In forex trading, hedging technique refers to buying and selling one forex pair at the same time. To protect their capitals, traders employing normal one-direction trading will cut loss absolutely, while traders employing hedging technique will drive their equities by continuously adding and removing positions in both long and short directions. For an imaging expression, hedging is pretty like a game of chess where losing players try their best to solve the difficulties they face instead of ending the game and starting a new one.
It is popularly said that hedging is a very difficult technique that can only be used by professional traders. Yes, hedging is extremely difficult and it requires traders the following characteristics:
* Very experienced: Young traders cannot hedge.
* Very accurate: Traders who don’t have very accurate market forecasts cannot hedge.
* Very patient: Emotional traders cannot hedge.
Even though you may have all of the characteristics above, hedging is still extremely risky. The first reason is that you may get bogged down in a hedged situation for a very long time. Hedging if used properly may be a good strategy, but it is not a miracle that can save you from every bad situation in a day or two. Yes, hedging requires a lot of time, and you must be very patient. However, how much patience is required is still a question only the market can answer – sometimes days but sometimes months or years. In addition, during the hedge period you cannot withdraw your money at all.
The second risk comes from the number of positions opened in a hedged situation. Typically, you will have to take more measures in worse situations, which often results in more open positions. To hedge the 1st layer of positions, you need to open the 2nd layer of positions. What if the 2nd layer unfortunately fail to work? You have to hedge it with the 3rd layer, then perhaps the 4th, 5th, 6th… layers. Mistake will be born from mistakes, increasing the number of your open positions to 10, 20, 50… and making your account out of control.
Finally, most traders employing hedging technique will at least once suffer a substantial loss. For example, if you are stuck too many months in a hedged situation or if you open too many positions, even the very best patience will still be destroyed, pushing you to the verge of giving up everything. You will finally end up with an inevitable decision: exit all trades – for rest, for peace. The big cost of hedging is that the hard-earned profits you have accumulated for years will be erased in just a second.
In summary, hedging is not for everyone, and should not be for anyone. In order to protect yourself from placing a hedging position (either by mistake or by interest), you should open your forex account at a US broker (because all US brokers do NOT allow hedging, by law). Oanda may be one of the best names for you.
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