[lildon01]

Hi David,

I am currently a swing trader in the forex market. I am interested in your opinion as it relates to knowing whether or not hedging some of my trades would be beneficial to my trading style or not. Let me give you a brief desciption of my trading style so you can better descern whether or not hedging is for me or not.

I set my trades up(using day candlessticks) with an initial stop loss, but I never set a limit (take profit)order. I am exited from trades by the stop loss orders that I set. In other words, I reset the stop loss everyday, according accorrding to how the currency pair moved, by analyzing the last "closed" day candlestick. And this is done everyday until the stop loss is hit, and I am effectively taken out of the trade, hopefully for a profit. These technique took me about 6 months to perfect. Usually when I am stopped out, the trend that I was riding is about to reverse anyway.

My stop loss method of exiting the trades seem to work at least 80 percent of the time, but it is the times that I am exited out of the trade prematurely(because my technique failed) that concerns me. For instance on a highly volatile pair like gbp/jpy I may get stopped out early and subsequently miss a rebound in the market of
200+ pips. That is very frustrating. So my concern is, should I place a hedge of some kind (with a stop loss on the hedge itself) in place of my conventional stop loss so that I dont lose anything when the market is going against my trade, but at the same time be positioned to profit when the market starts to head in favor of my original trade position? Please make a video or tell me how to successfully hedge my trades, if its in my best interest, that is, that would be suitable for my trading style. Thank you.

[David Waring]

Hi Lildon01,

Welcome to the community.

It sounds like you have a nice trend following strategy there that you have put a lot of time into and are experiencing some success as a result so congrats on that.

Let me start by saying that it is important to find a balance between constantly striving to improve a strategy and seeking to be right 100% of the time. As we talk about in our lessons on the psychology of money management many profitable traders are right less than 50% of the time. One of the key factors in trading profitably, especially when trading trends, is the ability to accept losses even when some of those trades that you take losses on turn back in your favor which happens constantly even to the best strategies.

So as long as you are psychologically ok with losses and looking to improve your strategy then I think you are heading in the right direction but there are a few things that I would mention here.

The first is that (and I know there are many people out there who will argue differently) there is no such thing as "hedging" in the spot FX Market using two spot trades. Long story short this is something that was made up by the original forex brokers to keep people in trades and to get them to deposit more money to cover the margin for the opposing trade.

When you buy to enter a position and then close that position, what you are doing is selling the same amount of the original position. So similarly when you buy to enter a position and then sell the same amount by pushing the sell button you are doing the exact same thing as closing the position, regardless of whether or not the platform you are trading on shows the position as closed or shows two exactly opposite open positions.

Another way of looking at it is that putting a "hedge trade" on and then taking the "hedge trade" off when the position starts to move in your favor would be exactly the same as closing the original position and reopening it when the market starts to move in your favor.

Psychologically however traders do not want to realize the loss even though its the same thing either way so brokers allow them to put these "hedge trades" on.

Ok with this being said it sounds like you are getting stopped out the most in currency pairs with higher volatility. With this in mind my question would be here if you have adjusted your stop placement methodology to take into account the higher volatility of pairs like GBP/JPY and if so how did you do this?

If the answer to the above question is yes then my next question would be do you expect to make large enough profits from the higher volatility pairs to warrant the wider stop and if so why?

Best Regards,
Dave