Every trader is looking for opportunities how to hedge their positions against potential loss. There are a lot of insurance policies, but they are all individual for individual case. If to generalize the methods of insurance positions, they can be divided into two groups: hedging and locking of positions.
Hedging is opening opposite positions simultaneously with the main on the associated asset. For example, wheat and corn are correlated with each other. Hedging involves opening a long position on wheat and short corn. In whatever direction price charts are moving, the trader will either have a small profit or small loss. Disadvantages of hedging:
- there is a risk that the correlated asset will change in price with a lag, thus defeating the effect of the insurance position;
- due to the different underlying value of the assets an accurate calculation of the volume of transactions for each of the tools is required.
The hedging strategy is used by professional: major investment banks, management companies, etc. whereas Beginners prefer a more simple and clear safety tool — locking positions.
Locking positions: trap for the novice investor
Locking — this is analogous to the hedging transaction but the trade is only opened in the opposite direction on the same instrument with the same broker. Example: the opening of the lot to buy an asset worth $ 10 and similar simultaneously sell the same amount. However, there is a problem: brokers are not particularly enthusiastic about such a strategy and many terminals do not support this function providing the clearing position. That is, if you open a long position in the amount of $ 10. and short for 3 dollars, there will be offset and there will be only one long position for 7 dollars.
European brokers also prefer locking as it is more accurate safety tool. But they work with one instrument through different brokers, which eliminates the possibility of “collapse”. However, this leads to high costs of the Commission.
It would seem that such a strategy does not make sense, because, the amount of received a profit is a loss. But locking of positions is often used even by experienced traders, because:
- it is a psychological support, somewhat soothing when placing orders;
- ability to trade in the market with the unpredictable movement of the trend;
- with proper closing of positions can manage to capitalize on both.
The main drawback of the strategy need to constantly be mindful of all installed “locks” (the task is even more difficult if they have different volume and different prices). If you get lost in the safety orders, you can receive a loss.
How to trade with locking correctly
Define 3 basic rules before trading:
- total open positions must not exceed 10% of the deposit;
- it is recommended to open simultaneously no more than 10 positions;
- the deposit amount is not less than 30 lots. In other words, if the order volume 0.1 lot, Deposit at least 3,000 USD.
The essence of the application of the method of locking is the following:
- a stop order is set at around 30-40 points from the price;
- another pending order is placed in the opposite direction through 10-15 points from the price. The second (reverse) order is placed the same amount of length 10-20 points. If the trader gets loss, it will amount to a maximum of 10-20 points;
- if order is triggered, but the price has moved in a turn and grazed a warrant, opened in the opposite direction, then re-open the order in the direction of the price;
- profitable position of the insured trailing stop.
The strategy seems complicated, but in practice it is more or less clear. Need to open positions in the direction of the price and follow the market direction, quickly closing the losing position.
To sum up. The locking position is not the best tool for insurance deals for novice traders. Squeeze from this strategy will at best be able only for a professional, whereas for beginners we recommend just accept the resulting losses, minimize risks, a simple stop loss and don’t use complex strategies. By the way, note professionals: “Alpari” have included the option of locking the position of the platform MetaTrader 5 in spring.