Hedging on: illusory and hidden opportunities. Part 2. Gap Earnings Strategy
Let's continue to consider the topic of opportunity hedging on which we started in 89 issue of ForTrader.org magazine.
Articles of the series "Hedging on: illusory and hidden opportunities"
How to use hedging on gaps?
This strategy is another purely technical trick hedging on which also requires neither "market sense" nor a "magic" indicator, so it can be used by novice traders. This strategy implies the use of Metatrader platformsbut with some modifications can also be used on other trading platforms.
If you look carefully at the contract specifications of different brokers, you can notice that the closing of the "Take Profit" is made according to this level of "Take Profit", even if such price was not in the price stream. The opening of a pending order, on the contrary, is quite often made at the nearest real price. Therefore, given that the price does not actually move smoothly, but makes large or small jumps, it is possible to profit from the so-called "rough spots" of the market.
In the simplest case, instead of the "Take Profit" in the existing strategy, you can put a pending order to fix profits. When it turns into a market order, it must be counter-closed with the main order. If your broker has five figures in a quote, then the profit will almost always be slightly higher than when using the "Take Profit" if the "OrderCloseBy()" counter-closing function is used.
But nothing prevents us from going further and forming a holistic strategy based on price gaps - gaps in the flow of quotations.
A simple strategy for making money on gaps
Maximum gaps occur between market closings and openings. It is not always known which way the price will jump by Monday, but in some cases it is quite obvious. If the currency was clearly losing ground during the week, it has very little chance of going up over the weekend. Government offices are closed over the weekend, and news that has an impact on the economy is extremely rare, so trendIf it is already formed, it is likely to remain unchanged.
If you choose a broker with a large shoulder and open at the last second the highest possible volume "Sell" deal, then you can not only double your capital in one weekend, but also multiply it by 5-18 times, and the risk of complete loss of money does not exceed 20-25%. Currently, many people already use this trick and rush to close transactions immediately after the opening of the trading session. As a result, there is often a quick reversal of prices, accompanied by a high spreadand profit taking becomes a problem.
In this case hedging can be helpful again. If for fixing of profit to use function "Take Profit", the order will close on it with profit, but quite possible situation when you could get profit in three times more, as the jump in prices was three times higher. If the pending order will be set on a place "Take Profit", it will be opened at the nearest real price and will reliably fix all possible sum which could be extracted from the price jump between trading sessions.
Let's consider an example of such hedging on one of the most popular currency pairs GBPUSD. The week that started on 31.08.2014 brought a slightly bigger drop in price than usual: from 1.65912 to 1.63246 at the close of the trading week. Based on this we can conclude that this movement will most likely not be able to stop over the weekend. Let's assume that we had at account $200, and it was decided to risk the whole amount using 1:1000 leverage. In practice there are rarely brokers with higher leverage. It is extremely rare that 1:2000 leverage is offered for such small amounts. But we will not use the most favorable conditions, but consider average possibilities. With a leverage of 1000, it is possible to open an order with a total value of almost $200,000. The actual amount will be somewhat less due to margin requirements but it is not that important to demonstrate the possibilities of the strategy. It is extremely important to open an order at the last second when further price movement to the unfavorable side is no longer possible.
When the market opened on 07.09.2014 the price was: 1.61673.
1.63246 — 1.61673 = 0.01573.
That's how much of a gap between trading sessions.
$200 000 * 0.01573 = $3146
This is the amount of equity in the account.
Then it is necessary to make an immediate counter-closing of orders, fixing the profit. Naturally, what must be taken into account is the spread and additional margin restrictions that do not allow opening orders with the full use of leverage. Therefore, it would be more correct to round up the amount from $3146 to $3000. But even in this case, multiplying capital by 15 times in just two days with minimal risk more than pays for the software you need to have in order to use this strategy.
It is natural to ask the question: how often are there opportunities to use this strategy? Let's consider the intersession gaps on the popular currency pair GBPUSD over the past 10 weeks.
The horizontal axis shows the size of the weekly bars. The vertical axis is the size of the gap following the given bar. As can be seen from Figure 2, opportunities to use this strategy were presented weekly, and only once trading results were unprofitable. For additional information, a linear approximation by points was made: the black line and the formula for calculating the approximate size of the expected price jump by the size of the weekly bar.
What does the effectiveness of hedging in Forex depend on
Although the hedging tool looks pointless at first glance, given the number of technical nuances of trading, it can be used to improve trading strategies or create independent trading schemes on the Metatrader platform.
Efficiency of use hedging depends directly on the quality of the code of the auxiliary and basic programs you use in trading, so it is extremely important to order them from a reliable and trusted service provider.