DislikedLet me take a stab at this...
If you are looking to hedge, then you are probably trying to avoid using stop losses at all, like Breeze. You protect your trade with the hedge instead of a stop loss.
In your example above, you would open the hedge with the same number of lots you opened the original trade. For an initial sell order:
Sell @209.00 x 10 lots
If you want to hedge after 50 pips of loss, then you would open an opposing trade of:
Buy @209.50 x 10 lots.
You've now frozen your loss at -50 pips no matter which way the price goes. If the price continues up, then your hedge trade will show a profit and the original trade will show a bigger loss, but the combination of the two will always be -50 pips.
The art of hedging is knowing when to release either trade in order to make some profit and hopefully increase your usable margin.
Hedging is very tricky and I would suggest trying it out for a long time on demo before trying it live. There are some peculiarities about hedge trades that most people don't consider. It's easy to get into a "hedge trap" as I call it. I know first hand as I was in the trap for months after the August drop and I'm still fighting with this latest drop in G/J.
Usable margin is the key to keeping from a margin call. Your account can have $1,000,000 in it, but if your usable margin gets too low you will be margin called.
Keep in mind that while a trade is hedged, your usable margin will not increase, but will probably decrease as days go on. Daily premiums will drop your usable margin every day. Opening a hedge trade in itself knocks the spread out of your usable margin and you won't get it back. Figure that one lot of G/J at a 9 pip spread is about $81 out of your usable margin every time you open a hedge. If you are constantly opening and closing hedges, you will eventually bleed away your usable margin.
Even if one of your hedge trades is showing a $10,000 profit, closing that trade will make no change to your usable margin. Your cash balance will increase, but your usable margin stays the same.
Also, if your account is in USD, be aware that if USD/JPY goes down, so does your usable margin figure due to the conversion of the losses in your account to USD.
So, if you've got plenty of margin, hedging can be profitable if you know what you are doing, but if you are hedging to protect your account because your margin is getting low, be very careful.
MARGIN IS KING in this business.
BruceIgnored
thanx Bruce....it was going to take me another 2 weeks or more before I can add....you did great.
Breeze