Your familiar with a hedge in Forex, yeah? It is where we open an opposing trade with the same currency pair when the trade goes against us, there are many forms of this style however I wanted to share one strategy which I use occasionally to protect my account especially when the market is not trending very well which tends to be most of the time. This hedge strategy is simply a stop loss hedge strategy. If you are planning on using this strategy, be warned, it can backfire. It is not a surefire success strategy and involves skill throughout its complete execution. So you have been warned. However on many occasions it has also allowed me to pull twice as much pips from the market during uncertain times.
Above – Longleat Hedge Maze, Wiltshire – Not this sort of hedge.
Firstly before I get started, i first wanted to describe an average movement in Forex even when the market is trending. I will refer to the Eur / Usd for this strategy. The market commonly goes to 100 pips in one direction and then commonly almost comes back to the same initial spot. This is even more common when buying or selling around support and resistance lines, which is how I and most of us trade.
* I apologize about the audio quality in this video, I was travelling at the time of making. I will update in future with better audio the concept outlined in the video.
Video Above – How you can use Hedging as a strategy to successfully make money in Forex. Shows how in just 2 months over 1800 pips is attained with a small loss of only 380 pips.
Okay, so back to how this works?
Basically said, where i normally place my tight stop below a support area, instead i will put an opposing order in for the same currency pair with the same amount of units. If you are in the US where hedging has been banned because of a number of reasons then simply do the opposite trade on a separate account. There is nothing illegal about that.
Now let’s look at a common trade as an example, I place a buy order just above support, I see the bullish candle formation and everything looks great. The market starts to rally in my direction and then bam, it turns around and then decides to break support 30 pips below the buy order. This is where your stop loss would usually act, however this is not the normal average trade. Instead you knowing that support has been broken most likely the market will rally down to the next support which is another 100 pips away on this occasion. Instead of stopping you out you open a sell order already configured from original buy entry to open if for some reason it went against you. So this trade opens and the market sells off 90 more pips before it pauses at a the next support.
That means your buy is now minus 120 pips and your sell trade is plus 90 pips. A little down on your account, but that does happen. Then the market starts to show signs of bullishness again so what you do is place an order to buy above the current tested support and then place another order to sell below that support again. This is where it gets interesting and this is what happens most of the time. Before that buy opens close your sell for around 80 to 90 pips profit. So you have that profit locked in and taken. If it now decided to break this support again then another sell will open which will reduce the loss on the original buy that you are still holding, however if the buy opens and continues up then you will get your money back and more.
Okay, so this is how I do this one, say the buy opens and it rally’s 50 pips up, what i will do now is if i see signs of weakness I will close this buy and lock in some midway profits between my minus buy trade now that is around minus 50 pips and my recent buy that is now around 50 pips profit. Once i close my buy in profit, i have two options, one is i could close my original buy, meaning overall i made around 90 pips give or take a couple of pips due to spread or i could simply place a pending sell stop order down a little from where i closed my buy trade in profit and then close my other pending sell order at the same time. Either way that other sell order is useless now so closing it is needed if doing this.
That way if after you close your buy trade for the 50 pips profit and it drops down and then continues dropping the sell order will open and once it gets down to the same support so you can assess the situation again. That would mean a sell trade at 40 pips profit and now a buy trade minus 120 pips. However it also means that during this time you have taken profit twice, one for 90 pips and the other for around 50 pips. That is a total of 140 pips which out weighs any loss in the current situation.
So that would mean that if you saw more bounces on the support this time you could close that sell trade giving you another 40 pips profit and then simply create another pending buy and sell at this support line and the trading continues. Either way that the market goes you have the potential to make money.
All sounding a little confusing?
Well, it can be so use it with caution if you ever decide to use this technique. Now there are worst case scenarios as well, that is when the buy opens up on the second support and then the market does exactly like the first original trade, it turns around and breaks the strong support and rallies down again. This is where you need to be careful, what you can do is open a second sell once the first sell order is at least 30 pips in profit and will continue opening sells at each 30 pips interval until the market hits the next support. Once it does hit the next support then i will liquidate all sells at the same time which will usually cover the costs of the second buy if done right.
In this situation, it is not uncommon for me to get three opposing sell trades like this before hitting the next support area –
- 90 pips
- 60 pips
- 20 pips
Total overall 170 pips profit closed at next support. At a time where you have for the worst situation of 2 minus buys, 1 at minus 220 pips approximately and the other at minus 110 pips approximately.
That means that your account has bagged 170 pips plus 90 pips ( original sell profit) in this worst case scenario. That is a total of 260 pips profit. With your account current draw down at 330 pips. That means that even in the worst case scenario the account is only down 70 pips and these trades are not yet over. Most likely your luck will turn around here and at least on the third time even for those that are extremely unlucky the trades will go your way. Otherwise it means that the currency pair is in an extreme downtrend.
So, if on the third attempt at support, it does go your way, then that means that the market will rally usually up to the last support ( now resistance area ) area where it may drop. This allows you to open another buy getting around 80 to 90 pips profit thus covering all losses with some profit and then to open another sell if it drops here or a buy if it rallies further on breaking this new resistance. if it does break and rally on further which is not uncommon that means not only will you make profit on the last buy but your other buy will now be in profit and your original buy will be becoming less and less loss. This is where you can liquidate all remaining positions, whether the trades remaining are in profit or minus. Overall, ending the cycle of this hedge sequence with the profit attained.
Above – In the above image it shows this strategy in action.
Around 400 Pips Profit
So to conclude on all figures abiding by the sequence detailed above, the only trade that you closed in minus is the original buy for around 50 to 60 pips minus. However for profit overall you would have bagged over, can you work it out? At least 400 pips. Not bad if this is just a few days of trading. And to think, we could of simply just used our stop loss originally and lost 30 to 40 pips.