The Logic of Hedging / Locking
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Thread: The Logic of Hedging / Locking

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    Rookie rinaji's Avatar
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    The Logic of Hedging / Locking

    Hedging or locking means we open two opposite positions, so even though the price goes up or down but floating value is not changed.

    Logically, hedging in the same pair is not allowed because it means we play with ourselves. try to imagine at the same time you buy 1 lot position on EUR/USD and sell 1 lot position in EUR/USD. This means your profit in one position are your loss in one another position.

    If you buy 1 lot position on EUR/USD and then sell 1 lot position on EUR/USD, then this means that you close your position.
    Why? Let's examine ....
    Buy in EUR/USD = exchange USD to EURO and Sell in EUR/USD = exchange EURO to USD
    this mean we have no position. we have to close buy position or close sell position.

    HEDGING/LOCKING and STOP LOSS/CUT LOSS
    Which do you choose to limit the risk (risk management)? Hedging/locking or stop loss/cut loss?
    Are you using hedging/ locking when you get a floating loss?
    I often find that many traders use hedging/ locking only because they hope to get the chance for recovery. And some of them are confused to find the best moment to open the locking position.
    They do not realize that logically, hedging and stop loss are similar.
    What is different? If you are using hedging, then you do not get a loss psychologically, because you do not close your position, but the fact you have to close your position. *Read again my explanation above.*
    The difference is if you use a stop loss, then you have lost your equity and balance, but if you use hedging, it is as if you do not get a loss, even though you've lost your equity, but the balance is still intact. But this is affecting psychology.

    Why do I say that logically hedging and stop loss are similar? Let's see.


    If we assume that there is no spread. Open position = 1 lot size (fixed), pair eur/usd
    HEDGING
    1. open buy position in A, exchange usd to euro.
    floating loss 10 pips in level B
    2. open sell position in B, exchange euro to usd. it means close buy position = stop loss = cut loss.
    there is no position (locking). floating loss still 10 pips in level C
    3. close sell position in C (profit 10 pips), exchange usd to euro. (same with point number 1, so we conclude in this case that close sell position is same with open buy position).
    have buy position in level C
    4. close buy position in B (loss 10 pips), exchange euro to usd. (same with point number 2, so we conclude in this case that close buy position is same with open sell position).
    Clear in level B
    Result: profit 10 pips (sell) + loss 10 pips (buy) = 0 pips (BEP)

    STOP LOSS
    1. openn buy position in A, exchange usd to euro.
    floating loss 10 pips in level B
    2. close buy position in B (loss 10 pips), exchange euro to usd. remember, close buy position = open sell position = hedging = locking
    there is no position in B to C
    3. open buy position in C, exchange usd to euro.
    have buy position in level C
    4. close buy position in B (profit 10 pips), exchange euro to usd.
    Clear in B
    Result: loss 10 pips (buy1) + profit 10 pips (buy2) = 0 pips (BEP)

    CONCLUSION: Here we understand that hedging = locking = stop loss = cut losses = close position.
    NOTE : Buy in eur/usd = exchange usd to euro. and then close buy position = open sell position (hedging/locking)= exchange euro to usd.
    Sell in eur/usd = exchange euro to usd, and then close sell position = open buy position (hedging/locking)= exchange usd to euro.

    Hedging in a pair with the same lot size is a system of platforms, no different than closed position or do not have any position. But traders usually do not understand fully, even they make a hedging strategy for the recovery of the loss, it means they do not understand the logic of hedging.

    Remember, hedging in one pair is different from the cross hedging (hedging on a different pair which is correlated).

    Hopefully this thread useful for you, I hope you understand about the essence of this topic. have a nice day.

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    hedging is better than cut loss or stop loss, we can lock our losing and protect the balance from unwated situation, and then just wait for good moment to reduce the floating minus and even convert floating minus to profit, and of course, it is not easy for the firrst time, traders need to take learning and practicing first, they can use demo account for it

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    Registered user Dheeraj123's Avatar
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    Yeah hedging is a very good system to lock of our trading position its better than stop loss but hedging need a very big amount of money I think for hedging we should take very less lot size in trading then we will able to use hedging properly in forex thanks for this information very good explanation sir

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    Rookie rinaji's Avatar
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    Quote Originally Posted by newentry View Post
    hedging is better than cut loss or stop loss, we can lock our losing and protect the balance from unwated situation, and then just wait for good moment to reduce the floating minus and even convert floating minus to profit, and of course, it is not easy for the firrst time, traders need to take learning and practicing first, they can use demo account for it
    um, maybe you did not read all the posts that I created, or maybe you've read all my posts and do not try to understand, or maybe my writing can not be understood. I tried to change the misconception about this, but it is difficult to change the mindset of a person.
    Quote Originally Posted by Dheeraj123 View Post
    Yeah hedging is a very good system to lock of our trading position its better than stop loss but hedging need a very big amount of money I think for hedging we should take very less lot size in trading then we will able to use hedging properly in forex thanks for this information very good explanation sir
    Yes mate, you are right, sometimes there are brokers which take more margin for hedged positions, but there are also brokers which do not take the extra margin.

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    Rookie kagho's Avatar
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    Quote Originally Posted by newentry View Post
    hedging is better than cut loss or stop loss, we can lock our losing and protect the balance from unwated situation, and then just wait for good moment to reduce the floating minus and even convert floating minus to profit, and of course, it is not easy for the firrst time, traders need to take learning and practicing first, they can use demo account for it
    well i think that you are better off if hedging works for you for i tried it and the only result i got was a margin call but i learn t two lessons
    1)never try hedging again
    2)even if you hedge never hedge a losing position

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    This is a very strong trading analysis over here, although the approach or this is very plain to me, but the way it is said and drew over there is too thrilling by all traders. I can say that it is a good thing not to do hedging at all, no mater the defence on this regard, my stop loss is the only one I take serious.

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    This is very effective idea to protect trading capital from huge loss. I came to know about it elaborately and I appreciate it very much. I will practice it in my trading further. Hope it will bring me better and effective result in my trading.

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    Rookie rinaji's Avatar
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    Quote Originally Posted by kagho View Post
    well i think that you are better off if hedging works for you for i tried it and the only result i got was a margin call but i learn t two lessons
    1)never try hedging again
    2)even if you hedge never hedge a losing position
    A good lesson from your experience, I've also been to use various methods of hedging. Such as: hedging for loss position, average hedging, hedging martingale, and also hedging correlation. And I understand about the concept of hedging, and I made this thread to discuss about hedging. Thank you for sharing something useful here.
    Quote Originally Posted by cozard007 View Post
    This is a very strong trading analysis over here, although the approach or this is very plain to me, but the way it is said and drew over there is too thrilling by all traders. I can say that it is a good thing not to do hedging at all, no mater the defence on this regard, my stop loss is the only one I take serious.
    A good decision my buddy..., you probably understand more than me about the concept of hedging, especially for use in risk management in lieu of a stop loss. I also prefer to use a stop loss.

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    This is a good strategy to make our margin no more decreasing with unwanted condition but for me this is a very hard strategy that we can use before I get some margin call, even this very hard but this strategy can be applied into trading that we don't know price will goes up or down.

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    Quote Originally Posted by jull View Post
    This is a good strategy to make our margin no more decreasing with unwanted condition but for me this is a very hard strategy that we can use before I get some margin call, even this very hard but this strategy can be applied into trading that we don't know price will goes up or down.
    hedging strategy is not a strategy that will be easy for us to do well because we have to realize that in this trade we have to do a better analysis later when we use this hedging strategy where if we are not able to use a good analysis with this hedging the when it will open a trading position that is locked we will find the level of difficulty, and we must be vigilant then with something like that

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