Forex Hedging Systems - are they useful? ~ Forex trading pip

Friday, July 29, 2011

Forex Hedging Systems - are they useful?

3:29 AM

Forex Bond

There are many forex traders who seek to protect their assets after having suffered substantial loss of equity. While this is a good way to cut their losses may seem, a hedging strategy is not necessarily any help at all. In this article I will discuss why hedging trades may be a bad idea if you want to limit your trading losses.

What is covered?

Forex Trading Pip

The goal of coverage of a business there, the potential losses that would otherwise be incurred, can not be reducedthe hedge.

For example, say I go long the EUR / USD at 1.4030 price. The market immediately goes down to 1.4010 against me, resulting in unrealized loss of -20 pips.

In order to hedge against further losses, give me a second to trade: a short circuit at 1.4010 (which is the current market price). In this way, if prices fall further, at least I do not want to lose pips. If prices fall by another 5 pips, I lost 5 points in my first long position and win in 5 pipsmy second short position nets for a total of zero pips.

The problem of coverage in this way

This form of coverage is very interesting for the novice traders who do not really understand what they're doing. At first glance, it appears that coverage can stop a merchant from suffering further losses, while simultaneously turning the potential of trade to its advantage. This is the exact way of thinking that causes many traders wrongly in hedging transactions as you enterthose I have just shown.

Here's the problem with this method of protection:

Although the price still to be done in my favor and go back to the 1.4030 price, I'm still suffering from an unrealized loss of -20 pips! Why?

Because even though my first long trade balance (current market price at 1.4030 is the price itself is long gone), my job is the second short by an unrealized loss of -20 pips (remember that in the short to 1, 4010) to suffer a total loss compensation is not made-20 Pips!

Can you see how that even if prices rise again in my favor, I cover it still manage to lose money? Had I not sure I would at least break even from now.

It's not all. Because I have a second (cover) came to trade, I had to pay transaction costs extra on the bid / ask spread!

Forex Hedging Systems - are they useful?