How to use HEDGING to your advantage

Hedging can be a useful tool to the Forex trader. When you have an open
position, for example, you are long on a USD/JPY trade and you right click your
trade on the VT platform, a menu will pop up and you have a choice to Hedge
your trade. If you click Hedge, you will automatically open up a position in
the opposite direction at the current market price without canceling out
your other position and without margin increase!. In the above example you
would now have a USD/JPY trade long and short. You will now neither gain or
lose any equity in your account because the gains and the losses will cancel
each other out.

Hedge in an emergency: Hedging a losing trade won’t solve your problems, but
it will 1. Keep you from more losses 2. Give you time to think about what
happened to your bad trade and 3.Give you a second chance. Some traders will
hedge losing trades instead of stopping out there position, because they have a
chance to win back the losses of the original bad trade.

Example: You are looking to ‘Trade the Trend’ so you go long on the
EUR/USD, using the indicators in this guide. The indicators signaled BUY
so you opened up a position. In case of a bad trade, you choose to
hedge instead of using a stop loss (be careful when doing this). Your
‘Trade the Trend’ indicators didn’t work and your position goes against
you, you hedge your trade. Now you have a losing position and a winning
position going in the opposite directions. You didn’t use up any more
margin. What do you do now?

My recommendation: When your position is hedged, you are safe and
you won’t lose any more money in your account. Here is what you should
do:

1. Wait until another chart set up occurs and proceed to step 4. or Exit
the trading platform.
2. Wait till the next trading day or session
3. Look for the DTF indicators the next day.
4. Instead of opening up another position, simply get rid of the bad
position that was hedged. So if the indicators the next day signaled
long in the EUR/USD, like in the above example, then you would get
rid of the short, losing hedge and hope that the price will rise enough
to erase the previous days losses to make a profit.
5. If your position moves against you again you can hedge that position
again and repeat steps 1-4.

Hedge a winning trade: You may also hedge a winning trade to protect your
gains, if you don’t want to completely close your position. When you do this you
won’t gain or lose any more money with that position. The advantage to this
would give you the opportunity to keep trading those positions in the future and
give you a break. You can always right click on your position and choose ‘close
with hedge’ to close both positions at once. If you hedge a winning position you
can follow the above steps 1-4 to keep trading your position the next trading day.
** Please note that hedging can get complicated. Try to keep it as simple as
possible and try not to have a web of hedged and unhedged positions open at
the same time—as it becomes exponentially more difficult to keep track of, and
what positions to let go etc...

** Hedging is also optional and you don’t need to learn how to use this tool if you
choose not to. You can be a successful trader by simply using stop and limit
orders.

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