Hedging strategies or locking can be used conventionally or as tricks in forex trading. However, what are the differences? Conventional hedging strategies are generally used to overcome losses by locking trading positions through entering positions opposite to previous positions. A trader may open a buy position, but when the price drops, they open a sell position on the same currency pair to prevent further losses. If the price reverses, they then close one of the positions to unlock it. This method is commonly done by novice traders if they feel they have positioned incorrectly.
However, there are also hedging strategies aimed at obtaining profit from the outset, not because of feeling positioned incorrectly. A trader may open sell and buy positions at the same price within a relatively short time. For example, trader A opens a sell position on EUR/USD at a price of 1.3300 and then opens a buy position at the same price. If the price drops to 1.3200, trader A closes their sell position with a profit of 100 pips and leaves their buy position open. Then, they open two new positions, sell and buy at the level of 1.3200. If the price returns to 1.3300, trader A will close all three positions, with the previously opened buy position breaking even, and the two new positions remaining balanced. Thus, trader A gains a profit of 100 pips from the initially opened sell position. If the price continues to drop, trader A can use the new sell position to lock the initial buy position and open two new positions at the same price, and so on until they achieve a profit.
For experienced traders, this trick can indeed yield profit. However, there are several notes to consider:
- Practice First: Novice traders are advised to practice using this trick on a demo account before trying it on a live account. Some brokers may prohibit the use of this trick, so make sure to check your broker's regulations before starting.
- Execution Difficulty: It's not easy to get exactly the same buy and sell prices, especially with pending orders. Automatic execution with Expert Advisors (EAs) may help, but it can sometimes be difficult to execute when the market is quiet.
- Suitable Market Conditions: This trick is more effective when the market is moving sideways, not when it's trending strongly.
- Realistic Profit Targets: Profit targets should be relatively large for this trick to succeed. If only aiming for a few pips, this trick may not be effective.
- Patience and Evaluation: High patience is required to wait for price movements to reach certain levels. Always evaluate every few trades to ensure this trick aligns with your strategy.
If after several attempts, you fail to generate profit, perhaps this trick is not for you. Always remember to adjust your trading strategy to your own style and goals.