HEDGE STRATEGY
A hedging strategy is used to capitalize on any market movement. In this strategy, usually both a buy and a sell trade are opened at the same time, locking in profits from the profitable side while partially closing out the losing side. This way, the used margin doesn't necessarily grow, leaving plenty of capital for traders and avoiding overallocation. This is the reason why many people prefer hedge strategies over martingale strategies, where the allocated capital grows exponentially, potentially leading to account wipeouts. Many EAs on the MQL marketplace use several kinds of hedging strategies. Here, I'd like to introduce one of the many. I'd like to clarify that this is not my idea, and I actually got it from this video. I've developed a tool that enables traders to hedge easily, saving a ton of time and stress from the everyday life of a trader.HOW DOES IT WORK?
Let's suppose that a trader predicts that the market is going to go up, so he enters a buy trade. The price of the security goes down, so to protect the position, the trader enters a sell trade with the same volume. Regardless of where the price goes now, there will be a trade that is in profit and the other will have a floating loss. If the price hits a desired price for the profitable trade, let's say it goes down so the short trade is profitable, the trader closes out the trade with profits and closes a part of the losing trade as well, in a way that he can put some money in his pocket, so the profit of the profitable trade minus the loss of the losing trade closed out partially is more than 0. Now the trader made some profits but there is a bigger drawdown because he hasn't closed the whole losing buy trade yet. Now it is time to "squeeze" the hedge. Squeezing the hedge means that a new sell stop order will be placed with the remaining volume of the buy trade, in the same order distance below the current price as between the original buy and sell trade. If the price reaches the sell stop, the whole procedure starts again, waiting for one of the positions to be closed out with profits and a part of the losing trade to be closed out as well. If, however, the price goes up instead, the sell stop will act as a trailing sell stop, placing the order at a higher and higher price following the ask price with the order distance mentioned before. This is where "squeezing" comes from: the trader squeezes the price between the sell order and the buy trade. Then either the buy trade will be profitable and now the trader is in profits or the sell stop will be activated, and the procedure starts again. Sometimes, the price is stuck between the buy trade and the sell trade; this is when the trader can "build from the inside," which means creating new buy stop and sell stop orders between the last buy and sell trades and going through exactly the same steps with the original trades.
PARAMETERS
To define the strategy, the following parameters can be used:
- Buy Level: The level where the hedging strategy places the buy order when starting the strategy or building from the inside.
- Sell Level: The level where the hedging strategy places the sell order when starting the strategy or building from the inside.
- Volume: The volume used for the orders.
- Takeprofit: The takeprofit of the trades. For example, if the buy trade is at 100 and the sell trade is at 90, and the trader closes out the sell trade at 80, the takeprofit is 90-80 = 10. The buy trade would be closed out at 110.
- Gain per lot: This defines the amount the trader wants to gain when closing out a profitable trade in the hedge with 1 lot. If this is, for example, $10 and a buy trade is open at 100 and a sell trade at 90, both with 0.5 lots, the trader would put $5 into his pocket when closing out at 80.
The Orderdistance, as already mentioned above, is the distance used when squeezing the hedge, which is the same as the distance used for the last build from the inside or the original distance if the trader did not build from the inside.
CONCLUSION
A hedging strategy is almost always profitable, but it generates very low returns. The most important attribute the trader can have when utilizing this type of strategy is to be patient and wait until the hedge becomes profitable. Sometimes a strategy like this can take several days to reach the desired profit. Creating this type of strategy can be done easily by the ManHedger EA. It automates the whole process, saving a huge amount of time but leaves plenty of room to control the strategy. I hope I could help in understanding the strategy. If something is not clear, make sure to watch the video mentioned above. Thanks for reading.
Good luck with trading!
