Hedging retraces

There's plenty of discussion regarding hedging in order to cover a loss until such time as a trend develops and you can remove the hedge. In my opinion it's probably just easier to take the loss and take a better trade next time. I am interested in the idea of hedging once a trade is in profit in order to take some profit from a retrace.

The way I see it is that if a pair is trending strongly and more or less following Elliott wave theory (this thread isn't about that, I know it never fits reality but it's a fair idea and that is the way that forex tends to trend) and you are using fib extensions, channel lines and horizontal s/r to determine roughly where a pair may reverse in a trend isn't it possible to take a trade in the opposite direction of the trend, locking in some profit and then remove the hedge and add on another trade if/when the pair reverses from it's retrace? This way you get the best of both worlds, you lock in your gains from the move in your favour so whatever happens you can keep that and if the pair does follow Elliott and retrace then carry on you can take profit on your countertrend trade and add on in the direction of the trend keeping your original trade open.

It seems to me to be a lot less frustrating than watching a pair make a big move then retrace, taking your gains with it, only to hit your stop at breakeven or wherever you have put it.

Anyone got anything positive to say about this idea?

Do yourself a favor and take a piece of paper and try to figure out how you can simulate hedging by using FIFO (ie, a non-hedging account).

Hedging it's an illusion, an accounting trick, which would be ok, but you also pay more spread, which is not ok.

I was also convinced that you could not trade a combination of short-term/long-term strategy without hedging, but you can.

Do the math. Open your eyes.

Simulate hedging? What on earth can you mean? My broker allows hedging no problem. I'm not sure you've fully understood what I'm proposing. Do yourself a favour and reread the question.

Hedging can be useful when you play the imbalances in correlated or negative correlated pairs.
You can adjust the entry points more accurately if one pair doesn't move (immediately) by liquidating a long or short position from the other pair.

But for that kind of play you need the best trading conditions (best spreads and lowest commissions).

Why dont you just scale out a portion of your position when you asume its gonna retrace, and reenter when you think retrace is over. Although I wouldnt do even that,because when I am riding a move that is "meant to be", it aint gonna retrace much, so by scaling out I am basicaly reducing my position on a winning trade, and if its just playing around I would rather bail out the whole position with small loss or small profit!

It's obvious noone is quite understanding what I am saying. Here's a chart of eurnzd. I have 4 open positions and one pending. By the time the buy limit is reached I'll have 5 open sell positions and the buy limit is for the net amount of my short positions.

If price hits that buy limit I can watch it retrace with profit locked in and close the buy position when the price shows signs of going down at fib retrace resistance. If it doesn't stop going up then my short positions will be closed at break even one by one as the price reaches them but I will have a net long position to cover it right from the 50% extension of the current move.

This obviously relies on the price moving in that predictable pattern which it may or may not do but I think it's a good idea to lock in your profit when price reaches the 50% extension (it's so far away on this chart because of the spread) and then wait to see what happens. Of course as you are trading with the trend it may well happen that the price just continues down but at least you have got some profit from the original move.

Look at it this way, if price follows a more or less predictable pattern of impulse and corrective waves, regardless of length then you are quids in. A lot of trends DO follow this pattern more or less and those that don't won't matter much anyway as you will make bundles on the trends that do follow the pattern.

Arfer,

I understand exactly what you are saying because I have used this strategy in the past.

You have two choices. When the price starts to retrace, close your position and open a new one when the trend resumes. Or, open an opposing position to make a profit from the retrace.

Both options work, IF you are able to read the market correctly.

I experimented with 'bi-directional' trading for awhile, but my entries were bad so I ended with an overall loss.

If you are able to read your charts properly you will be able to make money in both directions simultaneously.

Good luck.
JH

I think a trader should have several options of what to do with an open positon. Taking a straight profit or loss is just one of them. Freezing the trade at the moment is another (hedging), riding out the storm is another if you know what you are doing. I'm sure there are others. Sure, some cost more than others.
Closing the trade means trade concluded. You now have to look for a new setup for the next trade. What if the now resumed ongoing trade has less than ideal set up for a new trade? The hedger has a reason to continue his trade; what would be your reason for starting a new trade under this condition.
Straight yes or no is not always the best way to go. Lets explore options.
So, that is an option; closing the trade will cost less ( spread, swap) but you will have to remember the trade when the trend resumes as it is no longer in your market orders.