Forex Hedging As a Substitute for Stop Loss
Hedging here means we open Buy and Sell positions simultaneously or without close one position.
In the previous article, we have discussed the importance of Stop Loss and considerations to determine how many points should Stop Loss determined. However, many traders are still less comfortable with Stop Loss that are “stiff”. Most still think conventional Stop Loss like this is still too rigid to anticipate the turmoil that occurred in the market. Well, for my friends who still think conventional Stop Loss is too rigid, I suggest to try other alternatives to limit losses, namely using Hedging.
Hedging here means we open Buy and Sell positions simultaneously or without close one position. Using Hedging as Stop Loss can be done in two ways.
1. Instant Execution
That is, we open a new position opposite to our position is being minus floating in the same currency and without first close the minus position earlier. This method is used to lock positions that are floating minus.
Example: We open order Buy EUR / USD at 1.3000 position and then it turns out we suffer losses up to 50 points (down to 1.2950) then at 1.2950 position we key (Hedging) by way of open order new Sell at 1.2950 on EUR / USD again. So in this way then our loss will remain floating -50 point continue, until later one or both positions Hedging we close. So even though the price goes down towards 1.2500 any loss position we remain -50 points.
2. Pending Order
That is, we put a pending order at a certain price as a protector of a position we take, so even if the price moves beyond our prediction when we are not monitoring the chart, the pending order will automatically activate to protect losses for the position we have taken earlier.
Example: We open order Buy EUR / USD at 1.3000 then we put a pending order (Sell Stop) at 1.2950 position on EUR / USD as well. In this way if the price turns down, then the pending order will automatically activate and limit the loss on the first position earlier.
The problem is, how do we determine in what position do we put a pending order? If my suggestion is, because this Hedging we mean as a substitute for Stop Loss, then the consideration to determine in what position we put a pending order is less or less the same as our consideration in determining the conventional Stop Loss. Please refer to the previous article about Stop Loss.
Weakness Hedging As a Substitute Stop Loss
The way hedging as a replacement for Stop Loss is indeed has a weakness of the psychological side, especially for traders who have not so experienced. Usually we will hesitate to close one positive position, for fear that our hedging position close, the trend continues to continue so that the position is still open minus without any protective again. Meanwhile, if we hold a positive position, worried that if the trend suddenly turned so we even got a floating negative collection.
There is a suggestion from one of the traders who used to use hedging as a substitute for Stop Loss regarding when we close the hedging position: the hedging position should not be installed TP. Consequently, we should be painstakingly scalping for that position. That is, we continue to monitor the price movement, once we think the trend began to reverse direction, immediately close a positive position.
Even if the trend still continues, open the position again, and so on. Indeed we will lose the spread, but still mendinglah we can take advantage of price movements, rather than just anxious to see the loss of positions that “already” we take. Hedging way as a replacement for Stop Loss is not recommended for beginner traders, however, it can be an alternative for traders who do not want Stop Loss that are rigid.
Any alternative that we will choose, should be tailored to our “circumstances”. That is, we should feel comfortable with whatever decision we take when trading. My main advice is, enjoy your trade. Enjoy every process in trading. Do not let trading only produce “disease”. Already spent time, energy, cost, still plus hunger anyway.