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The Hedging Strategy
June 24, 2014 – Written by admin1
Hedging means buying and selling a position during the same period of time, with the same trading volume. The purpose is to compensate for the losses of the first position with the gains earned in the second one. You basically open a position for a certain asset, while at the same time you also open an exactly opposite position for the same asset. This strategy intends offering the trader protection, as there will certainly be a gain for him. So, the main goal is the protection, the profits coming only second.
However, you should use this strategy whenever you expect the price to increase, but you are not sure of its direction. This usually happens when the release of important economic news and information is likely to take place. The markets generally anticipate the forecasted numbers of the news, but sometimes they are simply taken by surprise by certain events and factors. And this is the perfect time for hedging.
When to use the hedging strategy?
It is very important to know when it’s the perfect time for this strategy to be implemented. Most traders fail in finding a right time, even though they have an advanced knowledge on trading.If you notice sudden changes in the market, you should try hedging the position, analyze the market behavior and assess whether the hedging strategy would be the solution or closing the losing trade seems more appealing, instead of waiting for the trade to be successful without a guarantee of results.Also, the strategy can be used whenever you believe that the price of the asset goes towards the reverse and then it returns to the first position.
But maybe the best time for this strategy is when the price follows a strong trend and reaches either a very high or a very low point, because usually it tends to come back to the original price.
A 100% hedging technique is defined as the safest and the most profitable as well, because the risks are kept very low. When putting it into practice, you have to make use of the roll over rates there are between brokers, as you will have to choose two of them for trading. Well, you have to opt for a broker that charges interest at the end of the day and for a second one, which does not charge any interest. is a good choice!
How does it work?
This type of hedging involves opening a position of a particular asset with a broker which will offer you a high interest whenever the position is carried, and at the same time opening a position of the same asset with a broker which will not charge any interest for entering the trade.
Factors to take into consideration
Well, actually the currency, as only those can be traded using this strategy, as these are traded in pairs. If you wonder which currency pair to choose, this mainly depends of the market movements of each of them. So, begin by making an accurate analysis of the market and go from there. See what currency pairs are following the trend that you want or wait for it to happen, in order to assure yourself of success.
It is equally important to sign up with a broker that will allow you to hold your positions for a long period of time, even if it charges you some fees. So I recommend you to read our review for , it could be as good as Anyoption if you became familiar with the trading interface.
The hedging strategy implies having a lot of money, as you will experience losses too. And opening 2 positioning with 2 brokers can be quite costly, especially at the beginning, when you still do not have enough experience.
The timing is another important part you have to carefully consider when applying this strategy. Hedging will work properly only if you give yourself enough time to enter the necessary trades that are required in order to be able to balance the losses of the other trades. Moreover, it is useful to define your expiry times in such a manner that it allows you to take advantage of this strategy the way you must. The confidence you have in the price trend is another important aspect, as depending on how much you trust a trend going all the way up to expiration, you can place different sums of money on the second position. The greater the confidence, the larger the sums you can invest.
This strategy is often criticized, as it is considered counterproductive. Why? Because some believe it is of no use investing in an unsuccessful position right from the start. But what is overlooked, is the fact that by entering both trades early, you win a lot more concerning the strike price, which cannot be secured once the trend emerged. However, hedging is not the best solution for every trade, it only applies in specific situations, such as those described above.
What you have to know
To begin with, hedging is not for everyone. Therefore, if you are a beginner in the trading world, you must first acquire some experience. Engaging in trades by making use of this strategy may be quite risky for those that do not have an advanced knowledge on trading.
You should also know that there are specific brokers which do not offer the opportunity of applying this strategy. No matter the reason for which they do not allow this possibility, before signing up with a broker, you must make sure that it enables you taking advantage of it, if you really are committed to putting it into practice.
You have to be patient and wait. The market does not always behave the way you want, so it is important to have patience and to wait for the right time to act.
Try evaluating your actions when trading. This will help you in deciding which were the right calls you took and which were the mistakes you made. And by being aware of your capabilities, further chances of success are achievable.
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