June 13, 2011

How to Escape from Hedging Position

How to Escape from Hedging Position

"No performer should attempt to bite off red-hot iron unless he has a good set of teeth."

Hedging is a situation where there are opposite positions in our trade. LONG and SHORT simultaneously.
This results in:

Locked the profit or loss. The price movements will no longer affect the equity.
(I am not talking about martingale technique)


I know that hedging is not supposed to be a strategy in managing risk. Because, it may cost even more than just merely cut the loss short.

More further NFA, National Futures Association is already inhibited the use of hedging.

Refer to the above statement of Houdini, means that you are better off without it.
There are 4 ways to escape from hedging. Understanding the philosophy and calculation is the first step upon escaping locked trade.


When you hedge your position. Means that you have LONG and SHORT positions at the same time. One position may have profit and the other, loss. 

It is also possible that both of your positions show negative. It is because the running price is trapped between your long and short position. If that happens, you may want to wait until one of them shows better result.

To help you understand why you need to cut the profit first, is to learn the Reversal Trading method. 

We will not cut the profit right away. 
We will wait until the position to reach the peak and ready to reverse. That's is where we cut it and let the reversing's move results in addition to our equity.


To cut the loss is a completely different idea. You need to understand Breakout Trading Method to utilize this strategy.

If you the market is going to a certain direction according to breakout principles, then you may want to cut any positions opposite to it and let the profit run.


And please, don't lock it again.
By adding a new position, we assume that there is no hedging position. Once the new position enable us to gain few pips to cover the loss, we may exit all the position at once.


It takes courage. And courage pays.
I can't not emphasize it even more, plan your trade and trade your plan.

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About ArrowFX

Technically analyze the forex market mainly on USDJPY, EURUSD and GBPUSD by using market rhythm method started by Philip Nel on Forex Factory. The thread started on 2007 and still alive.
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