2008-08-28 03:47:56
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Hedging - Can it be done?
One of the items that has been done expecially using the Mt4 platform and FXCM is the use of Hedging, this process allows you to basically take off the stop Loss’s and do a reverse trade opposite of your current trade and match the lotsize so it becomes a zero trade as it moves, (exception of swap).
I have always said that it is the quickest way to lose your account, why? basically the drawdown, the amount of dollars your trading vs what you will need to do to get out of the trade, also doubling up on the hedge again and again eventually overleveraging your account and a margin call.
SO how do you really get out of a hedge…..
There are 2 methods I have came up with that works, both are a risk and both are intensive as far as your attention is concerned, there can be a EA(expert advisor) written for this but suffice to say you can test both strategies and see what happens.
Most conservative:
Using the DAY, 4HR and 1HR make sure all 3 match direction, I use the Psar and EMA’s for direction on a trend, I want to make sure all 3 are trending the same direction both by the EMA and the PSar.
Using Pivots, look for the R1 and S1 levels, depending on the Trend, put an order 2 times the lotsize above the R1 or below the S1 with a 1hr ATR(average True Range) stop Loss. Since your matching up 3 timeframes, the odds are working with you on the move, the breakout of the pivot lines gives you the opportunity for the move, and the SL is your protection.
Put a Take profit, at least the Spread below the R2 or above the R1, the majority of the time the pair will hesitate around the R2 or S2 before possibly moving foward. if it does, you can always set another trade below or above the S2 or R2.
Once you have done this and Taken Profit, calculate the amount gained vs amount lossed, if your Ahead, then cash out all trades with a small gain. your out of the trade.
IF not, then keep that amount you gained and start over again, doing the same thing till you manage to gain enough over time to exit the trade.
Option: on the gain, sell a portion of BOTH sides of the hedge trade, this is tricky because you don’t want to sell off more than you gained, so look at mini/ or micro lots to reduce it by a portion. (around 1 dollar per pip on a mini). so if you gained 100 dollars on the breakout trade, you can reduce each side by 50 pips. (1 micro).
Style 2: using only the 4hr and 1hr do the same as above. The only problem is if the day is opposite, you can hit resistance or support on the day and it can reverse, this will cause more loss’s as you try to exit the trade.
Also as your trading and using other pairs, the gains from those pairs can allow you to reduce the lotsizes of your hedge till it is minimal. then you can cleanup the remainder easier.
As another option, if the hedge is due to a trending retracement, and one side is a gain, you can set the SL of the side of the retracement to be at your entry or entry +2, this is risky as your assuming the trade will resume the trend, and you may get into a wider hedge that will be more difficult to remove.
the basic thing is DON’T PANIC. this is not an overnight process that can be done in an hour or two, it takes time and effort.
Good Luck!!!
Andy (cowboy) Stapleton |
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