Forex Hedging Methodology
In general, Hedging is a risk management strategy that is used in limiting or compensating for the probability of loss from price fluctuations in commodities, currencies, or securities. As a result, hedging is a risk transfer without buying an insurance policy.
In general, Hedging is a risk management strategy that is used in limiting or compensating for the probability of loss from price fluctuations in commodities, currencies, or securities. In other words, hedging is a transfer of risk without buying an insurance policy. Hedging uses various techniques, but, basically, involves taking the same and opposite positions in two different markets (such as cash and futures markets). Hedging is used also in protecting one’s capital against the effects of inflation through investments in high-yield financial instruments (bonds, letters, shares), real estate, or precious metals.
While Hedging according to the meaning of the word is protecting value. In forex trading, hedging means we open two opposite positions so that even if the price rises or falls the floating value remains the same. Hedging is usually done when we open the position of losses. So that the losses do not get bigger, we key with this hedging technique. So that this Hedging is also known as Locking because when we use this hedging technique our position is locked which makes the value of profit and loss always move hand in hand.
For some people, Hedging is considered one of the most effective ways to gain profit; but keep in mind that whatever tactics, strategies and methods, the risk is always attached. Some traders may prefer to position hedging to save or lock our loss. One of the weaknesses of this hedging is that it takes a long time, requires faster and more accurate calculations. Therefore, it can affect our psychological aspects for the impatient and consequently we can get stuck to the minus point even greater.
Hedging is a state in which we open 2 opposite positions simultaneously. For example, open an open buy position, but also at the same time open open sell positions simultaneously with no stop loss but only profit targets, usually the profit target ranges from 30-50 points. The intent and purpose is so that we can make a profit in the event of a price swing when the price is bullish or when the price is bearish.
How to work hedging
When one of the positions opens to reach the target, for example 50 points, then the opening position will automatically be liquidated so you only have 1 position which is still minus 50 points. The next step is to wait until the minus in the other position is reduced slightly, for example from minus 50 points so stay minus 30 points. If it does happen the minus decreases, then we will open the opposite position again, but in fact we have 20 points profit. So on the process goes. The important thing to remember is, we must be consistent according to our target. Do not be nervous if for example the two positions are even minus all. Think quietly, that in fact whatever happens, your minus will not be more than the numbers that have been locked.
What if after trying to wait for some time in the hope that my position in this one will be reduced, but in fact it will increase?
This is one of the weaknesses of the hedging tactics. One way that can be done as soon as possible to open again in the opposite position before the minus is getting bigger, with the hope that someday the opportunity to reduce the minus will always be there.
Ideally, a hedging system is practiced if one position experiences a loss of only 30-50 points. The hedging system is starting to feel heavy practiced if one of his positions has suffered losses of more than 100 points.
Other Tips on How to Unload Hedging
- Do not get emotionally / patiently looking for the moment out of locking.
- If locking / hedging is more than 50 pips, it takes up to several times to use this technique.
- Use H1
- Use the daily pivot indi
- Wait for the price to touch the S / R 3. According to monitoring if the price has touched S / R 3, the price will bounce 30-50 pips, before the market will decide to continue the trend or even the trend changes. We take advantage of those moments.
- Release hedging is worth profit when the price touches S / R 3.
- If locking / hedging occurs more than 50 pips, then you have to do a limit order of 25-30 pips in the opposite direction with our open position that is minus (open floating)
The second way
We can do hedging, and we can take advantage of the price fluctuations. However, the initial stage must be sacrificed.
for example: BUY and SELL simultaneously, with the same lot. If it reaches 100 pips for example, we close the minus, and let the profit. Then, we open the opposite position again. Here we have a profit hedging position. Want to go up or down we just take profit target.
For example hedging profit: SELL AUD / USD at 0.9100 and BUY AUD / USD at 0.9000 the price is in the middle. If the price goes up BUY let it go. install SL at 0.9085. Sell automatically executed. If it is safe we sell again. If we jump, we are ready to install SL on BUY 0.9020 for example. SELL let, if the BUY jump is executed. if seen safe. we BUY again. and handled by SELL. etc.
Above is an example of safe, relaxed hedging, and we can leave it (without having to spend hours in front of the chart)