Hedging Transactions Are Only Effectively This Way
Abstract
Does it often happen that when placing an order but the market performed out of your expectations, and fearing of your one-way error and rush to place another order in the opposite direction?
The following will share the key idea of placing such an order!
Whats Hedging?
Investors make two-way trading operations on the same product, such as a buy (long) order and a sell (short) order on the gold market. The two operations does not have to be performed at the same time. As long as there are two orders in different directions on the same product, it is called a hedging transaction.
The Expected Effect of Hedging
Generally speaking, when an investor encounters a volatile market, because the market trend is unclear, there may be losses in both long and short orders. Therefore, investors can utilize the advantage of hedge trading in this context , and the sample would be introduced on the following page.
In the figure below, the rough example shows if placing a buy (long) order and a sell (short) order at 1785 at the same time. When the gold market runs to around 1783 with a significant depreciation, the long order will execute the Stop-Loss and the short order is retained until about 1765 then exit. Settling the profit & loss, the Long order hold made loses of $200 USD, and the short order would make about $2000 USD profit. Concluding with the total profit around $1,800 USD by completing this operation process of hedging transaction.
Common Errors
Most investors chooses to conduct this at the wrong timing!
The key of hedging transaction is to consider using it when the market has been confirmed with vacillating pattern. Therefore, the research and judgment of the trend is the primary focus of this idea, but most investors does not do this.
Take the last page as an example; Common Investors wouldn’t be sensitive enough to react when the quotation sunk to 1783, but by the quotation plunges to 1765, they then realized even the floating profit of $2,000 USD were earned from the short order, the long order also losses $2,000 USD respectively. And normally they would always try to leave the hedge order in state. If the decision was made, would resulted with several consequences:
- Interest cost,
- As the order is reserved, the investor will consecutively pay interest on position hold.
- The Reducing Liquidity,
- The Hedge Order will restrain the flexibility in the account prior to closing the position,
- When Can Unlocked
- When the deal is done, positions were locked, both the profit & loss too. If another swell hits, devastated the orders holding. Would the Investors still remain calm to sort it out?
Epilogue
Hedging transaction is not an inferior trading technique. The key to operate is on grasping the timing and the method of use. If the Investors may utilize it’s flexibility during the volatile session and the operation were welly conducted, then the effort could provide you with controllable transaction costs and stable profitability.
Therefore, if Investors are interested in adopting hedge trading, you should be practicing on simulation from the demo account first. Once all the skills became competent, then implementing it to actual trading could very much favoring your everyday transactions.
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