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For veteran traders, you must know about forex hedging strategies. As explained in the article here, forex hedging is a trading strategy used to limit or protect trader funds, from unfavorable exchange rate fluctuations. Forex hedging strategy gives traders the opportunity to reduce the value of the loss, or even turn profit.
In practice, the forex hedging strategy is carried out by executing buy and sell orders in an instrument, or in two opposing instruments. For example, if you are stuck floating in a short position on the EUR / USD instrument, so that the loss does not increase, then a simple hedging strategy can be done with long positions on the instrument. If in two instruments, the example of the opposite currency pair is USD / CHF and EUR / USD. Buy orders can be placed on one of the currencies and sell orders on other currencies.
In theory, the forex hedging strategy does look very easy and profitable. However, please also note, in the real market situation, forex hedging strategy is one of the strategies with a high level of difficulty. Besides requiring more understanding of the market, it also requires a strong and confident mentality so that execution can be perfect.
This article will discuss a few simple hedging strategies that beginners can practice.
Simple Hedging Strategy Steps
The first step that needs to be done in the forex hedging process is to choose the right pair. In the selection of this pair, try to choose a major or famous cross pair. For example, do not choose pairs such as AUD / NZD, CAD / CHF, or some currencies of the same kind.
After selecting the desired pair, then select the time frame you want to use. In choosing this pair it is very important to choose a time frame that is showing a consolidative movement. This is important to determine the trading method (scalping, intraday, or swing). For example, if there is a consolidation at a 15-minute time frame, then we will run our forex hedging using the scalping method.
After you set the time frame to be used, it's time to see the trends that are happening at that time. How do you see the trend? You can go to 1 time frame above the previous time frame, and identify trends using moving averages or draw channels.
The third step is the execution of buy and sell. Try to execute this order quickly, so that the distance is not too far away (the order cannot be done simultaneously). If you want to do it simultaneously, Stop and Limit Orders must be used (read the guide for installing pending orders).
Next, let the price move at will, and we will wait until the order moves in a certain range.
When the price has moved as far as the specified range specifications, close your position that suffered losses and execution again buy and sell at that position.
Repeat this step until the overall result is profitable.
The Basics of Determining the Range in a Simple Hedging Strategy
Remember the fourth step? this is where the range will be determined. Pay attention to the price range below:
Major pair (USD)
Scalping (m5): 10-20 pips
Intraday (m15 / h1): 30-90 pips
Swing (h4): 100-200 pips
Cross Pair Pair (EUR)
Scalping: 15-30 pips
Intraday: 40-120 pip
Swing: 120-240 pips
Cross Pair Pair (GBP)
Scalping: 20-40 pips
Intraday: 50-150 pips
Swing: 150-300 pips
Calculation of this range is needed so that when you install a hedge or lock you do not carelessly place an order at the point you like (locked position). Second, to seek profit with forex hedging, more knowledge and patience is needed in placing orders.
Maybe you ask how can we benefit in such a locked state? The point is in the consolidation range. Always remember, at a time the price on the market will move in one direction continuously without consolidation. That is what you are waiting for as a place to get profit. Do you remember why you were told to identify price trends?
Example of the Application of a Simple Hedging Strategy
Suppose you choose a EUR / USD currency pair with a 5 minute time frame. This means that the range that can be selected is in the range of 10-20 pips. Let's just say you choose a 10 pip range. Here's the short simulation:
Execute buy and sell positions in EUR / USD with 1 lot.
Prices move as far as 10 pips up. Close sell positions (-10 pips). Re-execute buy and sell positions for 1 lot.
It turns out the price is moving back towards your position below or down 10 pips. This means you get:
Buy first = 0 pip
Buy second = -10 pips
Second sell = +10 pips
Close the second buy position (-10 pips) so that you have suffered a 2 pips loss now.
Re-execute buy and sell positions as much as 1 lot.
Prices move back up to 10 pips. With this your open position is:
Buy first = 10 pips.
Second sell = 0 pip.
Buy third = 10 pips.
Third sell = -10 pips.
Close the third sell position (-10 pips) so that you have now suffered a loss of 30 pips.
Re-execute buy and sell positions for 1 lot
This time the price moves back up to 10 pips. With this your open position is:
First Buy = 20 pips.
Second sell = -10 pips.
Buy third = 20 pips.
Buy fourth = 10 pips.
Sell fifth = -10 pips.
Close second and fourth sell until the total loss reaches -50 pips. But in this position the total profit has also reached 50 pips (addition of the first buy profit, third buy and fourth buy).
Re-execute buy and sell positions for 1 lot.
If the price has almost certainly formed a trend up and up again as much as 10 pips. With this your open position is
First Buy = 30 pips.
Buy third = 30 pips.
Buy fourth = 20 pips.
Buy fifth = 10 pips.
Sell fifth = -10 pips.
Close the fifth sell position with a loss of -10 pips, so that currently there is a total loss of -60 pips.
The numbers in the figure above are points of buy and sell execution positions carried out in the example in the USD / JPY time frame M15 market. Then what about profits? Until the last position, the total profit from the first, third, fourth and fifth buy is 90 pips. So that the total net profit if it is reduced by a loss is 30 pips.
The simple hedging strategy described here is the type of forex hedging that is used to find profit. So, always remember to maintain your Money Management. This simple hedging strategy will not always guarantee your profit. Optimal hedging is used to lock a loss position. so the loss of a trader does not occur at a level that exceeds risk tolerance.
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