The Risk of Hedging Strategies On Forex And How To Overcome It
The hedging strategy hailed by many people was also a big risk. What is the risk of hedging strategy? How to solve it?
As ever discussed in Hedging Strategy Can be fruitful Profit Trading, hedging is divided into 2 types of planned and unplanned hedging. Generally, planned hedging is mostly done by professional traders who have been well aware of the market situation and conditions. While unplanned hedging is more done by newbie.
In this article will be a little more about the risks of unplanned hedging strategies, errors in removing hedging positions, and how to overcome them.
Double spread, Double Commission, Double Stress!
To perform a hedging strategy, you are required to open Buy and Sell positions in one pair simultaneously or with a relatively short time. Most will argue, with this you will not get a loss and just waiting to open when hedging. However, did you know that opening a position simultaneously on one pair is an impossible thing? Do not believe? Please try it yourself. In a lonely market condition, Bid and Ask price difference can be 1 to 10 points adrift. What about the crowded market or its volatility is rising? Of course more. This is not included if you are using a pending order or EA.
The point is, you have a loss when deciding to do a hedging strategy. A position that opens with such a relatively short period of time will never make a profit if it is closed simultaneously! Oh, wait a minute, why can this happen? The answer is actually simple: spread. Spread makes your order will never be in the same place.
ASK = The price that is executed when buying
ASK -> Profit is calculated from the BID value
BID = Price that is executed when selling
BID -> Profit is calculated from the ASK value
Spread = ASK – BID
Check out the picture above carefully, and look at it, or please try it yourself on your Metatrader. Perform hedging and your position will automatically loss to wherever the price will go. But wait, there’s something else. If you use an ECN broker, then the commission will also be charged in both positions. While over commission later is a very avoidable hedge fund with funds hundreds of thousands to millions of dollars. I have not included a swap fee yet. Considering most of you would already have a swap-free account, would not you?
The high cost resulting from spreads and commissions alone is already a big loss for you. This has not been added with anxiety, stress, fear because the position is still locked for days. Double spread, double commission, double stress!
Trapped In Endless Hedging
Already here do not tremble first, this is just the beginning. Ever seen Inception? In the film, Leonardo De Caprio is dreaming that he is dreaming in his dream. It can also be one of the risks of hedging strategies. You can be trapped in hedging hedging in a hedging position. This condition can also be referred to as Endless Hedging.
Most newbie traders learn the hedging strategies of some irresponsible people. These are usually people who claim to be market financial advisors, professional traders, or even hedge fund managers. With the lure of losses will not increase, the individual even asks beginner traders to increase his hedging position. Not infrequently you will be asked to increase the number of transactions in each hedging, so the trading strategy then changed to Martingale.
Look at the picture above. This strategy is slightly different from the hedging strategy above. In this hedging strategy, you do not need to execute Buy and Sell in the near future; simply by putting a pending order at levels with a certain distance. This hedging strategy has been studied and practiced by the author several years ago. For the type and setting lotnya can vary and vary.
The hedging strategy of this model begins with a sense of uncertainty about current trends. Thus, the Pending Order is placed at levels that are potentially the beginning of the trend. The first trap is first installed with lot 1. When the price keeps spinning in the same place until the eighth Pending Order is touched, how to open a proper hedging?
Most newbie traders with low level of market knowledge will feel overwhelming with this situation. Uncertainty about this position can make you hesitate, even wrong in making decisions. This is because there are so many uncertainties that can happen. What if the price returns once we open the hedging? Or, what happens when the price has started a trend, while we are late opening the hedging?
The worst possibility is the price will continue to pace around that level, and our position will be locked in a long time. Not only that, you can also get Margin Call or even Stop Out when the hedging position is not open yet.
Wrong Open Hedging
Starting nauseous and dizzy? Stuck in endless hedging is not the culmination of all the risks that can happen when you do hedging. The biggest risk of course there is when you are wrong in the process of opening hedging. There are basically 3 possibilities that can occur after you release the hedging: gain, loss, or even break. This subject, here are some simulations that may occur:
1) False Determining Timing
In removing the hedging position, timing is the most important element. Unfortunately, timing is also the most common mistake in opening hedging. Generally, timing errors occur because a trader panics when the price suddenly moves against his position. This panic can also be continued until the time to remove the hedging position.
If hedging is done when the timing is fitted, at least the profit and loss will breakeven or breakeven.
2) Wrong Opening Position
In addition to timing, wrong release position is also a frequent mistake by traders. Most traders in Indonesia in particular, do not understand how to remove his hedging. They only have knowledge that hedging can lock the loss they are experiencing at that time. This lack of knowledge is even accompanied by a sense of laziness to learn. Often, the positional errors arise because of the Fund Manager’s suggestions.
Both position and timing are equally important. Although the position is released right direction, but if the timing is less appropriate release, losses may become even more swollen to cause Margin Call and Stop Out.
How to Overcome the Risk of Hedging Strategy
Do you still survive reading this article? If so, your desire and effort to learn and continue to grow deserves thumbs up. In this final section, we will discuss how to solve the risk of hedging strategy. A simple solution to this is actually only one: never do hedging at all! The ribetnya solution, let’s discuss some other possibilities that you may apply or at least learn.
1. Do not Do Hedging
Still remember some of the risks of hedging strategies above? If you are afraid of experiencing these things, you should cultivate in your mind, NEVER PREPARE HEDGING STRATEGIES! How often do you see the professional traders around you being successful because of a hedging strategy? Honestly, the author has never met a trader like that. However, the assumption may be because the author’s experience is still short in the world of trading. Make trading like a trading business. If you can maximize it, only with the average moving a lot has become a millionaire. The hedging strategy that is dizzying and triggering anxiety is unnecessary.
2. Take Advantage When Opening Hedging
If you remain insistent or fail to hold your hand itch to open a hedging position, then your position should end in profit. Treat hedging strategies like normal trading strategies with defeat limits, profit targets, etc. After all, what’s the point of trading if in the end you do not get a profit? Try reading this simple hedging strategy article if you have no idea about hedging that could be a lucrative thing. In addition, there are many other strategies that can be used and put together with hedging.
3. Learning, Learning, Learning
Has it started bright and bright mind? It is not worth your time to read an article about the risks of hedging strategies is not it? Your curiosity to benefit from current hedging strategies has increased, right? At the end of this article, I will include some references and strategies you can use along with hedging.
Always remember, there is no Master in the world of forex trading. Man continues to evolve, so does the psychology of the market. If you are reluctant to continue growing, then of course you will be left behind by others. So focus your mind right now to keep learning, learning, and learning. If you are confused from where, maybe you should start back from basic. What is the forex trend, perhaps? About trader psychology, maybe?
You should read carefully this last point. This last point can be a cure from a variety of trading diseases. If you understand this point, even using the most absurd trading strategy though, you will never get MC or SO.
Money Management Is The King
Money Management is the king. For this you may be able to read more in a good money management article. But briefly and succinctly, trading is business. So if this business may have spent a lot of your money, not because you can not trade or mentally you are weak, but because you can not manage and control the running of finances in your trading account.
Try to ask yourself, how can a company achieve a very high profit with various costs to be incurred? Because of its financial arrangement. A company knows how to manage the entry of the money path. Some ways may be to stop some products that do not get a satisfactory market response, do market mapping, or hire a qualified accountant and financial advisor. Everything is done so that the flow of finance in the company can run well, or you can say profitable.
Now let’s use the same analogy on trading. Read again the above paragraph, just replace the company with forex trading. Have you set up your funds in and out? Have you studied the market you are about to enter? Have you closed all positions that have lost or bad response from the market? Have you hired a mentor who can teach you? If not, it may be time for you to improve.
How was your journey along this article? enough tense? Is it worth the time you spent reading this article? In closing, I will remind again as the author, that hedging is a trading strategy with a very high level of difficulty. The process is not good for your learning process or your psychological condition, so it might be better if you cut loss and acknowledge the loss.
Please be careful in doing hedging and locking. If you do not really understand how to make decisions in the hedging process, or just have heard that hedging can lock your loss, we recommend STOP! Never do hedging again. But if you want to learn more, here are some strategies that can be used with the application of hedging.
The strategies included here will be further studied, backed up or forward tested first, especially if you use them to seek profit in hedging. These strategies are chosen because they involve mostly ranging conditions in the market. Here are the types of strategies:
- Trading with rounding bottom pattern.
- Trading with bbma.
- Trading with bollinger bands.
- Trading with double top and double bottom pattern.