by Cynthia Macy

Co-Author of The Day Trade Forex Trading Systems

Hedging can be a useful tool to the Forex trader. When you have an open position, for example, you are long on a USD/JPY trade and you right click your trade on the VT platform, a menu will pop up and you have a choice to Hedge your trade.

If you click Hedge, you will automatically open up a position in the opposite direction at the current market price without canceling out your other position and without margin increase!

In the above example you would now have a USD/JPY trade long and short. You will now neither gain or lose any equity in your account because the gains and the losses will cancel each other out.

Hedge in an emergency:

Hedging a losing trade won’t solve your problems, but it will:

1.  Keep you from more losses

2.  Give you time to think about what happened to your bad trade and

3.  Give you a second chance.

Some traders will hedge losing trades instead of stopping out their position, because they have a chance to win back the losses of the original bad trade.

Example: You are looking to ‘Trade the Trend’ so you go long on the EUR/USD, using the indicators in this guide. The indicators signaled BUY so you opened up a position. In case of a bad trade, you choose to hedge instead of using a stop loss (be careful when doing this). Your ‘Trade the Trend’ indicator setup didn’t work and your position goes against you, so you hedge your trade. Now you have a losing position and a winning position going in the opposite directions. You didn’t use up any more margin.

What do you do now?

My recommendation: When your position is hedged, you are safe and you won’t lose any more money in your account. You have some choices about what you can do:

1.  Wait until another chart set up occurs and proceed to step 4. or Exit the trading platform.

2.  Wait till the next trading day or session

3.  Look for the DTF indicators the next day.  Hint:  using a Slow Stochastic set at 14,5,3,E will show you the tops and bottoms so you'll know when to exit one of your positions and let the other position ride the new trend.

4.  Instead of opening up another position, simply get rid of the bad position that was hedged.

So if the indicators the next day signaled long in the EUR/USD, like in the above example, then you would get rid of the short, losing hedge and hope that the price will rise enough to erase the previous days losses to make a profit.

5. If your position moves against you again you can hedge that position again and repeat steps 1-4.

Hedge a winning trade: You may also hedge a winning trade to protect your gains, if you don’t want to completely close your position. When you do this you won’t gain or lose any more money with that position. The advantage to this would give you the opportunity to keep trading those positions in the future and give you a break. You can always right click on your position and choose ‘close with hedge’ to close both positions at once. If you hedge a winning position you can follow the above steps 1-4 to keep trading your position the next trading day.

** Please note that hedging can get complicated. Try to keep it as simple as possible and try not to have a web of hedged and unhedged positions open at the same time—as it becomes exponentially more difficult to keep track of, and what positions to let go etc...

** Hedging is also optional and you don’t need to learn how to use this tool if you choose not to. You can be a successful trader by simply using stop and limit orders.

About the Author

Cynthia Macy is co-author of ‘The Day Trade Forex System: The Ultimate Step-By-Step Guide To Online Currency Trading’.

Visit:

http://www.daytradeforex.com/products.htm

for examples of actual trades using the Day Trade  Forex System. 

For more comprehensive trading information, visit her other websites at:

http://www.professionalforextradingonline.info