Locked positions, tactics for locking positions in exchange trading
There are many options for cutting losses when trading forex or other financial markets, but all of them are designed to take action before opening a new order.
In contrast, locking allows you to significantly reduce losses, and sometimes make a profit from an already open, unprofitable transaction.
Locked positions are those transactions during which another order was opened with the same volume, but only in the opposite direction in relation to the already opened, unprofitable order.
This method of reducing losses is sometimes also called “Hedging”; it should be used carefully, taking into account the market situation.
Before using this method of reducing losses, be sure to make sure that the losses occurred as a result of a price reversal and not due to a trend correction, otherwise you will only make the situation worse.
Features of hedging transactions for one asset
This operation, as the name suggests, implies the conditional closure of a transaction, or, to be precise, the recording of a financial result. It is used if a trend reversal has occurred and a loss has occurred on an already opened order.
The easiest way to understand the essence of a locked position is with specific examples.
1. A long position (buy) is opened on the GBP/USD currency pair with a volume of 1 lot, the transaction is directed in the direction of the trend movement. But after some time, the price reverses and now the loss on this operation is 10 points.
There are two options for solving the problem - simply close the order with a loss of 10 points or hedge.
2. Locking (closing) is carried out - a short position (for sale) is opened with the same volume of 1 lot for the GBP/USD currency pair.
As a result of the operation, after some time the following picture can be observed: the loss on the first transaction is already 20 points, while the profit on the second is 10. The total financial result remained at -10 points.
3. Making a final decision - if a downward trend continues to dominate the market and profits continue to grow, then the first (long) position is closed, and the profitable transaction remains. If the price goes up again, we close the second order.
Choosing between two options is the most difficult decision in the presented situation; you need to be sure to guess in which direction the price will move.
Disadvantages of hedging (locking) positions
This method of reducing losses on Forex is the most controversial; many traders simply fundamentally do not use it in their trading and for the wrong reasons:
1. When opening an opposite transaction, you pay the spread again, thereby increasing the loss by its value; for greater clarity, this indicator is not taken into account in the example given.
2. It is quite difficult to determine which of the open positions to leave and which to close; novice traders often make mistakes when making this decision, as a result only increasing the amount of losses.
3. As a rule, locking does not end with one opposite position; the trader has to open up to a dozen transactions in order to correct the existing situation, thereby further complicating trading.
It is for these reasons that this tactic has the same number of both supporters and opponents.
effective tactics to achieve greater impact for claims insurance that are not as expensive to use or as difficult to implement.