What is Using Hedging instead Stop Loss:
Using Hedging instead Stop Loss means 2 contrary positions with the same amount. For 1 lot buy position you can open another PENDING ORDER of 1 lot SELL. This is what I call Hedging as Stop Loss Surogate
Opening position Using Hedging instead Stop Loss
ADVANTAGES of Using Hedging instead Stop Loss:
- Psychologically – you will not deal with a loss – you have the chance to try again at the next signal point .
- You can move the loss and recover it in any other point – reducing DRAWDOWN risk .
- Is a consolidation strategy. If both the order are taken (buy &sell) you can cover appropriate one at the return of the trend.(see point B below)
- Manage the long shadows very well .
Using Hedging instead Stop Loss constist in:
- You can opened a position as in upper figure. Buy order is taken as a Market Order and a Pending order is open as stop loss (same amount contrary).
- IF Price is going in right direction (long) – No issues – Take Profit
- IF Price is making a long shadow and continue long – close the stop loss pending order at 0 and continue with buy position. Take profit after.This will work magically if you will have a V retreat having in the lowest V point a shadow. You can cover the SL surrogate and go up (in the upper drawing). Otherwise we will be in the case 1.
- IF Price is taking Stop Loss and going long or short but beyond the order here are 2 options:
- A: Try to recover the order on the next level
Recover at next level Using Hedging instead Stop Loss
B: Recover it when the market will come back in the same point (as I said in the ADVANTAGES – is a consolidation strategy)
Using Hedging instead Stop Loss – trend changing
CONCLUSION: Using the Headging instead Stop Loss can increase your trading moral, reduce drawdowns. In the same time complexity is increased.