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Hedging a Substitute of Stop Loss


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Hedging a Substitute of Stop Loss

 

In previous post, we have discussed about the importance of Stop Loss and considerations to determine how many points Stop Loss should be determined. However, many traders who are also less comfortable with a Stop Loss that is "rigid". Most still consider such a conventional stop-loss is still too stiff to anticipate the turbulence in the market.

 

Well, for my friends trader who still considers the conventional stop-loss is too stiff, I suggest to try other alternatives to limit losses, using hedging. Hedging here means we open Buy and Sell positions simultaneously or without one of his close position.

 

Use hedging as a Stop Loss can be done in two ways:

 

The first way: with instant execution

 

It means we open a new position opposite the position we got minus floating in the same currency and without her former position minus close earlier. This method is used to lock the position that was floating minus.

 

Example:

We open orders Buy EUR / USD at 1.3000 and then position it turns out that we suffer loss by 50 points (down to 1.2950) and then at 1.2950 is our key positions (hedging) by way of a new open Sell order at 1.2950 on the EUR / USD again. So in this way then we will still floating loss -50 point on, until later one or both of these hedging positions us close. So even if the price drops continue in the direction 1.2500pun our loss position remain -50 points.

 

The second way: with a pending order

 

That is, we set pending orders at certain prices as a protector of a position we take, so even if prices move outside of our prediction on when we're not monitor charts, pending order will be automatically activated to protect the loss on the position we have taken earlier.

 

Example:

We open orders Buy EUR / USD at 1.3000 and then we put the position pending order (Sell Stop) at position 1.2950 on EUR / USD as well. In this way if the price was moving down, then the pending order will be automatically activated and limit losses from the first position earlier.

The problem is, how do we determine how we put in the position pending order?

If my advice does, because hedging is we mean as a substitute for Stop Loss, the discretion to determine how much we put in the position of pending orders so more or less the same with our considerations in determining the Stop Loss conventional. Please refer to the previous post about Stop Loss

 

How to Stop Loss of hedging as a substitute for it does have a weakness of the psychological side, especially for traders who have not so experienced. Normally we would not hesitate to close one of the positive position, fearing that our hedging positions close, it turns out the trend continues so that the position is still open growing without any protective the minus again. Whereas if we are to hold a positive position, worried -if the trend suddenly turned around so that instead we would have a negative floating collection ...

 

There is a suggestion from one of his trader friend who used to use way of hedging in place of Stop Loss on when we close the position hedging: hedging position should not have installed the TP. Consequently, we must be patient scalping for the position. That is, we continue to monitor price movements, so we think the trend started to reverse direction, immediately close a good position. Even if it turns out the trend continues, the open position again ... and so forth ... Indeed we would lose a spread, but still better if we can take advantage of price movements, rather than just anxious to see loss of the position that "already" we take

 

The way Sop Loss hedging as a substitute for this is not recommended for beginner traders, however, could be an alternative for traders who do not want a Stop Loss that are rigid. Whichever alternative we choose, should be adjusted to "the circumstances" we. That is, we should feel comfortable with whatever decisions we take when trading

 

The main advice I still ... Enjoy ... Enjoy your trades every trading process in the air ... Do not be trading only produce a "disease" spent time, effort, cost, plus still suffer a heart attack too ... hehehe ...

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  • 4 months later...
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I still prefer to using stop loss. But I am sure each trader have his own reason to using stop loss or doing hedging.

 

hyga same feeling that I'm used to using a stop loss in trading and rarely using hedging as a stop loss because I feel the stop loss is more automated in this trade

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  • 2 months later...

well, in my opinion, hedging different with stop loss. hedging not substitute and have different form function. in hedging, traders should open 2 different positions at the same time. the goal is riding both ups and down. and if a positions not closed yet, no profit or loss will appear in our trading record. our order will keep breakeven.

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  • 1 month later...

I have the same opinion with you. There are still some very bad side of the hedging even though it's meant to take advantage of one position's loss. What if the trader had closed the first position with loss and opened another one opposite it and at some point, the second begins to tilt in the losing end as well. I still think Stop Loss is the best approach to trade.

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  • 1 month later...

stop loss is the best still. traders cut the loss and open new position on the correct direction. such way enabling traders to gain maximum profit. the goal of hedging is avoid loss perhaps. but this technique require traders to measuring the correct close position. and that can be disadvantage when traders close position not at the good level.

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I agree with what you said before myregister. In addition, hedging also helps a trader to lock in the current position, and if that is profit then a trader can do "profit locking" where they can use that profits in the long term and to recover losses in other trading, is perfect for long term traders.

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  • 3 weeks later...

That is true too, profit locking is a good idea for someone who want to secure their profit for quite long time but still uncertain but still ber careful that profit could be eroded by swap. I don't recommend to hold it for month unless you use full lot size or even more than that.

But you have both of the position, the one with positive swap and the one with negative swap, so as long as there is no negative rate for both currency, i can say you are pretty much safe. Hedging is not subsitute for Stop Loss, but it is one of the best complementary for it.

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Hedging instead of using stop loss will have to pay extra for spreads for opening another position and keeping them overnight will increase the negative cost of trading. This is not a good idea. Some may argue that on Islamic accounts there is no overnight fees but brokers may stop giving services if they suffer too much negative swap because of it.

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I don't think that hedging is a substitute for stop loss, but as i said that profit locking is a very good idea that trader with big cash in their account could try. Also if they are after a long term strategy it will help them to sustain from the uncertainty of the market itself and many hedge fund use it too.

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