Any great idea about HEDGING positions welcome here
if I may offer my opinion.....
Hedging is a method to limit risk.
Consider this scenario.....
You may consider an investment in ABC Oil to be a good as you feel that it will outperform the market.
However you know that the whole oil sector can be volatile, so if the sector falls, ABC Oil will fall with it, even though it is a solid company.
So what you do is you Buy ABC Oil and at the same time you short the oil sector.
This limits your risk as if the oil sector falls, your short will gain and as long as ABC Oil outperforms the other oil companies, you will have a net profit.
This is hedging.
There is no such thing as true hedging in Forex.
True hedging is not opening an opposite trade in the same instrument, yet that is exactly what so many traders do.
There is no logic behind this at all, so I do not understand why it is so common.
Say you have 1 lot Buy open with EURUSD and it goes 100 pips in loss.
So you "hedge" it with an opposite 1 lot Sell.
You are now in a position where if the EURUSD falls another 50 pips, the Buy order now shows a loss of 150 pips and the Sell a gain of 50 pips. A net loss of 100 pips. EXACTLY the same as if you had simply closed the Buy order. No matter whether the price goes up or down, the net position will always be a net loss of 100 pips.
Also, should the trades be held overnight, swap charges will be applied (maybe triple swaps), so now the loss is bigger than it would have been if the Buy trade had simply been closed.
Not all brokers offset opposite orders in the same instrument against margin requirements, so there is a risk that there may not be enough free margin to open the "hedge". In an EA, this could leave you exposed to more risk than you are comfortable with.
If there is not the intention to "re-enter" the Buy by closing the "hedge", then you also incur additional spread/commission charges.
So it is not just my opinion that "hedging" in Forex is unproductive and pointless, it is a fact. When swaps are taken into account, "hedging" actually loses more money.
My advise to anyone when considering "hedging" in Forex is "Don't do it". You are not hedging, you are opening an opposite order in the same instrument.
Now there will be some who will say "Ah yes, but what if instead of Selling 1 lot as the hedge, I Sell 1.1 lots?"
Again, don't do it, there has to be a reason to Sell. If you have a reason, then close the Buy and open a 0.1 lot Sell. It has the same result, but without additional charges.
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