Many forex dealers, including MT4 brokers, allow their clients to open two opposite trades at the same time - they can buy and then sell the same currency pair at the same time, without closing the original trade. This feature is commonly referred to as "hedging". It doesn't take very long to realize that what's really happening is that the original position is in effect being closed, and that what results is that you have no position in the market. Yes, one of the trades will be in profit, but the other will be in an equal loss, so the account equity will remain unchanged so long as both trades remain open. As far as your P/L sheet is concerned, the position is closed.
Since your account equity is unaffected by market movements, by definition, you have no position in the market. If you are a proponent of "hedging", stop and think about that for just a few seconds, instead of coming up with a creative rebuttal by saying you can make money while "hedged' (no one is saying you can't). What has many people tricked is that they can steadily increase their account balance this way, because when they close the half of the "hedge" which is in profit, their account balance will increase. But the account balance is irrelevant. The value of your account is not measured by the account balance, but by the available equity. When you close half of your "hedge", your account equity does not change, so what you have in fact done is not close a trade, but open one, because you have exposed your account to the market. If you closed your long trade, then you are in a net short position, so it is the same as if you had no trades opened before the transaction, and at that point decided to open a short position. Check it yourself.
So why do dealers offer such a useless "feature"? For two related reasons. The first is that it takes advantage of inexperienced traders, because what it is in effect doing, is doubling the spread you pay - you are paying the spread for two trades instead of one. By "hedging", you are basically donating an extra spread payment to your dealer. Unless you are an incorrigibly kind person, there is absolutely no reason to do this. There are many more deserving organizations that could use your donations. The second part of the reason is the fact that traders actually demand it. What it boils down to is that the traders who are unable to see this "hedging feature" for the fallacy that it is are actually telling their dealers "yes, please Mr. Broker, double my spread". It is akin to a construction company telling their supplier "yes, Mr. Supplier, please double the price of the lumber you are selling me". It simply does not make business sense. The argument I hear back from proponents of "hedging" is usually something like "I don't care, I can still make money", and I agree, it is still possible to make money with increased spreads, but why not make more by stopping such a silly practice? It offers absolutely no advantage, and it doubles your costs! Why not simply call up your dealer and ask them to double your spreads? They will do it gladly, and you will have simplified your life.
In any case, the other type of "hedging" in forex is trying to mitigate risk by buying and selling correlated pairs. For example, a trader may want to buy EUR/USD and buy USD/CHF, since EUR and CHF are correlated. It should be noted that this is the same as buying EUR/CHF (if done in a calculated ratio). This can be useful to traders whose dealers don't allow for small enough increments to be traded to apply proper money management rules. Whatever is outside the proper ratio can be considered a position in either EUR/USD or USD/CHF (whichever is the one in excess of the exact ratio). It is also useful in creating synthetic pairs, so in that example, if you dealer doesn't offer EUR/CHF, you can still trade it by applying proper positions sizing to separate EUR/USD and USD/CHF positions. It should be noted here that this is also not really hedging, but is actually a synthetic forex pair. I will follow up with another article on how to properly create synthetic pairs if you are unfamiliar with the calculations. In any case, this can be marginally useful, but if your dealer doesn't allow you to trade in small enough lot increments for your money management strategy, or doesn't allow you to trade the pairs you want, then I would recommend changing dealers and moving your business to one that does, rather than fiddling with these calculations.
The author of this article has been a professional forex trader for over 3 years, and is particularly well versed in the way forex broker back offices work. Please feel free to browse his website Forex Trading Zone For more articles similar to this one, you can visit the forex articles section and for help choosing a broker, you can check the forex broker reviews, which are the most detailed reviews available on the web.
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