Hedging As a Substitute for Forex Stop Loss
Hedging here means we open Buy and Sell positions simultaneously or without close one position.
In the previous article, we have discussed the importance of Stop Loss and considerations to determine how many points should Stop Loss determined.However, many traders are also less comfortable with Stop Loss that is “rigid”. Most still think conventional Stop Loss like this is still too rigid to anticipate the turmoil that occurred in the market. Well, for friends of traders who still consider this conventional Stop Loss too rigid, I suggest trying other alternatives to limit losses, namely using Hedging.
Hedging here means we open Buy and Sell positions simultaneously or without close one position. Using Hedging as a Stop Loss can be done in two ways.
1. Instant Execution
That is, we open a new position that is opposite to our position which is minus rating in the same currency and without first closing the minus position. This method is used to lock the position that is floating minus.
Example: We open order Buy EUR / USD at 1.3000 position and then it turns out we suffer losses up to 50 points (down to 1.2950) then at 1.2950 position we key (Hedging) by way of open order new Sell at 1.2950 on EUR / USD again. So that in this way our loss will remain floating -50 points continuously, until later one or both of the Hedging positions we close. So even though the price goes down to 1.2500, our loss position remains at -50 points.
2. Pending Order
That is, we put a pending order at a certain price as a protector of a position we take, so even if the price moves beyond our prediction when we are not monitoring the chart, the pending order will automatically activate to protect losses for the position we have taken earlier.
Example: We open a Buy order EUR / USD at position 1.3000 then we put a pending order (Sell Stop) at the position of 1.2950 on EUR / USD as well. In this way if the price turns down, the pending order will automatically activate and limit the loss of the first position.
The problem is, how do we determine in what position do we put a pending order? If my advice is, because we mean Hedging as a substitute for Stop Loss, then the consideration to determine in what position we put a pending order is more or less the same as our consideration in determining a conventional Stop Loss. Please refer to the previous article about Stop Loss.
Weakness Hedging As a Substitute Stop Loss
This method of hedging as a substitute for Stop Loss does have a psychological disadvantage, especially for traders who are not very experienced. Usually we will hesitate to close one positive position, for fear that our hedging position close, it turns out the trend continues so that the position is still open the more minusnya without any protector again. Whereas if we hold a positive position, worry that the trend suddenly reversed so that we even have a floating negative collection.
There is a suggestion from one of the traders who used to use hedging as a substitute for Stop Loss regarding when we close the hedging position: the hedging position should not be installed TP. Consequently, we should be painstakingly scalping for that position. That is, we continue to monitor the price movement, once we think the trend began to reverse direction, immediately close a positive position.
Even if the trend still continues, open the position again, and so on. Indeed, we will lose the spread, but it’s still better we can benefit from price movements, rather than just worrying about seeing the loss from the “already” taken position. Hedging way as a replacement for Stop Loss is not recommended for beginner traders, however, it can be an alternative for traders who do not want Stop Loss that are rigid.
Whichever alternative we will choose, it should be adjusted to our “situation and conditions”. That is, we should feel comfortable with whatever decision we take when trading. My main advice is, enjoy your trade . Enjoy every process in trading. Do not let trading only produce “disease”. Already spent time, energy, cost, still plus hunger anyway.