– the only way to survive in a volatile market

By Dr. S. Sivaraman
Forex market has become more of uncertainties. The volatile moves of the market are mostly seen as independent moves irrespective of market sentiments created by data release and events. When the data released is USD negative then quick rises are seen in other majors and also when the data released is USD positive the market duck briefly and discounts the data and firm up again. Even when the data released from Europe or UK are disappointing, after a brief dip other majors rise.

The big players of the market – the operators, understand the traders’ sentiments very well and make moves all the time to trap the traders and make them stop out of their positions.

Traders are afraid to buy other majors at the highest levels because of past bad experiences and when they short other majors at the higher levels for the season, new highs are shown to give the traders a surprise. It appears to even the strongest USD bulls to feel that other majors can freely rise and rise. When the traders keep away from the market to understand the trend they find that they missed the easy trade of buy and sell trades in other majors and enter long and see that their stops are hit quickly before further rise of the market. What do the traders have now as possible trading strategy? Hedging trading could be the possible solution to survive in such uncertain market conditions.

What is hedging?

It is the facility available in certain trading platforms, where we will be permitted to hold both long and short positions without offsetting each other. The buy position will limit the risk of the sell position and it will limit the risk of losing equity when the market moves against us. This facility is further enhanced to place as advance hedging order or ‘entry stop’. So traders can use the entry stop order instead of stop order to limit the risk. Besides, the entry stop order can also be used as trailing hedging order in some platforms. This will facilitate the traders to reduce the risk when the market moves in his/her favor. The entry stop order can be used till the positions comes to positive level and then it can be replaced with normal stop at entry or trailing stop to maximize the profit.

Hedging can also be used for either way trading. If the entry stop is filled then the trader will have a buy and a sell positions. Then stop can use in them so that when the market moves up the sell position will be closed with stop and then the buy position will make profit. One can maximize the profit using trailing stop in such profit making position. This way the emotion of the trader will not make him to hesitate to take a buy position near the high when the market tends to rise more and more. Incase the drop happens then the buy position will be closed with trailing stop to protect the profit .This way the stop can be used in buy or sell positions depending upon the market moves.

Many platform providers suggest account openers to have two trading account to take a buy position in one account and a sell position in another account as hedging .But when the market makes one sided move like current condition then one account will be wiped-out when the other makes the money and it becomes a zero sum game. Also strategies suggest hedging with different pairs. The most recommended hedging with different pair is to hedge EURO/USD buy position with GBP/USD sell position. But most of the time operators make differential moves in EURO and GBP to handle EURO/GBP cross. In such a condition if EURO/USD drops and GBP/USD holds then the equity erosion will be seen. Also if a buy position in EURO/USD is hedged with USD/CHF buy position, EURO alone may drop and USD/CHF may not rise as a move made by the operators to handle EURO/CHF cross. One cannot use visibly GBP/USD with USD/YEN as they make contrarian and independent moves. I.e. when GBP/USD rises USD/YEN also rises as contrarian move or when GBP/USD rises USD/YEN may drop briefly and then rise along with GBP/USD. So hedging with other pairs mostly fails to limit the equity risk.
Many traders are afraid using hedging because they fail to understand how to handle hedging. In such conditions they can use a stop in position making loss for more than 2 hrs.

More such strategic trading solutions are taught in my Professional Trading training course given to subscriber members.