Hedging on: illusory and hidden opportunities. Part 1
In this article we want to tell you how inexperienced traders are addicted to such a method as hedging on The "market sense" and "magic" indicators are not required, but also show how simple strategies that require neither "market sense" nor the use of "magic" indicators can produce a steady income.
Hedging on: basic principles
What is it хеgimletting on ? It is the opening of a counter position. Let's take this concept as an example.
Suppose you already have a market order to go up ("Buy") or, in other words, you have already opened a long position. For some reason it may seem to you that the order has run its course, but instead of closing it, you can open a counter position, which will be directed downwards ("Sell") and will be called short position.
If a counter position is opened with the same amount of investment as the first position, then any price movement will balance the loss on one position with the profit on the other. Thus, you will get frozen capital in your account and a reduced amount of investment in new orders, which could bring you income. This is exactly what is called hedging on .
In the picture an inexperienced trader unsuccessfully opened order "Buy" tries to save it by placing an oppositely directed order "Sell". Applying hedging on Thus, you can only freeze your capital.
Before we proceed with further explanations and show that everything is not as simple in the world of money as it seems at first glance, let us make a technical digression from the topic. In my opinion, it is an understanding of the technical details that can be of considerable benefit to the modern trader. Learning to "feel" the market is possible only on the basis of long-term experience, and not everyone can find a "magic" indicator on the Internet, which would point with a bold arrow to the direction where the money lies. Therefore, there is nothing better than to find out where the market itself is ready to "drop a handful of gold coins" due to its technical peculiarities, and we will only have to set up our palms in time and technically correctly. Often you can double your capital in a single trade by correctly timing and skillfully using hedging on .
Technical approach to trading operations - the key to success
But let's start, as is customary when forming strategies, with the end: if you already have two counter orders, how do you close them? Traders all over the world change brokers in pursuit of the tightest spreadThat is, the minimum difference between the buy and sell price. Their years of experience have taught them that, and it would be highly unwise to neglect the opportunity to reduce the spread. If you close two opposite orders one by one, you will lose one spread on each of them. That is, you lose two spreads in total. The Metatrader4 platform allows you to close a hedge with the loss of one spread using the special method "OrderCloseBy()". However, this method is only available to scripts and Expert Advisors, it is not accessible through the user interface.
It is not surprising that you might need some toolkit of scripts, advisors and indicators to multiply your capital. You have to be very careful when ordering elements of this toolkit, because your profit or loss can directly depend on their quality.
An important tip: use only proven software vendors with a tradition of high quality and maximum experience. Only in this case you can be sure that the software product will be the most oriented exactly to your needs. Otherwise, by haphazardly choosing a developer, very often you may encounter losses simply because your developer's skills were not controlled by anyone.
Hedging on : how not to do
The recommendation to open a counter-order when the price moves in an unfavorable direction, so peculiarly advertised by some sources, leads to the freezing of capital, and also to the fact that at the right time you have no opportunity to open a deal, which can bring good income. Close an unsuccessful trade and wait for the price to reverse, and then open again. This is exactly what most experienced traders do, do not delude themselves with the illusion that they have not yet closed at a loss. Attempts to close a hedge without losing money are rare and take a lot of time - it is an unjustified expense for the trader and the trading robot. Errors are an inevitable companion of any trading system, but you should strive, above all, to minimize the diversion of resources. Only in this case the trading system has a chance to become effective.
But it's time to move beyond criticism and caveats to uncovering the opportunities and benefits that come with hedging on . Fortunately, he has something to be proud of.
Hedging in scalping
A very effective way is to hedging on in scalping. This tactic usually uses ECN accountsBecause, firstly, they provide an extremely narrow spread, and secondly, they eliminate the possibility of the broker playing against its clients. Sad to say, but that kind of game takes place on almost all accounts with narrow spreads. The broker briefly widens spreads slightly at those moments when it needs to close profitable Stop Loss or Take Profit orders. As a result, it turns out that even though the spread is low most of the time, it is noticeably higher for you. Certainly, in such conditions scalping is not the best decision.
Let's assume that you have chosen wisely the account for scalping and use the ECN account, which provides access to a wide network of providers liquidity. The sign of a good ECN account will be that new quotes in the period of active trading will come to your terminal 300-1200 times a minute. In such conditions it can be rather problematic to place an order manually, even if you have a high-speed Internet connection. Of course, you can simplify the task of opening an order by agreeing to slipBut for scalping purposes, the points you lose in doing so can often play a decisive role: having a narrow spread means you can't take advantage of it.
Let's take a closer look at the situation. If we compare the bars formed on the ECN account with the bars on a regular account, they differ only slightly in appearance. The main feature is an active price movement within the bar. This very movement, if one is able to use it, is a great source of income requiring nothing but a technical approach to its retrieval.
Examining the work of ECN accounts, we can find that, as a rule, only a part of ticks has time to be processed trading terminal. Therefore, there is not even a hope of being able to profit from these fluctuations, unless all trading operations are outsourced to a trading server. There is such a possibility, and it is the only one of its kind. The terminal should send pending order pairs to the server on both sides of the current price. The pairs should consist of the pending order "Buy" and the pending order "Sell". The "Buy" order must be placed lower than the "Sell" one. When the price turns both orders into the market ones during the chaotic oscillations, they must be closed in counter using the "OrderCloseBy()" function. The difference between the opening prices of these orders will make your profit. The income from one pair is minimal, and you should not strive to make it larger than the spread. At the active movement of the price, in one minute bar you can close 10-20 such pairs. But even during the lull the strategy works perfectly.
The figure shows a simple grid of ten pairs of opposite orders placed in pairs at a distance of two spreads. The blue dashed line is "Buy". The red dotted line is "Sell". The interval of one spread between pairs of orders in the grid is left for clarity. It is not needed in the real trading and it hinders the strategy performance approximately by half. But even so, we can see that more than 50 pairs of orders will be closed in profit within a day. If pairs are more densely arranged and partially overlapping, on such a quiet day, which is seemingly useless in trading, you can close up to 150 pairs of counter orders in profit, increasing your capital significantly, since this trading scheme requires minimal funds for maintaining open positions.
Accounting for trending movement
This strategy is negatively influenced by the presence of a strong trend movement. Having touched the higher "Sell" order, the price can transfer it to the category of market orders, and move upwards, having left the pending "Buy" order below. The loss will be accumulated, which can exceed the income even from a dozen of successfully closed pairs of orders, if the price is actively moving in a trend. Taking this into account, the necessary precautions should be taken. Of course, if there is a strong trend movement, it is not difficult to make a profit, and complex strategies are not required. However, a trend movement can occur unexpectedly. In order to limit losses when prices rapidly exit the price channel, it is recommended to put safety measures along its borders. pending orders: «BUY_STOP» — на верхней и «SELL_STOP» — на нижней границах. При таких мерах предосторожности, как правило, эти ордера принесут дополнительную прибыль к той, которая сформируется внутри бара.
The loss is formed only if both insurance orders will be converted into market orders due to the sharp price fluctuations up and down, but this loss is difficult to surpass the profit of a dozen pairs of orders closed inside the bar.
It is quite convenient to set and correct the price channel borders for this strategy using a specially written script, and to shift the formation of pending order pairs to the shoulders of an Expert Advisor. Thus, it is possible to make profit on several currency pairs at once. The only thing to do is to correct the channel borders in time and stop the expert advisor during news releases.
This strategy, despite its advantages, has a disadvantage. Correct ECN accounts are not available for investments less than $1000. Therefore, in the following article we will consider a strategy that allows to reach this minimum level for ECN accounts, starting from the lowest investments.
Conclusions
- Hedging on - not a lifeline if you make a mistake.
- Modern technical tools of the trader significantly expand the possibility of making a profit.
- During periods of calm in the market one should not sit idle. Despite the absence of a trending movement, these periods conceal the possibility of high dividends when using quality tools.