Simple Forex Hedging Strategy

Simple Forex Hedging Strategy

Many traders understand forex hedging, but have not been able to run it properly. Here are the steps of a simple hedging strategy that can be applied.

For veteran traders, you already know about forex hedging strategies. As explained in the article here, hedging forex is a trading strategy used to limit or protect trader funds, from unfavorable currency exchange rate fluctuations. Forex hedging strategy provides an opportunity for traders to reduce the value of losses, or even turn a profit.

Forex Hedging Strategy
Forex Hedging Strategy

In practice, forex hedging strategy is done by executing buy and sell orders in an instrument, or in two opposing instruments. For example, if stuck floating in the sell position on the instrument EUR / USD, so that losses do not grow large, it can be done a simple hedging strategy with a buy position on the instrument. If in two instruments, the example of the opposite currency pair is USD / CHF and EUR / USD. A buy order can be made on one currency and sell order on another currency.

In theory, forex hedging strategy does look very easy and profitable. However, please also note, in the state of a real market, forex hedging strategy is one strategy with a high level of difficulty. In addition to the need for more understanding of the market, it takes also a strong mental and full of confidence that execution can be perfect.

In this article will discuss a few simple hedging strategies that can be practiced by beginners though.

Simple Hedging Strategy Steps

  1. The first step that needs to be done in the forex hedging process is to choose the right pair. In the selection of pair pair try to choose the pair that is major and famous cross pair. For example, do not select a pair like AUD / NZD, CAD / CHF, or some similar currencies. After selecting the desired pair, then select the time frame you want to use. In choosing a pair it is very important to choose a time frame that is showing a consolidative movement. It is important to determine the trading method (scalping, intraday, and swing). For example, if consolidation occurs at 15-minute time frame, then we will run our forex hedging with scalping method.
  2. After you set the time frame to use, it’s time to see the current trends. How to see the trend? You can go to 1 time frame above the previous time frame, and identify trends using moving averages or drawing channels.
  3. The third step is the execution of buy and sell. Try to execute this order quickly, so the distance is not too far (order can not be done simultaneously). If you want to do it simultaneously should be used Stop or Limit Order (read the guide to install the pending order).
  4. Next, let the price move at will, and we will wait until the order moves within a certain range.
  5. When the price has moved as far as the specified range specification, close your losing position and execute buy and sell back at that position.
  6. Repeat these steps until the overall results make a profit.

Basic Determining Range In A Simple Hedging Strategy

Forex Hedging Strategy
Forex Hedging Strategy

Remember the fourth step? this is where the range will be determined. Note the price range below:

Major pair (USD)

Scalping (m5): 10-20 pips
Intraday (m15 / h1): 30-90 pips
Swing (h4): 100- 200 pips

Couple Cross Pair (EUR)

Scalping: 15-30 pips
Intraday: 40-120 pips
Swing: 120 – 240 pips

Cross Pair Couple (GBP)

Scalping: 20-40 pips
Intraday: 50-150 pips
Swing: 150-300 pips

Calculation of this range is required so that when installing hedge or lock you do not arbitrarily put the order at the point you want (locked position). Second, to seek profit with hedging forex, it takes more knowledge and patience in placing orders.

Maybe you ask how we can benefit in such locked state? The bottom line is in the consolidation range. Always remember, at one time the market price will move in one direction continuously without experiencing consolidation. This is what you are waiting for as a place to get profit. Still remember why you were told to identify price trends?

Examples of Simple Hedging Strategies

Suppose you choose the currency pair EUR / USD with a time frame of 5 minutes. This means the range that can be selected is in the range of 10-20 pips. Let’s say you choose a range of 10 pips. Here’s the short simulation:

  1. Execution of buy and sell positions in EUR / USD as much as 1 lot.
  2. The price moves 10 pips up. Close sell position (-10 pip). Re-execute a buy and sell position of 1 lot.
  3. Apparently the price moves back towards your position below or down 10 pips. This means you get:
  • Buy first = 0 pip
  • Buy second = -10 pip
  • Second Sell = +10 pip
  1. Close the second buy position (-10 pips) so you currently have 2 pips losses.
  2. Re-execute a buy and sell position of 1 lot.
  3. The price moves back upward for 10 pips. With this your open position is:
  • First buy = 10 pips.
  • Second Sell = 0 pip.
  • Buy third = 10 pips.
  • Third Sell = -10 pip.
  1. Close the third sell position (-10 pips) so that you currently have suffered losses of 30 pips.
  2. Re-execute a buy and sell position of 1 lot
  3. This time the price moves back upward as far as 10 pips. With this your open position is:
  • Buy first = 20 pips.
  • The second sell = -10 pip.
  • Buy third = 20 pips.
  • Buy fourth = 10 pips.
  • Sell ​​fifth = -10 pips.
  1. Close sell second and fourth until now total losses reaching -50 pip. But in this position the total profit has also reached 50 pips (addition of first buy profit, third buy and fourth buy).
  2. Re-execute a buy and sell position of 1 lot.
  3. If the price has almost certainly formed an upward trend and climbed back as much as 10 pips. With this your open position is
  • First buy = 30 pips.
  • Buy third = 30 pips.
  • Buy fourth = 20 pips.
  • Buy fifth = 10 pips.
  • Sell ​​fifth = -10 pips.
  1. Close the fifth sell position with a loss of -10 pips, so there is currently a total loss of -60 pips.

The numbers in the above figure are the execution points of buy and sell performed on the example in the market USD / JPY time frame M15. Then what about profits? Until the last position, the total profit earned from the first buy, third, fourth and fifth is 90 pips. So the total net profit if it has been reduced by a loss is 30 pips.

A simple hedging strategy described here is the type of forex hedging that is used to find profit. So, always remember to keep your Money Management. This simple hedging strategy also will not always guarantee your profit. Optimal hedging is used to lock a position that is being lost. so the loss of a trader does not occur at a level that exceeds risk tolerance.

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