if I may offer my opinion.....
Hedging is a method to limit risk.
Consider this scenario.....
You may consider an investment in ABC Oil to be a good as you feel that it will outperform the market.
you know that the whole oil sector can be volatile, so if the sector
falls, ABC Oil will fall with it, even though it is a solid company.
So what you do is you Buy ABC Oil and at the same time you short the oil sector.
limits your risk as if the oil sector falls, your short will gain and
as long as ABC Oil outperforms the other oil companies, you will have a
This is hedging.
There is no such thing as true hedging in Forex.
True hedging is not opening an opposite trade in the same instrument, yet that is exactly what so many traders do.
There is no logic behind this at all, so I do not understand why it is so common.
Say you have 1 lot Buy open with EURUSD and it goes 100 pips in loss.
So you "hedge" it with an opposite 1 lot Sell.
are now in a position where if the EURUSD falls another 50 pips, the
Buy order now shows a loss of 150 pips and the Sell a gain of 50 pips. A
net loss of 100 pips. EXACTLY the same as if you had simply closed the
Buy order. No matter whether the price goes up or down, the net
position will always be a net loss of 100 pips.
Also, should the
trades be held overnight, swap charges will be applied (maybe triple
swaps), so now the loss is bigger than it would have been if the Buy
trade had simply been closed.
Not all brokers offset opposite
orders in the same instrument against margin requirements, so there is a
risk that there may not be enough free margin to open the "hedge". In
an EA, this could leave you exposed to more risk than you are
If there is not the intention to "re-enter" the Buy by closing the "hedge", then you also incur additional spread/commission charges.
So it is not just my opinion that "hedging" in
Forex is unproductive and pointless, it is a fact. When swaps are taken
into account, "hedging" actually loses more money.
My advise to
anyone when considering "hedging" in Forex is "Don't do it". You are not
hedging, you are opening an opposite order in the same instrument.
Now there will be some who will say "Ah yes, but what if instead of Selling 1 lot as the hedge, I Sell 1.1 lots?"
don't do it, there has to be a reason to Sell. If you have a reason,
then close the Buy and open a 0.1 lot Sell. It has the same result, but without additional charges.
I will however take it a step further - It is not an opinion, it is FACT! Most traders however cannot seem to get their heads around it and continue to dispute it, just like the "Gridders" and the "Martingalers"!
There is also "hidden risk", I learned it the hard way 5 years ago when I started trading. I had trade(s) in the wrong direction and started to panic, so I said me I will open an "hedge" to win some times, to calm down and have time to decide something, so I did. The margin level was very close to stop out (around 120%) but I was saying me "I am safe". Hovewer the total lot size was very big (don't remember exactly), and what happened ? ... the account has exploded (all trades closed by stop out, margin level below 100%), without me changing anything, but there was a spike (probably a news I don't remember).
I could not believe it, started to think the broker cheats me (as everyone ). I checked all...10 times...to finally understand there was no cheating but just me being stupid. Before explaining what was the reason, it could be fun the ask if someone can explain why the account was blew out while my trades was fully "hedged" ?
This is useless, but it is not how it's supposed to be used.Let's take another scenario:You have 2 strategies, both of them work on same symbol but different timeframes. Both use different risk/reward and so different volumes traded.
One is a swing trade on the daily or something, and it goes long (one or more orders depending on the strategy).The other scalps short, or maybe another strategy already trades the monthly short.The scalp short position uses say 1 lot but stop loss of 30 pips and the daily swing long has stop loss of 200 pips but position is 0.1 lot.So, to simplify the management of different strategies it is useful to use hedging, but of course not the way you described.Of course you could achieve it without hedging but it will be much more complicate to manage.
It is not "hedging" as the trades depend on different strategies.
If I buy EURUSD according to my strategy and you sell EURUSD according to your strategy, we are not hedging each other. We are working with a totally separate algorithm.
Personally, I don't hedge.
I am aware of certain strategies that employ hedging to mitigate losses.
I presume it gets rather ugly if the sell trade falters and price rises. Now what do you do? Hedge the hedge?
I guess it comes down to the probabilities of the system in question, to which I can't comment.
I'm not saying I agree with this methodology, but there is a school of thought working that way.