Hedging: Offset Risk

This article was written in early 2010 ( almost 2 years ago) and our views towards hedging are this ” If you can’t trade within a tight DRAW-DOWN, floating your losses for a longer duration can give you time that can help determine where and when the next move may take place. It can give you more time to think if you’ve put yourself in an unpredictable trade. Since trading is often unpredictable, the method below may help you in the short term, but it is surely not a solution to worry free trading. I look at hedging as a ” worse case scenario if you’ve already leveraged yourself into a DEEP HOLE and you need TIME to think it through and nothing else.
- Will – DEC 2011

Take a Break: A hedging Break

I used a hedging method that allowed me to take a break from scalping anytime that I needed.

How does this work?
• If you enter a Trade and the volatility of that pair becomes flat, I would place a hedge trade to counter the first trade.
• This allows me to walk away and not have to worry about the trade.
• Once I am ready to resume trading.
• I close the trade that is against the direction of the next trade setup that I see.
• So the trade that I may close out could be a huge loss, or it could be a huge profit.
• Either way, the pips do not matter, because the trade was hedged
• and basically, you did not lose or profit from this trade at all.
• Actually you do lose the Spread cost, however, this method worked well for me
• It allows me to take a break any time I want
• It gives me extra time to think about the next trade setup.
• A needed Time Out

You may say, “what is the point of doing this, why not just close the 1st trade at a loss and enter into the market once you are ready to trade?”

My answer is: The market ranges, consolidates, and often retraces to significant price levels. Understanding the market behavior will eliminate the hastiness of New Traders. They often close profitable trades too soon, hold on to losing trades too long and often change their direction as often as a Traffic Signal. When you are hedged, you can not win or loss, ultimately resulting in an unemotional trading discretion, allowing the trader to think clearer and wait for the appropriate moment to close the hedge.

Hedging is basically a ” Time Out “, which all scalpers need occasionally. Also, another approach of using hedging is the ability to secure profits if uncertainty from a near by news release and or market open/close is near.

iDRAW Hedging with Breakouts

Momentum is flat and you expect a break out, you have enter in a 1.0 lot long position as you expect the break out to go in your favor. The break out will be from an economical news release which may cause a 100 pip movement up or down. Your technical analysis is telling you that the break out will be up, but since the economical data can force the price downward before going in your favor, you use iDRAW as a hedging tool to protect your Long Position. You setup a trendline under current price action, just in case the burst of momentum is not in your favor. Your iDRAW Expert advisor will place a Short position If the trendline breaks downward giving you the change to bank some pips, before the Price hits a lower support level and pushes the price back up again. Now, preparing for this event with iDRAW is quite simple to offset your Long position while giving you an opportunity to bank some Short positions in the break out. Preferable, setting up additional trendlines for a Break out to the upside would also increase the overall profitability of using iDRAW in economical news releases. Therefore, if the break out does go in your favor, your current 1.0 lot positions will gain immediately on the break out and the iDRAW will offer additional positions as the breakout goes in your favor. For an example of this scenario, please look at the screen shots of the charts on the iDRAW Page. These two charts are before and after a iDRAW setup that incorporated the Short Hedge to offset my already entered LONG positions, as well as entering more LONG positions if a break out did in fact go in my favor. This 1 setup is the day that I gained $+++ and 1800 pips. The 1800 pips was from position building