A Simple Hedging-Technique to take a ZERO loss

[JCKriek]

Hi there Fellow Traders,

Herewith a basic hedging strategy to "trade yourself out of a losing position"

Scenario
--------

You entered a trade long and exposed one standard lot which means if the trade moves 100 pips against you, you lose $1000 and the direction of highest probability also changes as soon as the market moved that 100 pips against you

Technique
----------

First of all, let's assume you decided before-hand to trade yourself out as soon as the trade moves to a $1000 loss

As soon as your long trade reflects a loss of $1000, place a 1 lot sell in the market to hedge the long trade using your entry system strategy

Now that you "locked" the $1000 loss, the market can move in any direction and you obviously won't lose more than the $1000

The next step would be to move the stop of the sell to lock-in a profit of at least 10 pips. Now you can remove a $100's worth of the lot size from the initial losing long trade

For instance:

The trade is $1000 against me - which is 10 mini lots. I make $100 on the hedged short trade and can now remove 1 mini lot which leaves me with a loss of $900 - 9 mini lots

Keep on removing 10% of the hedged position everytime you make $100. Therefore if you keep on removing a $100's worth of the initial losing trade's lot size, you will eventually have traded yourself out.

Please note that this hedging technique will keep you busy 24-hours a day and you might have traded yourself out only after the umpteenth trade , but you will eventually walk away with a zero loss

Some Guidelines to Follow:

1) This technique will only be applied to a scenario where a major trend line is violated and you can clearly see how the market WILL change it's trend for the next few weeks

2) Always trade the second position in the direction of highest probability which will obviously be against the direction of the initial losing trade

Easy as that!

[JCKriek]

Hi there fellow traders,

Herewith a graphical representation of the technique

Have fun!

[momotrader]

Hi Johan,
this one cannot work because when you win 10 pips on the sell side and you lock in your 100 profit the losing long side has lost another ten pips and you have to close this o.1 one with - 110. So you will never be break even or am I wrong?
momotrader

[JCKriek]

Hi there Momo,

It will take more than 10 trades for this technique to work, but you will eventually exit with no loss.

Think about it this way:

The losing long trade is now 110 pips against you when you take the first $100 profit with the new short hedge trade. Now you close 1 mini lot from the first long losing trade for a loss of 110pips x $1 which equals $110

Now you are left with a loss of $990 but this time only with 9 mini lots. Now you do the next hedge trade for another $100 profit and now the first losing long trade shows a loss of 9mini lots x 120pips which equals $1080. Now you close another single mini lot from the first trade for a loss of $120, now the first long losing trade reflects a loss of $1080 - 120 which equals -$960

By the time you take $100 profit on the third trade, the first long losing trade (now with 8mini lots) gives you a loss of 130pips x 8 which equals $1040. You again remove 1 mini lot and now the losing long trade reflects a loss of -$910

By the time you take $100 profit on the fourth trade, and you have removed 1 mini lot, the first long losing trade reflects a loss of -$840. What happens now is that, yes, the market does move more and more pips against the first long losing trade, but with less and less lots and you on the other hand keep on taking 10 pips using the scalping technique and removing $100 from that first trade.

Like I said earlier, it won't take 10 minutes or only 10 trades for that matter to trade yourself out, but you eventually will do so. Also the market does not move in a straight line and should the market pull back a bit, it just gives you extra leeway - call it a freebie

Remember that you could snow ball your hedge by locking 10 pips in with your stop and then removing that "banked" profit from your first long losing trade and entering another hedge and so on. After a while you would have 3-5 lots in against your losing trade for no risk as they are all locked and then the following will happen, picture this:

The first long losing trade reflects a loss of -$840, but this time with 7 mini lots. Now you have "snowballed" the hedge trade into a profit of $300 using three standard lots. Now you can remove that $300 from the first losing trade with a huge smile on your face

Just carry on like this, try it first on a demo account and then you will see what we mean.

Thank you for your interest in this subject and please, do not hesitate to throw me with the questions!

Happy trading out there

[JCKriek]

Rudy's Hedging Trade details + Track Record (As per LTR discussion)
_____________________________________



On May 19 2008, 18:15pm, the losing 10mini lot sell trade was entered

The first hedge long trade was entered on May 20 2008, 09:06


See the attached chart:

[mczoni]

Hi Mr. JCKriek, I am really interested on your hedging technique but i am still blur, i dont how to entry the hedging as well. Can you discribe once more the trading examples on the charts.

Regards;
mczoni owen
mczoni@hotmail.com

[JCKriek]

Hi Mczoni,

You can only implement the hedging technique if the market moves significantly against you resulting in a change of the direction of Highest Probability.

Before I start explaining, are you familiar with the Probability Study Technique and can your current broker offer you two simultaneous trades in the market (a long and a short trade) ?

Kind Regards

Johan

[SaM5246]

Example:

Long- means you are Buying
Short- means you are Selling


*Your Broker must allow you to simultaneously take BOTH Long and Short positions for you to do this.



Ok so you take the following trade:


Long 10 Lots of Eur/Usd at 1.5500 (We'll call it Position 1)


The market instantly drops to 1.5400 (-100 pips against your Long Position)

At this point you immediately implement the hedging technique and go SHORT:


Short 10 Lots of Eur/Usd at 1.5400 (We'll call it Position 2)


Total loss: -100 Pips (across both trades) $-1000


Now the Eur/Usd goes to 1.5350 or 50pips lower from where you took your hedge trade going Short.

Position 1 (Long) -150 pips x10 Lots = $-1500
Position 2 (Short) +50 pips x10 Lots = $+500


Total Loss: -100 (across both trades) (20 Lots) $-1000



Now we can close 5 lots on the original trade. So now we are:

Position 1 (Long) -150 pips x5 Lots $-750
Position 2 (Short) +50 pips x10Lots $+500


Total Loss: -100 pips (across both Trades) $-250


Now the market drops again to 1.5300 (50 pips lower again)

Position 1 (Long) -200pips x5 Lots = $-1000
Position 2 (Short) +200pips x10 Lots = $+2000


Total Loss: 0 pips??.... Nope you have 5 extra Lots on your short position vs your Long Positon so that leaves you with:

Total Gain: $1000!


So how do you sell off part of your lots? If you have 10 lots as in Position 1 and you are using Meta Trader 4 you can Right-Click on your open trade and then "modify or delete order", adjust the pull down menu to "Instant Execution" and then to 5 lots and hit "close". This will let you close out 5 leaving you with 5 open.


Hope this clears things up,




Sameer

Let me know if my thinking is right on this guys...

[JCKriek]

Your explanation is very cool, Sam!

Thanks!

Johan (;