a newbie like me.

    Read all your posts. Very understandable. Thank you.

    ReplyDelete

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