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.

How To Increase Forex Profits 100% in 10 Minutes

This simple exercise will increase Forex profits 100% and works for 99% of all short-term FX traders - stop trading so much - widen out your stops - widen out your profit targets - and only trade in the direction of the trend indicated by 4 hour chart.

• 1) Stop trading so much

Sure there are no commissions but the spreads are HUGE and believe it or not (well you’ll believe it after you do the simple exercise below) the spreads are reducing your profits 100%!

• 2) Widen out your stops

Initial stop loss should be a minimum of 23 points; I use between 23 and 35 point stop losses for short-term trading.

• 3) Widen out your profit targets

Unless you think a trade can make you 100 points or more don’t do it.

• 4) Only trade in the direction of the 4 hour chart

The real money is made in the direction of the trend
Simple exercise :

• Download all your trades for the year into an excel spreadsheet (if you don’t know how to do this ask your broker for help).
• Determine the dollar value of the spread for each trade.
• Sum up the total dollar value of all spreads for all trades and add this number it to your current account balance; this is your spread adjusted account balance.
• Take your spread adjusted current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
• Take your actual current account balance and divide it by your opening balance at beginning of year; the result will be a percentage change.
• Subtract your spread adjusted year to date percentage change from your actual year to date percentage change.
• That number should be 100% or more
  

Take the necessary steps as outlined above (1 to 4) and improve your results 100%

Stop Loss and Limit

As with other business sectors, investment in margin trading FOREX has the potential losses. However, the interesting part of this business is that the risk level can be set from the beginning, so it can know the potential level of losses that will occur.



This brief article will help you how to put the "fence" in your position so that the risks that might occur can be limited as far as we want. So is the profit gained can we limit it. The reason why we limit the profit here is because of the nature of the currency itself is a very volatile / fluctuate so that our position may now have become a profit loss due to exchange rate has moved indigo reversed from what we want.



Now imagine if you are an employee in an office and also invest in forex trading. Say you trade at night and during the day you have to work and not be able to monitor your trading position. What if when we are monitoring our trading positions and prices move opposite to our position and even move opposite too far. It could happen a margin call (closing of positions in margin loss due to lack of collateral). Of course this is not our desire.


That's why the facility provided "fence" or limit in any forex trading platform. Point to prevent the unpredictable circumstances that affect our trading portfolio too far. The second boundary is termed a Stop Loss and Limit.

Stop is willing to limit our losses while the limit of responsibility is a limit to profit target that we take.