Locked positions, tactics for locking positions in exchange trading

There are many options for reducing losses when trading Forex or other financial markets, but all of them are designed to be taken before opening a new order.

In contrast, locking allows you to significantly reduce losses, and sometimes even make a profit from an already open, unprofitable transaction.

Locked positions are those transactions in which, during the execution of the transaction, another order was opened with the same volume, but in the opposite direction to the already opened, unprofitable order.

This method of reducing losses is sometimes also called “Hedging” and should be used with caution, taking into account the market situation.

Before using this method to reduce losses, be sure to ensure that the losses arose as a result of a price reversal, and not due to a trend correction, otherwise you will only make the situation worse.

It should be noted that not every hedging can be a locking, since when hedging, transactions are often concluded on various assets with the opposite correlation.

Features of hedging transactions on one asset

This operation, as the name suggests, involves the conditional closing of a trade, or more precisely, the locking in of the financial result. It is used when a trend reversal occurs and an open order incurs a loss.

The easiest way to understand the essence of a locked position is through specific examples.

1. A long position (buy) on the GBP/USD currency pair is opened for 1 lot, with the trade moving in the same direction as the trend. However, after some time, the price reverses, and the loss on this transaction is now 10 pips.

There are two options to solve 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 on 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 already amounts to 20 points, while the profit on the second is 10. The total financial result remains at -10 points.

3. Making a final decision – if the market continues to trend downward and profits continue to grow, the first (long) position is closed, leaving the profitable trade. If the price rises again, the second order is closed.

Choosing between two options is the most difficult decision in the given situation; you need to accurately guess which direction the price will move.

Disadvantages of hedging (locking) positions

This method of reducing losses in Forex is the most controversial; many traders simply don't use it in their trading, and for various reasons:

1. When opening an opposite transaction, you again pay the spread, thereby increasing the loss by its amount. For greater clarity, this indicator is not taken into account in the example given.

2. It can be quite difficult to determine which open positions to keep and which to close. Beginner traders often make mistakes when making this decision, ultimately increasing the size of their losses.

3. As a rule, locking does not end with a single opposing position; the trader must open up to ten trades to correct the existing situation, thereby further complicating trading.

It is for these reasons that this tactic has an equal number of both supporters and opponents.

To achieve greater effect in insuring against losses, there are more effective tactics that are less expensive and less difficult to implement.