Reviewing Locking Strategies in Forex Trading
Come on, to be honest, how many of you consciously cut losses when the losses suffered have reached the risk limit? Seems like a little. Now the question is changed: how many of you prefer to do locking strategies (popular as hedging ) when losses occur? It seems like a lot more. But is this locking strategy really efficient to apply in forex trading ?
What is locking?
Locking actors usually present arguments like this:
“Look, you know … for example I bought 1 lot of EUR / USD at the level of 1.39500, then the price dropped to 1.39000. Is there a floating loss of $ 500, right? Now, at the 1.39000 level I then sell 1 lot. So my position is safe, wherever the price moves, my loss remains only for $ 500. “
Then usually the “anti-locking camp” refutes, ” Well , then what is the difference between doing a cut loss ? Isn’t the cut loss the same: wherever the price will move, your loss remains only $ 500? ”
Sometimes it is answered lightly, “Well … at least it doesn’t hurt very much …”
But the pro-locking “hardline” group usually answered with enthusiasm, “But when I locked it I didn’t lose it. Only temporary. Later if the price drops for example to 1.38500 and I see a potential rebound, I open the locking . The way, the short position at 1.39000 was released, now there is a profit of $ 500. It’s pretty good.
Well if later after that the price rises again to 1.39000, my position has broken even. I can close the buy position. If it goes to 1.39500, my total profit is $ 500, which is obtained from the previous short position. If it rises even higher, for example to 1.40000, my profit will be doubled! “
This scenario is only one of the open-close “variants” of locking . Actually there are at least four variants of open-close techniques. I will not discuss them one by one, because they are basically the same.
Hm … sounds reasonable huh? If your answer is “yes”, beware, maybe you need to think again. Why?
Let me explain.
Equity is The King!
Let us quote and review the section per part of the trader Pro-locking argument above, “But when I lock it I have not lost. Only temporarily … “
Hm … really while? Let’s examine it.
Assume the trader has a capital of $ 10,000. Under the scenario above, when the price drops to 1.39000, it experiences a loss of $ 500. Right at that time, the equity he had had decreased, only $ 9,500.
When you do locking, wherever the price moves, equity will not decrease nor increase . Now, when he did OPEN SELL 1 lot at a price of 1.39000, in fact without realizing it, he had closed the BUY position he opened at the price of 1.3950!
How come? Doesn’t the Buy position still exist?
Try reading again the sentence in the yellow box above. When trading, what is seen is equity, not balance. In the scenario above, equity has been reduced by $ 500. It makes no difference to cut loss!
Indeed, long positions still exist, but what does it mean if it does not affect equity? No. Locking does “hold” so that the balance stays in the original number, but keep in mind the rules in the “yellow box” above.
Wait, this isn’t finished yet. There are still more “exciting” ones. Come on , we continue.
We are again operating the pro-locking argument above.
“… if the price drops for example to 1.38500 and I see a potential rebound, I open the locking . The way, the short position at 1.39000 was released, now there is a profit of $ 500 . It’s pretty good … “
If you really look closely, the profit of $ 500 is actually false.
Again: in trading, the strength of capital is in equity!
“Profit” of $ 500 was recorded in the account history and entered into balance, but let’s look again.
Don’t forget, there is still an open BUY position at 1.39500. What happened to the buy position? Of course, when the price is at 1.38500 the loss experienced by the buy position has swelled to – $ 1,000. Minus one thousand dollars.
So, even though the SELL @ 1.39000 position is closed and generates “profit” of $ 500, in reality equity does not increase because BUY positions that are “left behind” still have a loss of $ 1000. So, at that time, the situation was still a loss of $ 500. Equity still remains at the rate of $ 9,500, it could even be less than that if commissions and swaps (if any) are calculated.
Well, you know !
Furthermore, it also said: “… Well, if later after that the price rises again to 1.39000, my position has broken even. I can close the buy position. If it goes to 1.39500, my total profit is $ 500, which is obtained from the previous short position. If it rises even higher, for example to 1.40000, my profit will be doubled! “
If the market does comply with this scenario, it would be wonderful. But we have long agreed that the market has its own will.
What if if after a short position is closed, but the price actually gets worse? Of course the losses suffered will be even greater. Expecting prices to move according to our wishes is utopian in forex trading .
As said above, this is just one open locking technique variant in forex trading . Maybe the pro-locking will say, “If it is estimated that prices will go down, it will be the buy position. Short positions are left, because they will profit. “
Wait, means cut loss too? Ah … why not from the beginning?
Many reasons can be put forward to justify locking when loss. But if it is sorted again with the calculation of equity as described above, it will be seen that in addition to taking up time and mind, this strategy does not affect the growth of equity. Compared to cut loss , the psychological burden will be even greater.
Now we compare it to if you cut loss .
After the cut loss is done at the level of 1.39000, there is no more burden of mind. Loss is loss . History. Point.
When the price drops to 1.38500, if you see a potential rebound (as seen by locking players), you can re-open long positions. Although there is still a risk that prices will continue to fall, your psychological burden will not be as heavy as locking offenders. Why?
Buy signals at the 1.38500 level are very likely not to appear on the same day when the locking is opened (in this case it is to close short positions).It might appear the next day, or maybe two days later. Nobody knows exactly. Users locking techniques , most likely will not be able to sleep as fast as traders who have cut loss. What if the price continued to fall when he fell asleep, while he could not return to locking ?
Of course there are still arguments: post stop orders. Sell stop at 1.38000 level. Ah, locking again. Of course it will take time and mind again.
If it’s cut-loss ? Alright. As said earlier: only history remains. Will not affect subsequent transaction decisions.
Not completely “unclean”
Likewise, I do not say that locking law in forex trading is completely “unclean”. Please if you want to run this technique, but you must meet these specifications:
- Very experienced. If you are a beginner, it is not recommended to use this technique.
- Very accurate. Remember, the next position you take will greatly affect your previous position. If the accuracy of your analysis is not high, avoid using this technique.
- Not emotional. If during trading you are still emotionally inclined, using locking techniques will only worsen your psychological condition. In turn it will destroy your trading account.
Actually there is a safer and “correct” locking technique. What is it like?
Just wait. We will discuss in another article.
See you later.