Locking Strategy Application in Forex Trading
One risk management strategy in forex trading is locking . There are also those who call it a hedge / hedging position. This blog has published articles that discuss this strategy in terms of the negative side
If in the article the author reveals the “redundancy” of the locking strategy that traders usually do, this time – to keep the promise in the article – will be discussed the use of a more “safe” locking strategy.
Get around uncertainty
All traders certainly understand that there is uncertainty in market movements. Usually we apply the use of stop loss (SL) to get around uncertainty, with the aim of minimizing risk. By using stop loss, we automatically limit the risk.
But not enough people realize that even when our transactions in profit conditions can quickly turn into losses, especially when there are important economic figures ( big figures ). You may quite often encounter conditions when prices are reversing so quickly that they even beat the stop loss level that had been installed before, even though your position was in a profit .
That’s because the market responds to the data released. Big figure data usually (not always) has a significant impact on price movements, so volatile movements often occur at least the first 20 minutes after the data is announced.
The incident is certainly frustrating. To anticipate it there are at least three choices of strategies that you can do:
– Close positions before the release of important data
– Apply trailing stop
– Applying a locking strategy
What we will discuss in this article is to apply the locking strategy.
Why is it locked? Isn’t the transaction conditions profitable? Does that mean limiting profits? Why not let it reach the take profit (TP) level?
It is true. I am not encouraging you to assume that this strategy is the only option, but rather is sharing the view that it is precisely in conditions like this that locking can be done. As for your choice of decision, it’s certainly up to you.
The basic concept is to deal with uncertainty due to the effect of the announcement of important data.
Suppose that before the release of important data, your position is floating profit . Usually, before the release of important data, prices tend to move sideways. Technically, your trading system says that there is still potential price will move according to your position, but the sideway market conditions ahead of the data are quite frustrating.
Well, in such conditions there is nothing wrong with you “locking” the profits that have been gained by doing “locking profit” . When then the data is released and the price moves in the direction of the previous position, you just “unlock” by removing the position that is opposite to the market. After that you just let the market determine the ending position that is still open. This does not conflict with the concept of “let your profits run” .
Examples like this:
You have an open position that is to buy GBP / USD for 1 lot, for example at level 1.50000. Stop-loss was installed at 1.49000 and Take Profit at 1.52000. Then the price moves up and reaches the area of 1.51000. At that time, the condition of your transaction is a 1000 pips floating profit.
Some time before the release of important data, prices move sideways even though your TP has not been reached. Using the locking profit strategy, you open one lot of short positions at 1.51000. Thus, the condition of your transaction is “locked” with a profit of 1000 pips.
Remember that when prices move sideways, basically there is resistance in the market. Pay attention to the resistance level. For example in the range of 1.51200.
Now, when important data is announced and the effect is positive for the pound then followed by a break above 1.51200, immediately discard (close) the short position that you opened earlier. This position certainly suffered a loss of 200 pips. But when it turns out the price continues to rise to the level of 1.52000, the open Buy position will record a profit of 2000 pips. Your net profit becomes 2000-200 = 1800 pips.
This is certainly better than if for example the release of important data is bad and gives a negative sentiment for the pound. Let’s say the price then drops to 1.49900, so if you don’t prepare the anticipation you will lose 100 pips (even though it used to profit 1000 pips).
What if after applying the locking profit strategy above, it turns out that the release of important data is bad and the price drops? Easy. You just close all of the above transactions with a profit of 1000 pips ( brutto , before commission and swap if any).