Story by: Karlina Armady
Published: July 25, 2018
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Karlina is a Senior Trading Advisor who has more than 5 years experience in financial trading. She also manage the famous CAT certification program Institute as school principal. She is here to inspire you with great stories and motivations.
Some traders assume that the hedging trading technique is the safest technique because when it fails to get a buy position there is still a reserve "win" in a short position. However, not all traders are suitable for trading with hedging strategies.
The idea of holding two opposite trading positions is indeed quite interesting to implement,
but is it true that hedging can protect your position from losses? In fact, many traders find it difficult to take advantage of the hedging strategy. Numerous amounts of traders are trapped in locking positions - situations where traders do not know when to release one of the hedging positions. Traders often lose money, due to the fact that opening 2 positions would mean double the spread. The cost of trading like spread certainly cannot be ruled out, especially if price volatility is volatile.
Which is why not all traders are compatible with hedging strategies. In order to avoid risk, you should stay away from hedging strategies if you belong to the following type of traders:
1. Analysis continues to fail
The first quality needed in the success of a hedging strategy is the sharpness of analysis. To find out when it's time to hedge a loss position, at which level hedging can be opened, and what techniques can be applied, you need to know the opportunities for price movements first. If the analysis is often inaccurate, there is a greater chance that your strategy likely ends up as a fail.
2. Bad Money Management
At this stage, you certainly understand that hedging requires the opening of 2 trading positions (minimum). So surely, by hedging, you will increase the size and risk of trading. Not to mention, spreads also need to be taken into account at each position to be deducted from the trading costs.
In order for a trading account to remain safe, even if you open multiple positions for hedging purposes, you definitely need sufficient funds to support trading positions that are still floating. Money management must be a priority, therefore, you can place the size of trading in each position. If your trading does not follow through with money management, then you are not ready to face the risks of hedging.
3. Unstable emotions
Traders are always advised to minimize the influence of emotions as much as possible because emotionally influenced trading decisions tend to lead to larger losses. Unfortunately, the level of difficulty, pressure, and risk in the hedging strategy makes traders more vulnerable to emotional instability.
People often say that this hedging technique is the same as an "addiction" technique. To hedge the first position, you need to open a second position. If the second order doesn't work, then you have to hedge it with the third position and so on in which the loss rate increases over time.
Are you sure your emotions would be stable? If not, it may be best to stay away from the hedging technique.
Can you use hedging techniques?
No need to be discouraged if you are still a beginner or do not have the skills that are required in the trading analysis. The opportunity to use a hedging strategy is not completely closed for you. Experience can make you become a trader who has the sharpness for analysis, money management, and emotional control. Therefore, plenty of research on hedging strategies is required while you gather the necessary experience. This you can take from the 1 year CAT Program. It is advised to test the hedging technique on a demo account first in order to avoid real risks.