If you like to lose money, but you want the pain of losing to last for as long as possible, and then result in a furious ball of exploding pips, then "hedging your trades" is right for you.
In the past few years, I've noticed an explosion (metaphorical) of interest in hedging -- the act of buying and selling the same currency at the same time. Not coincidentally, I've also noticed an explosion (literal) of scores of trading accounts, as inexperienced investors have locked onto this method of trading and discovered, the hard way, what can go wrong.
What is hedging, anyway?
Remember that your decisions about what kind of pairs you trade, when you trade them, how you trade them, and what you use to trade them are personal choices between you and ... you.
Now let's cover some of the basics of hedging:
For a forex trader, hedging is commonly understood to be the act of buying and selling the same pair at the same time in the same trading account.
This fancy technique can turn into a cluster-bomb of ridiculous proportions. Here are some things you need to think about before you start running off and hedging all your losing positions:
1.
Think about why you want to hedge. What are you trying to accomplish? What will a hedge do for you that you can't accomplish in some other way? Does your hedging fit into a method of trading that you have become comfortable with? Or...
2.
Are you hedging because you want to avoid a loss? Many times, people will hedge a trade because they simply don't want to accept a large loss. They see themselves down by 20-30% in their account, and rather than accept the fact that they have lost a lot of money, they hedge their trade.
And then...
3.
Remember: if you hedge, you are locking yourself into a loss. Once you put on the hedge, you are locked into that loss. You're going to live with it day and night now. It's not going away. It is going to stare you in the face every time you go to your trading account. It could become an emotional burden for you. You could start to focus on getting out of the hedge more than you can plan and benefit from new trading opportunities. And here's something about those trading opportunities:
4.
Being in a hedge could distract you from those other trading opportunities. I call this (and I am not making this up) Trader Attention Deficit Disorder, which is a serious condition affecting many hedged traders. It means that when you are locked into a loss, you can become so focused on the loss and the hedge that you don't notice other good trades. If you have a hedge that lasts longer than 4 hours...
5.
Being in this hedge will probably cost you interest. Realize that if you buy and sell the same currency pair at the same time, you are most likely to have a net debit on interest at the end of every day. For some pairs, this interest payment can add up substantially day after day.
6.
How are you going to get out of the hedge? You're going to have to pick a top or bottom. And if you already knew how to do that, you wouldn't have been in the hedge in the first place, right? You don't want to put yourself in a position where you have to practically be a Psychic Friends Network Call Center Manager in order to extract yourself from the trade. Often times, people will remove one side of the hedge, only to see the pair trade lower (or higher) and then they feel like they have to put the hedge back on all over again. That's just an endless cylce of trying to pick a bottom or top. And remember that the wise man said: He who tries to pick a bottom gets a stinky finger.
Fancy, indeed! There are all sorts of reasons why a hedge, which was intended to solve your trading problems, just brings a host of new challenges to the table. I'm not saying that you should never hedge; I am saying that before you do it, consider what it is that you are trying to accomplish, and get yourself prepared for the consequences that result.
traders who hedge generally end up losing a lot of money, anyway.
ACCEPT THE LOSS!!!
In the past few years, I've noticed an explosion (metaphorical) of interest in hedging -- the act of buying and selling the same currency at the same time. Not coincidentally, I've also noticed an explosion (literal) of scores of trading accounts, as inexperienced investors have locked onto this method of trading and discovered, the hard way, what can go wrong.
What is hedging, anyway?
Remember that your decisions about what kind of pairs you trade, when you trade them, how you trade them, and what you use to trade them are personal choices between you and ... you.
Now let's cover some of the basics of hedging:
For a forex trader, hedging is commonly understood to be the act of buying and selling the same pair at the same time in the same trading account.
This fancy technique can turn into a cluster-bomb of ridiculous proportions. Here are some things you need to think about before you start running off and hedging all your losing positions:
1.
Think about why you want to hedge. What are you trying to accomplish? What will a hedge do for you that you can't accomplish in some other way? Does your hedging fit into a method of trading that you have become comfortable with? Or...
2.
Are you hedging because you want to avoid a loss? Many times, people will hedge a trade because they simply don't want to accept a large loss. They see themselves down by 20-30% in their account, and rather than accept the fact that they have lost a lot of money, they hedge their trade.
And then...
3.
Remember: if you hedge, you are locking yourself into a loss. Once you put on the hedge, you are locked into that loss. You're going to live with it day and night now. It's not going away. It is going to stare you in the face every time you go to your trading account. It could become an emotional burden for you. You could start to focus on getting out of the hedge more than you can plan and benefit from new trading opportunities. And here's something about those trading opportunities:
4.
Being in a hedge could distract you from those other trading opportunities. I call this (and I am not making this up) Trader Attention Deficit Disorder, which is a serious condition affecting many hedged traders. It means that when you are locked into a loss, you can become so focused on the loss and the hedge that you don't notice other good trades. If you have a hedge that lasts longer than 4 hours...
5.
Being in this hedge will probably cost you interest. Realize that if you buy and sell the same currency pair at the same time, you are most likely to have a net debit on interest at the end of every day. For some pairs, this interest payment can add up substantially day after day.
6.
How are you going to get out of the hedge? You're going to have to pick a top or bottom. And if you already knew how to do that, you wouldn't have been in the hedge in the first place, right? You don't want to put yourself in a position where you have to practically be a Psychic Friends Network Call Center Manager in order to extract yourself from the trade. Often times, people will remove one side of the hedge, only to see the pair trade lower (or higher) and then they feel like they have to put the hedge back on all over again. That's just an endless cylce of trying to pick a bottom or top. And remember that the wise man said: He who tries to pick a bottom gets a stinky finger.
Fancy, indeed! There are all sorts of reasons why a hedge, which was intended to solve your trading problems, just brings a host of new challenges to the table. I'm not saying that you should never hedge; I am saying that before you do it, consider what it is that you are trying to accomplish, and get yourself prepared for the consequences that result.
traders who hedge generally end up losing a lot of money, anyway.
ACCEPT THE LOSS!!!
forexflash
