Here are some common questions I get about hedging: Why not use Stop Loss to close a losing trade?
that’s a good question. Actually both methods work.it depends on your personality and either you I like it more
However, if you are using Stop Loss and it is not working for you, it may be time to try something new.
Hedging makes it easier to handle losses psychologically and gives you more control when you do. It can be a more consistent and profitable trading method compared to strategies that use stop losses and usually offer more trading opportunities.
Now that we understand the overall benefits, let’s dive into the details.
The greatest psychological benefits of hedging
When using a stop loss to exit a losing trade, market You basically decide when to lose money.
However, due to hedges, you Decide when to lose.
In principle, losing money now and losing money later are basically the same thing.
However, from a psychological point of view, being able to take losses only after securing a profit can be a great advantage.
This means you don’t have to worry about how long your losing streak will last before getting your next win.
You have more control over the process.
Provides an opportunity to minimize losses
Will you accept a $2,000 loss, or three losses of $800, $600, and $600?
Again, they are basically the same thing. But the difference lies in the psychological impact.
I personally like the idea of taking small losses instead of one big loss.
Even after thoroughly backtesting a strategy and knowing what to expect in terms of losses, it can be difficult to hit consecutive outright losses.
The great thing about hedging is that you can split your losses into pieces and roll them off at your convenience.
This makes it easier to handle losses.
more consistent revenue
I’ve heard stories of traders who claim to use hedging to make a net profit every day.
I haven’t personally confirmed that claim, but I think it’s certainly possible.
However, I know that hedging can be profitable monthly, even weekly.
That depends on how you implement your hedging and how much time you need to spend trading.
Compare this to other trading methods. Other trading methods can be prone to down months and very prone to down weeks.
Clearly, hedging is not a holy grail trading method that guarantees profits.
Like any trading method, it takes time and effort to get good at it.
However, in my personal experience, it can be a very consistent trading strategy if you know what you are doing.
Scalable across all timeframes
Hedging is a method that can be legally used on all timeframes.
I bought a trading education course and the instructor says their strategy works on all timeframes.
But when you actually backtest it, most of the time it’s not true.
There are some stop loss strategies that work on multiple timeframes, but in my experience they are very rare.
In practice, most trading strategies are based on one or two time frame.
However, since hedging is a framework and not a strict set of trading rules, it can truly be used on all timeframes.
No stop loss to trigger
Many traders complain that stop losses are triggered prematurely.
This is a legitimate concern when using Stop Loss.
That’s why many professional traders don’t use stop loss.
Legitimate brokers never intentionally trigger stops. Read this to find out who does.
However, even if you place your stop loss in the exact spot, you may end up being stopped out unnecessarily.
Method is as follows…
variable spread
Spreads can vary greatly between brokers.
So following a trading strategy of using a 30 pips stop loss will result in more stop outs on brokers with wider spreads.
But if you don’t use stop loss and hedging instead, you can’t stop out no matter how wide your broker’s spread is.
interbank market
After the New York session ended, the forex market interbank market There, most of the forex trading is moved from New York to smaller markets like Sydney.
During this period, spreads can be very wide and stop losses can be removed.
So if you are using a stop loss, you can easily get stopped out if you are trading a pair with a stop too close or the spread will be very wide.
However, if you have no stop loss and are using hedging instead, you cannot stop out.
market volatility
The last way it could stop earlier than expected is high market volatility.
If you’ve been trading for some time, you’ve probably seen something like this.
You went long and thought your stop loss (red line) was safe, but a temporary price spike ruined it. Then it goes in the expected direction.
In reality, these spikes are so frequent that the only way to manage risk without stopping is to use hedging.
adjustable risk
Using a stop loss puts a certain amount of risk on your trade.
Don’t get me wrong, it’s generally a good thing.
Hedging, however, can offer more fine-tuning in terms of how much risk you want to take on a trade.
For example, let’s say you want to go long here. If you are wrong about the trade, you will consider redlining hedging.
If the price drops to a level that you think is wrong for trading, you have the following options:
- 0% Hedging (e.g. 1 lot long, 0 lots short): The price is certain to go up and you can sit back and watch the chart.
- 25% hedge (eg 1 lot long, 0.25 lot short): price is almost certain to go up, but we need a little bit of downside protection.
- 50% Hedging (e.g. 1 lot long, 0.50 lots short): I think it’s likely that the price will eventually go up, but I’m not sure.
- 100% Hedging (e.g. 1 lot long, 1 lot short): You never know where the price is going, so you ‘pause’ your losses until the price action becomes more clear.
- Or anything in between!
Partial hedging can give the market more room to move while limiting losses. Even if you are partially hedged and the price eventually moves in the direction you expected, you can still make a profit.
When using Stop Loss, there are only two possible outcomes: Profit or Profit.
Hedges come in various shades of gray.
more flexibility
Hedging is probably the most flexible trading method.
It is also one of the purest forms. price action tradingif you do not use indicators.
The great news, however, is that even with an indicator-based entry strategy, you can still hedge.
Some traders have told me that they use indicators to trade standard trading strategies, but instead of stop loss they use hedging to close trades.
Hedging allows you to make money in both directions at the same time. Wait for the opposite direction setup instead of just going long or short.
You can make money when the price goes up and under.
So, if you don’t like being tied to a certain set of rules all the time, forex hedging could be the alternative you’ve been looking for.
earn positive interest
By holding a hedge, you may actually be able to make a positive profit each week.
It is possible to partially hedge and earn interest, depending on the interest rate environment among central banks.
For example, the USDJPY swap is currently at 11.55 on the long side and -19.38 on the short side.
So if you hold a 1.0 standard lot long and 0.25 short, you are partially protected if the price falls.
But the great news is that you can earn net positive interest on the hedge.
In fact, even if you are 50% hedged, you may still be making a small amount on the swap interest rate.
For me, this is the closest thing to passive income in forex trading.
Now you should do this in the area on the chart that you think is good for longs. If you get a good entry and the price stays above the entry price for a long time, you simply accumulate profits.
Make sure to keep track of swap rates for the currencies you trade, as they can fluctuate suddenly.
be unpredictable
This may sound like a bad thing, but it’s actually a very good thing.
In a world where AI and algorithmic trading are becoming more and more popular, it’s getting easier to understand the mechanical trading systems used by successful traders.
Once enough traders start making money with a particular trading strategy, someone somewhere in the world will figure out how to reverse engineer it into an algorithm.
When enough money starts trading with these algorithms, the system starts to lose profitability.
I know these are some big “ifs”, but they can happen, especially with the power of computers these days.
However, since the hedge does not rely on a mechanical set of rules, it cannot be reverse engineered and will likely work in the future.
Hedging also allows you to adapt to changing market conditions, so you’re not stuck with a dead trading strategy.
More fun
I find that hedging is more fun than other trading strategies because it’s like solving a puzzle.
You have to find a way out of the hedge and flatten out as quickly as possible. There are many ways to do this, and going through the options is a fun exercise.
Compare that to following a set strategy each day.
You follow the same rules, no diversity.
Obviously there’s nothing wrong with that. It’s great that you can rely on the trading system to make money.
However, some people may find it a little boring.
So, if you’re consistently profitable but have trouble motivating yourself to trade, hedging can be a great way to keep your brain focused on the process.
final thoughts
Hedging is a great way to trade forex.
It may not be for everyone, but if you sympathize with the reasons above, it can be a great way to go.
The key is to try it out on a demo account and see if you like it.
Also, be sure to download Click here for a free guide to forex hedging.
