Avoid Hedging Strategies If You Include This Trader Type
Not all traders match trading with hedging strategies. If you belong to the type of trader mentioned here, you should avoid the risks and difficulties of hedging techniques
Many traders believe, hedging strategies in forex can be an effective way to reduce risk. The idea of holding two opposite trading positions is interesting enough to apply. Moreover, there is also a strategy to utilize correlation pair that makes the application of hedging become more attractive to learn.
But really hedging can protect your position from loss? In fact, many traders find it difficult to benefit from a hedging strategy. Many of them are locked in locking positions, a situation where traders do not know when to remove one of the hedging positions. Traders even often lose money, because opening 2 positions means exposed to spread 2 times. Trading costs such as spreads certainly can not be ruled out, especially if price volatility is churning.
That’s why, not all traders match the hedging strategy. In order to avoid the risks above, then you should stay away from hedging strategies if you belong to the following types of traders.
1. Often Wrong Analysis
The first quality needed in the success of a hedging strategy is the sharpness of the analysis. To know when to hedge a loss position, at what level of hedging can be opened, and what techniques can be applied, you need to know the opportunity for price movement first. If the analysis is often inaccurate, then it is not possible your hedging strategy ends up failing.
Easy example, imagine you just entry buy EUR / USD at the price of 1.0800. As the price continues to fall to the 1.0700 level, you decide to hedge. If you follow the simplest technique, open buy and sell in the same pair, then next you will open the position sell EUR / USD at the level 1.0700 was. Soon the price weakened to 1.0600.
At such times, you can be sure if the price has been confirmed bearish, and closed the buy position. But what if the price is rebounding? Instead of patching the losses from the previous buy position, you actually suffer more loss because the sell order is still open.
That is why, accurate calculation of analysis is needed by users of hedging strategies. The risk of error analysis in this technique can be doubled, because there are more than 1 position that must be managed. In addition, the inaccuracy of the analysis will cause unnecessary losses. In the above trading example, you will not suffer a greater loss, if your trading analysis gives a signal to not rush to close the buy position.
2. Do not Have Money Management
At this stage, you certainly already understand if hedging requires opening 2 trading positions (minimum). So of course, by doing hedging, you will increase the size and risk of trading. Not to mention, spreads also need to be taken into account because each position will be charged off the trading fee.
In order for a trading account to remain secure even if you open a lot of positions for hedging purposes, it is certainly necessary to maintain sufficient funds to sustain trading positions that are still floating. Money management should be a priority, so you can put the size of trading in each position ideally. If your trading does not apply money management, then that means you are not ready to face the risk of hedging.
3. Still Emotional
It’s common knowledge that emotions are not the right friends in trading. Traders are always advised to minimize the influence of emotions as much as possible, because emotion-affected trading decisions tend to lead to big losses. Unfortunately, the degree of difficulty, pressure, and risk in hedging strategies makes traders more vulnerable to emotional instability.
To hedge the first position, you need to open a second position. If the second order does not work, then you have to hedge it with the third position. If it still fails too, you could be hooked to open the 4th position, 5th, 6th, and so on. In such circumstances, you are trading out of the plan and automatically increases the risk of loss.
In addition, hedging strategies require a lot of patience to get a profitable end result. Often, traders are required to be able to deal with floating positions and each loss and profit with great patience. If you are still emotional and not painstaking, then such difficulties will easily trigger adverse decisions, such as taking the easiest shortcut by closing all positions, without taking into account the profit-loss.
4. Less Experience
Sharpness analysis, measured money management, and emotional control, are 3 things that can be sharpened along with the increasing experience of trading. So, it is only natural that traders who are still minimal experience is not recommended to approach the risk of hedging.
Those who have already felt up and down and still survive in the forex market, must have been studied and trained to deal with the difficulties of hedging. In addition, experienced traders have the patience and mental trading that are needed to ensure emotional stability when cultivating a hedging strategy.
Hedging Strategy Not Impossible To Implement
No need to be discouraged if you are still a beginner or do not yet have a skill that is honed in the trading analysis. The opportunity to use hedging strategies is not entirely closed to you. Experience can make you a trader who has the sharpness of analysis, money management, and emotional control. Therefore, learn a lot about hedging strategies, as you gather the necessary experience. As a recommendation, testing hedging techniques can be done in a demo account first so you avoid the real risk.