Simple Hedging Strategies
Hedging is a method of reducing losses when trading on the Forex or stock market. It is based on opening counter positions to unprofitable trades.
However, it should be noted that there are other options that are used in the stock market.
This technique has almost the same number of both supporters and opponents, it all depends on the methods of hedging and on the specific conditions in which trading takes place.
One way or another, Forex hedging strategies have their right to exist and, with careful fine-tuning, sometimes allow you to pull out practically hopeless transactions.
Example of use : There is an uptrend on the chart of a currency pair, you open a trade of 1 lot in its direction.
After this, a sell order is opened, as a result, while the downward trend continues, the loss continues to increase on the first transaction, and profit gradually accumulates on the second.
As a result, the hedging strategy allows you to fix it at the level of 200 points, and does not grow any more. Having analyzed the existing trend and received confirmation of its downward movement, the first order is buried, and the second, profitable one, will continue to be supported.
The main mistake traders make is mistaking a correction for a market reversal; in this case, after the first order is closed, the loss on the second may also begin to grow, which will only lead to increased losses.
To prevent this from happening, you should always analyze the size of the correction (rollbacks), and take off an opposing position only if you are completely confident in the trend reversal.
channel indicator can be an excellent assistant in this matter; with its help, we build a price channel on a selected time period, thanks to which the magnitude of a possible correction will be clearly visible.
In addition, you should always pay attention to the situation on a higher time frame; it should become your main guideline. For example, if you are trading on a 15 minute time frame, then focus on what is happening on the 30 minute time frame.
For the most part, hedging strategies are more applicable to operations that involve actual supplies of currency; as you understand, they have nothing to do with speculative trading and are used only by large exporters and importers in the foreign exchange market.
To confirm this statement, try hedging positions on a demo account and you will see for yourself that it is quite difficult to get a positive financial result after this.
The only option to use such a hedging strategy would be to obtain additional profit through kickbacks.
For example, you have determined the direction of the main trend of price movement and opened a trade, at this time the price begins to move back, open another order in its direction, maintain the second position until the trend goes again towards the main trend, close immediately the second trade with a profit and continue trading.
This trading option is described in more detail in the article - http://time-forex.com/praktika/lokirovanie-forex
Hedging strategy for different assets
This strategy is actively used by various funds; its essence is that hedging occurs not on one currency or security, but on assets from different categories.
At the same time, transactions cannot always be opened in opposite directions; it all depends on what the correlation - direct or reverse.
For example, it is known that when shares of airline companies become cheaper, securities issued by railway companies become more expensive, so two investment portfolios are created from both types of shares.
As a result, if airline shares begin to fall in price, their value will be compensated by the rise in price of the railway. There are also other stable correlations between various exchange assets that can be used in the process of applying this method of risk insurance.
In addition, an interesting option is if hedging strategies are used to insure losses in operations designed to generate dividend income.
In this case, one type of securities is simultaneously sold and purchased, namely shares of one company. By working with several brokers, you can build a combination in which you will receive a profit in the form of dividends, regardless of whether the stock you purchased goes up or down.