Hedging and Averaging Techniques

Hedging and Averaging Techniques

Hedging is a technique to minimize unwanted risk by opening opposite trading positions. Usually hedging strategy is used to limit risk without cutting losing positions. (as sometimes traders do not want to use Stop Loss).
By using hedging, a trader is able to mantain loss amount at a constant range (locking).

Example :
A trader ordered Buy EUR/USD 1 lot. Unfortunately, market went against the trader’s position (downward). At the moment his position reached -20 points floating loss, he can order Sell EUR/USD 1 lot to lock losing position at -20 points. This action is called hedging, and no matter what direction the market goes, upward or downward, his loss will be locked at -20 points. (assuming there is no spread charge)

Averaging is a technique to minimize unwanted risk by opening another position with the same direction at different price level.
Averaging strategy’s objective is to minimize risk by averaging more than 1 positions which are opened at different prive levels.

Example :
A trader ordered Buy EUR/USD 1 lot at 2.0100, unfortunately, market went against the trader’s position (downward) to 2.0000. Now he suffered 100 points floating loss.

In this scenario, the trader could use Averaging technique to minimize the risk by opening Buy EUR/USD 1 lot at 2.0000. At this point there were 2 open trades : Buy EUR/USD 1 lot at 2.0100 (-100 points loss) and Buy EUR/USD 1 lot at 2.0000. (0 point)(assuming there was no spread charge).

A few hours later, market moved to 2.0050, the trader would have 1 trade at -50 points loss and another trade at +50 points profit. This point (2.0050) is BEP level (Break Even Point) of both trades. Once, the price goes higher than 2.0050, the trader will earn profit.