Hedging is possibly the most misunderstood trading method in the world.

It's also technically not allowed in U.S.-based accounts, so many traders think that there's something wrong with this trading method.

But if you take a closer look, there are many benefits to Forex hedging that I'll go over in this article. 

You might just change your mind. 

Even though there are a lot of benefits to hedging, remember that there are no magic trading strategies that are guaranteed to make money.

The trading strategy you use must match your trading personality and be practiced extensively to achieve mastery.

With that said, let's get into it.

1. Less or No Margin Required

Depending on the broker you use, a fully hedged position can require half the amount of margin, or even no margin at all.

For example, let's say that you're long 1 standard lot of EURUSD, and short 1 standard lot, at the same time.

If the margin for 1 standard lot is $250, you might only have to put up $250 for BOTH positions, which would ordinarily cost you $500.

At some brokers, you don't need any margin at all if you have a fully hedged (1:1) position.

This is a big advantage because you can basically have double the opportunities to profit, at half the cost.

Of course, there is also twice the opportunity to have a loss.

But if you know what you're doing and have practiced your hedging strategy, using less margin is generally a very good thing.

It gives you more opportunity to get out of losing trades.

Unfortunately, this does not apply if you hedge in a U.S.-based account. But it's still possible to hedge in an account based in the U.S.

More on that in a bit.

2. Potential to Make Money in Both Directions

Almost all trading strategies require that you to pick the direction that you think the market will go.

It's either up or down.

But with hedging, I can potentially make money in both directions.

I've even done demonstrations where I have opened a long and a short trade at the same time and made a net profit on both trades.

In this way, it's unlike any other trading method out there.

Now in all fairness, this can lead to overtrading, so it's important to learn hedging in a demo or simulation account before ever risking real money.

However, hedging gives me more opportunities, and that makes my job easier.

If you want to learn more about hedging, be sure to read my Hedging Guide for Beginners.

3. The Ability to Wait for More Information

This is a big one.

Have you ever thought that price would move in one direction, but as you saw more candles, it was pretty obvious that you were wrong about your initial prediction?

Of course, that happens all the time in trading.

The beauty of hedging is that I can take positions in both directions and wait until the market gives me solid clues that it will go in one direction or the other.

This can be a huge advantage because many times the markets will throw a “fake out” before making a big move in the opposite direction.

Even though I might be very sure about the initial position, that picture can change quickly and hedging gives me the ability to adjust.

4. Lower Stress

Sometimes I don't feel like trading.

When that happens, I can simply hedge my positions and get back to them when I feel like it.

Sure, I'll lose a bit of money on the swap.

But the ability to take a break is priceless.

Try doing that with any other trading method out there.

On top of that, I never have the stress of worrying if I'll get stopped out of a trade…even during rollover. 

If you've been trading for any length of time, you know that sinking feeling when you go to check your charts and you've just been stopped out…again.

Not the best way to start the day.

Get stopped out multiple times in a row and that can start to mess with your confidence.

With hedging, there are no stop losses, so I never have to worry about getting stopped out.

I simply hedge the losing position and move on.

A hedge still limits my risk, while giving me the opportunity to profit in either direction.

5. Potential to Make Passive Income

There was a period of time when the Japanese Yen was a popular currency to trade because the interest rate differential between the Yen and the US dollar was so high that traders could simply profit from the interest.

Traders were making big money by just holding their positions.

It was rumored that even Japanese housewives were trading this method because it was so easy and reliable.

I know a trader who did this full time as her only strategy.

But all good things come to an end and the trade eventually stopped working.

Some traders lost their entire accounts.

However, if you use hedging to target high interest rate differential trades, it's possible to still take advantage of this method on a shorter term basis, while limiting your risk.

6. Massive Liquidity and Lower Fees

One of the reasons why I prefer Forex hedging is because the market is massive.

Forex is the largest trading market in the world.

Since there are more traders to take the other side of your trade, you are more likely to get the price on your screen and suffer less slippage.

Other markets like futures, options and crypto have much less liquidity, which means that you might not get the price you want or you may not even be able to enter a trade at all.

On top of that, Forex generally has lower transaction costs than other markets, especially at smaller trade sizes.

So it's perfect for a wide range of traders, from beginner to professional.

7. Maximum Flexibility

Pairing hedging with scaling is powerful.

Scaling is opening and closing trades in parts instead of taking the whole trade in one big chunk.

For example let's say that I want to take a full-sized trade of 3 standard lots.

Instead of opening the trade with all 3 lots at once, I might take 1 lot to start, then see what the market does.

If price doesn't do what I expected, I can just hedge the 1 lot, instead of having to hedge 3 lots.

Scaling into a trade can also help me get a better average price than entering all at once.

I can enter 1 lot to start, then see what price does. If price action is still favorable, but moves slightly against me, I can enter trades 2 and 3, but at a lower cost than the first trade.

The same thing goes for my exits.

I can set 3 profit targets to capture a small, medium and large profit.

If my last profit target doesn't get hit and it looks like price will return to my entry, I can simply close out the trade at a smaller than expected profit.

Now double this potential on both the long and short sides.

As you can see, when I use hedging and scaling together, it gives me maximum flexibility to go with the flow of the markets.

8. Can be Added to Other Trading Strategies

Hedging can be a trading strategy in itself.

However, if you couple it with other trading strategies, it can be a powerful way to get out of trades that don't work out.

This is especially useful if you have a trading strategy that has a high win rate, but you want to boost the overall return of the method.

If a trade doesn't work out according to the rules of your strategy, you can work your way out of it with a hedge.

Again, you have to master your hedging “escape” method before you ever take a trade.

But it can be a nice addition to an already profitable strategy.

9. More Consistent Returns

I have personally found that hedging creates more consistent returns than most other trading strategies.

Individual results will obviously vary, depending on skill level. 

I'm not saying that you are guaranteed have more consistent returns, but in my experience, it's certainly possible.

Couple this with lower stress and more flexibility, and that's why I enjoy hedging.

10. Can be Done in a U.S.-Based Forex Account

Contrary to popular belief, you CAN legally hedge in a U.S. Forex account. 

It's not hedging in a traditional sense, but it's effectively the same thing.

Hedging in the U.S. is not as easy and it does take more patience, but it can be done.

I DO NOT recommended it, but if you insist on using a broker in the United States, then just know that it is possible.

Final Thoughts

Just like with any other trading method, there are benefits and downsides to Forex Hedging.

It's not for everyone.

But if this list of benefits appeals to you, then read my free Forex Hedging Guide to get started with this underrated trading method further.

As always, remember to start in a demo account and use play money to perfect your skills before ever risking real money.

The post 10 Benefits of Forex Hedging Most Traders Don’t Know About appeared first on Trading Heroes.

Hedging is one of the most misunderstood trading methods in the world.

So in this guide, I'll give you the facts about Forex hedging, so you understand what it's really about. I'll also dispel the common myths about hedging.

Then most importantly, I'll show you how I utilize hedging in Forex.

Alright, let's jump into it…

What is Hedging?

Hedging is a trading method where traders can potentially hold both long (buy) and short (sell short) positions at the same time. This is done to lower risk and take advantage of market conditions that may be harder to trade with one-sided positions alone.

Large multinational corporations primarily use hedging to manage their risk associated with currency rate fluctuations and changes in commodity prices.

But independent traders like us can also utilize hedging to profit from market fluctuations.

The Benefits of Forex Hedging

You can hedge in many different trading markets.

However, Forex provides some of the most favorable conditions for hedging.

First, transaction costs in Forex are relatively low.

Forex Traders usually only pay a spread, or a spread plus a small commission.

Second, Forex is the largest market in the world, so you'll usually get the price you see on the screen.

Other markets don't have that many market participants, so you may not be able to get a good price on your trades.

Next, it's equally easy to go long and short in Forex.

In other markets like stocks or crypto, it's not as easy to go both long and short. It's much easier to go long in these markets.

Finally, it's possible to trade very small lot sizes in Forex, making it possible to hedge if you have a small account.

This makes Forex hedging accessible to more people, compared to hedging in other markets.

How Does Hedging Make Money?

The next question that people ask is:

If hedgers have a long and short position at the same time, then how do they make money?

What critics of hedging miss is that you don't need to have the same sized short and long position on at the same time. 

Traders can do a partial hedge or utilize no hedge at all.

When positions are not fully hedged, that allows you to take advantage of directional moves.

However, if price does not do what you expect, then you can do a full hedge to stop further losses. At that point, you can clear your head and reassess your options.

In addition, you can potentially make money from both hedged positions, instead of taking a hard loss with a stop loss on just one position.

…and that's one of the many benefits of hedging.

How to Hedge in Forex

You should develop your own hedging methods, but this is what I do.

My hedging method is very simple, but also very powerful. 

It's a simple 5 step process:

1. Identify major support or resistance (S/R) zones
2. Place a trade as enters the zone
3. Place a take profit at the next minor S/R zone
4. If I'm wrong about the direction, I hedge the trade
5. I leave the hedge in place and look for another trading opportunity

There are several nuances that I take into account when looking to enter and exit trades, but that's the basic idea.

To learn more about how I hedge, take my course.

Examples of Hedging

Now these concepts may be a little hard to understand without some illustrations.

So let's dig into the charts so you can see some examples.

Like I mentioned above, I look for solid support and resistance levels.

This is the type of zone I look for.

In this case, I would be looking for price to bounce, so I might look for a buy somewhere inside the green zone.

As the chart moved forward, it turned out that I would have been wrong about the trade.

So when price closed below the zone, I would have hedged 100% with a short. In other words, if I had 1 standard lot long, I would hedge with 1 standard lot short.

In this example, price moved both above and below the green zone, giving me opportunities to close both the long and the short at a small profit.

Not all trades work out like this, but it's a good example of how hedging can have advantages over stop losses.

If you still have questions about how hedging works, here's a video that shows more hedging in action.

In this video, I use backtesting software to speed up the process of practicing hedging.

This is a process that I highly recommend doing before ever risking any real money.

Is Hedging Better Than a Stop Loss?

One method isn't inherently better than the other, it just depends on your trader personality profile.

Some people prefer stop losses because it gives them a hard exit and once they are out, they have a clear head and can focus on finding new trades.

That's great.

I personally use both methods.

But I use hedging as one of my trading methods because I find that it's a lot more flexible and not as stressful as using a stop loss. Instead of taking a loss right away, I can work my way out of trades where I wasn't right about the initial direction.

You can read about all of the pros and cons of each method in this article.

So if you're interested in hedging, I would suggest trying it out in a demo account or simulation software.

See if you like it and if you want to continue mastering it.

The Best Currency Pairs to Hedge

The best pairs to hedge are going to be the Forex pairs that have the lowest net swap. 

In Forex, long and short positions pay or receive separate swap rates, or the daily interest charge or credit, as a result of holding an open position.

If you're paying a lot of daily interest to hold a position, then that will obviously eat into your profits.

You calculate the net swap by adding the long swap and short swap rates.

This information is available from your broker, or you can get it in your trading platform.

In MetaTrader, right-click any market in the Market Watch window, then go to Specification.

Scroll down and you'll see the long and short swaps.

In this example:

• Long: -5.628
• Short: -1.765

Therefore, the net swap is: (-5.628) + (-1.765) = -7.393

So if you hold an equal long and short position in this pair, you won't be losing too much money.

Therefore, this is a good pair to hedge. 

As this is being written, I consider anything greater than -8 is tradable. This may change in the future.

On top of that, most brokers don't have a margin requirement if you have a fully hedged trade.

To learn more about Forex hedging swaps, and what makes a good swap, watch this video.

Get the MT4 EAs here.

Common Forex Hedging Myths

Like I mentioned in the beginning, hedging is one of the most misunderstood trading methods. There is a lot of BS floating around the internet about it.

So in this section, I'll address a few of the most common myths about Forex hedging.

You Cannot Hedge if You Live in the US

It's true that there are specific rules around hedging in the US.

However, you can still hedge in a US account, while still following the rules.

There are 2 hedging rules in the US:

1. You have to exit the oldest open trades first
2. You cannot go long and short in the same account

What many people miss is that there are exceptions:

1. You can exit older trades first, if they are of a different lot size than the newer trades. This can be easily achieved by using nano lots. You can also exit an older trade if it's in a different currency pair.
2. You can setup 2 sub accounts under your primary account. Take longs in one account and shorts in the other account.

That's all there is to it.

There is some thought and practice required, but it does work.

I've been doing it for years.

Here's a video that shows you the concepts in action.

Get a free trial to TradingView here.

You Can't Make Money with Hedging

As I demonstrated above, it's certainly possible to make money with hedging…IF you know what you're doing and have trained extensively.

Again, the key is know when to hedge and how much.

If you hedge 100% every time, then of course you won't make any money.

However, there are times when you might not hedge at all.

Or you might hedge only 50%.

That's the beauty of hedging, it's much more flexible than one-and-done stop loss strategies.

Hedging is No-Loss

Some content creators will tell you that there are certain hedging methods that have 100% winners.

This is simply not true.

There are hedging methods that have very high win percentages, but it's simply not possible to have all winners.

When you learn how to hedge effectively, you can close out a series of trades at a net profit, at a relatively high success rate.

If you want to learn more about why this is a myth, read this article.

Learn 7 More Forex Hedging Myths

Those are just 3 of the common hedging myths out there.

To learn the other 7, watch this video…

What if I'm Wrong About a Hedging Trade?

As I mentioned above, there's no way to have 100% winning trades in hedging.

But there are ways to get out of a losing trade without having to resort to a stop loss.

The first thing I do if I'm not sure about where price is going is to hedge 100%. 

Then I look for other opportunities or more clues about where price could go.

If I have a good idea of where price will go, I have a total of 8 ways to get out of a hedging trade.

I'll share one with you here.

This method might seem a little counterintuitive at first, but demo trade it on a chart and you'll start to seen when it can work.

What I share in this video is one of my most used hedging exit methods.

Can Hedging be Backtested?

Yes! I highly recommend practicing on backtesting software and a demo account before you ever risk real money.

Since hedging is so discretionary, you aren't backtesting a hard set of rules, but you're more getting a feel for what to do in different market conditions.

I suggest using backtesting software that has the “forward test only” feature. This feature doesn't allow you to move back on the chart, only forward.

When you use this feature, you cannot “cheat” and go back once you have seen what happens in the future.

This is the best way to simulate live market conditions. You will probably blow out your backtesting account the first few times.

But don't get discouraged, this is normal.

Keep at it and you'll start to get the hang of it.

This is the software I use to practice hedging.

Final Thoughts on Forex Hedging

Forex hedging can be a great way to trade because it is very flexible and can lower your stress, compared to stop loss based trading strategies.

I love it.

But just like any other trading strategy, it's not for everyone.

Learn it in a demo account and experiment with the ideas in this guide.

If you want to learn my complete hedging method that I've developed over 10+ years of live trading, click here.

The post The Heroic Guide to Forex Hedging for Beginners appeared first on Trading Heroes.

Hedging can seem very easy in the beginning because it's easy to enter a lot of trades and take small profits. But eventually, you'll hit a point where you have a few trades that are losing, and you might not know what to do with them.

I teach 8 different ways that you can get out of a hedged trade. But that's in my paid course.

In this tutorial video, I want to show you 1 of the 8 ways that I get out of a hedged trade that didn't work out as I expected…for free.

The Split Exit in Action

This video will show you what I call the Split Exit.

The text version is provided below the video if you don't want to watch the video.

This won't work for all hedged trades, but it works well for trades that have certain characteristics…which I'll get into later in this tutorial.

One way that traders can profit from a hedging trade that has gone against them is to be patient and wait for the next major support or resistance level. They can take a trade in the same direction as their original trade at the next support or resistance level, then wait for price to move past the breakeven point between the two trades, and close them both out at a net profit. 

This entry may seem a little counterintuitive at first. But it works if price action gives you clear support or resistance levels.

Alright, that's the main idea, now let's get into the details.

The Split Exit Explained

This exit depends on there being 2 well-defined support or resistance levels.

For example, the 2 lines above current price action would be 2 resistance areas that I would target.

Now I would take a short trade once price hits the first resistance zone.

Like this…

But if this trade idea fails, I'm going to be ready to take another short trade at the resistance zone above.

This is not going to be a hedge yet, but based on current price action, I'm fairly certain that price will bounce down at one of these 2 levels.

Price then taps the next resistance level, so I take another short that's the same size as my first trade. 

There's a nice Pin Bar at this level, so it looks like this trade has a good chance of working out.

At this point, I'm going to set a take profit on both trades that is slightly below the center line between these 2 trades.

If I'm right about the bounce, then the second trade will make more money than the first trade loses, and I can Roll-Off both positions at a net profit.

Now I'm going to have to keep an eye on this trade because it is not hedged.

But price hits the profit target quickly and I could have even exited the first trade at a profit, if I held on for a little longer.

If you didn't know, you can set your take profit on the first trade at a price that's going to lose money. That will get you out at a net profit, if the take profit on the second trade is set to the same price.

That's a complete trade example. Obviously, it would be the opposite on the long side.

Conclusion

So that's one way that you can get out of a Forex hedging trade that didn't go as you expected.

Many people think that they have to hedge if they are wrong about a trade.

Not true.

You can also take another trade in the same direction, if you feel that price will bounce at 1 of the 2 support or resistance levels. 

It helps to take a smaller position on these trades, effectively treating both trades like 1 position. So you might want to take half your normal lot size on the first trade, and the other half on the second trade.

If you want to learn more about hedging, download my free hedging beginner's guide.

To get all of my advanced hedging methods, including the full version of this tutorial, sign up for my course here.

The post How to Profit Even if You’re Wrong About a Hedging Trade appeared first on Trading Heroes.

That's the question that I will answer in this article.

I'm going to take a realistic look at trading strategies that claim to win 100% of the time.

First I'll define no-loss, then I'll share the strategies, and I'll finally review them based on my backtesting.

Are There Really No-Loss Strategies?

Let's get one thing out of the way, there's no such thing as a trading strategy that has 100% wins. 

That's simply not possible.

However, the following trading strategies claim that they can put on a series of trades that will be closed at a net profit, 100% of the time.

That's a big difference.

For example let's say that a hedging strategy puts on a series of trades that have the following results:

• +$112
• -$39
• +$453
• -$99

These trades net out at a profit of +$427, but there was a 50% win rate.

The overall result was profitable, although there were losing trades within this set of trades. 

Even if a strategy doesn't win 100% of the time, it can be very useful if it's net profitable for a long period of time.

Now let's find out what these strategies are like, and I'll give you my opinion of their claims, based on my experience.

No-Loss Hedging Strategies

I've been researching hedging strategies for years and I've found that there are 2 strategies that claim to be “no-loss” and seem to have merit.

Remember, I'm not saying that these strategies actually work.

My intent is simply to see if they have any potential and if they could be tradable for the average person.

But if I'm going to examine these strategies properly, I have to define them first.

The Zone Recovery Method

Once of the most popular “no-loss” hedging methods on the internet is called the Zone Recovery Method.

There have been a ton of copycat YouTube videos made about this method.

As far as I can tell, the guy in this video has popularized this hedging strategy.

The idea behind this method is that price will eventually break out, so he adds positions within a range, until price does break out.

Yes, this could be dangerous if the market consolidates for a long period of time.

However, if the volatility is high enough, price should eventually break out.

At least that's the theory.

The Grid Method

Another hedging strategy that claims to be no-loss is the grid hedging method.

There are different flavors of grid hedging but this video claims a no-loss result.

The basic idea behind this strategy is that the market will turn around at some point in the near future, so you just have to keep placing trades until the market turns and takes you out at a profit or breakeven.

There are several people who teach this type of a method and have a similar formula.

With this concept in mind, the strategy sets up a grid at set intervals on a chart. For example, it might setup a grid that has levels that are 25 pips apart.

Whenever price hits a grid level, you would take a fully hedged trade.

At first glance, that doesn't make sense because you don't make any money with a 100% hedge.

But the key is to take profit on winning trades, then wait for price to retrace and exit all of the previous trades at a profit.

Watch the video above for details.

Review of the Hedging Strategies

Now that you know the trading strategies and what they claim they can do, I'm going to analyze the strategies and give you my opinion of them, based on my testing.

The Grid Method

I'm starting with the grid method because I believe that this strategy doesn't work.

It probably works over a short period of time, but my testing has shown that it won't work over the long run.

Maybe I'm missing something, but that has been my experience.

The success of this method relies on the fact that the market is likely to turn around at some point and cash out the open trades at a net profit.

However, there will be times when price trends and does not pull back enough. That is when the strategy will get caught with a big loss.

In fact, he even says at 14:14 in the video above, that there are going to be some losses.

If a trader is good at identifying trending/consolidating markets, and uses good risk management, then that could improve the results dramatically.

Now in all fairness, I have not tried out his EA. Even if the EA does not have a 100% win rate, it could still be net profitable.

But based on my own manual testing results, it's very unlikely that this method could be profitable over the long run, especially since strong trends are not predictable. 

Another reason that I feel this strategy won't work is because of the dynamic nature of the markets.

Even if you optimize the method for a particular Forex pair, volatility in the market will change periodically and the grid sizes would have to be adjusted.

Once you adjust the grid, volatility could change again. It's like trying to hit a moving target.

On top of that, spreads change throughout the trading day and that would dramatically affect the performance of the strategy.

There just seems to be too much discretion involved, there are too many variables to account for, and it's not something you could run all the time.

You would probably have to know when to turn it on and off…if it works at all.

That's why it's important to learn how to backtest for yourself. You need to know how to test out ideas and find out if they are as good as they claim.

Learn how to backtest properly here.

So in summary, this is not something that I'm going to pursue.

The Zone Recovery Method

This strategy does have potential.

I did manually backtest it, but it takes a lot of time because of all the logic involved in entering and exiting trades.

The presenter in the video also says that he uses automation to trade this strategy.

That makes sense.

It's probably the only way that it could be traded successfully.

Since I haven't been able to code up a EA yet, I'm going to provide some observations that I had in my limited manual testing.

I could see this working if the following conditions are met:

• Completely automated with an EA
• Only open trades during high volume times. The London and NY opens would probably be best.
• Wait for high volatility periods before turning the EA on
• The account has to be large enough to carry the necessary number of open trades

My biggest concern is the martingale-ish nature of the strategy.

It's not full-on martingale, but does increase position sizes as new trades are taken.

There would have to be enough money in the account and only a few trades could be taken at once.

That might not be a huge deal. But again, more automated testing would have to be done.

I did some research on this guy and tried to find his automated program so I could test it. Unfortunately, it seems that he has moved on from offering his automated platform publicly and is working on another project in politics.

As I was looking around for a substitute “Zone Recovery EA” to possibly test out this method, I wasn't able to find anything that follows this exact formula.

Well, at least at a price that I was willing to risk. There are some EAs that cost $1,000 or more.

But risking that much on a random MetaTrader Marketplace EA is just dumb.

I did purchase one EA for about $100, that claimed to be a Zone Recovery EA. But after I started using it, I found out that it wasn't following the rules of the original strategy.

Unfortunately, that's pretty common with a lot of EAs out there.

So this method would require more automated testing, but I'm also cautiously optimistic that it could have an edge, and might even live up to the no-loss claim.

Conclusion

So that's the reality of no-loss hedging strategies.

There are no free lunches in trading and any trading strategy that claims to be “no-loss” has to be evaluated closely because it has the odds stacked greatly against it.

In my opinion, it is FAR easier to hedge manually and not rely on an automated trading program. 

If you want to learn the hedging method that works for me, check out my Zen8 Forex Hedging Program.

It's NOT a no-loss strategy, but it works for me and it might work for you too.

The post No-Loss Hedging Strategies (Hype vs Reality) appeared first on Trading Heroes.

That's a good question. In reality, both methods work. It just depends on your personality and which one you like more.

However, if you've been using stop losses, and it hasn't been working for you, then maybe it's time to try something new.

Hedging can make losses psychologically easier to handle and put you in control of when you take a loss. It can be a more consistently profitable way to trade, and it usually gives you more trading opportunities, compared with strategies that use stop losses. 

Now that you understand the overall benefits, let's dive into the details.

The Biggest Psychological Benefit of Hedging

If you use a stop loss to exit losing trades, the market basically decides when you take a loss.

With hedging however, YOU decide when you take a loss.

In principle, taking a loss now and taking a loss later are basically the same thing.

From a psychological perspective however, it can be a huge benefit to be able to take your losses only after you have banked a profit.

This means you don't have to wonder how long your losing streak will be, before you get another win.

You have more control over the process.

Provides Opportunties to Take Smaller Losses

Would you rather take a $2,000 loss…or 3 losses of $800, $600 and $600?

Again, they are basically the same thing. But the difference is in the psychological impact.

I personally like the idea of taking smaller losses, instead of one big loss.

Even after I thoroughly backtest a strategy and know what to expect in terms of losses, it can still be tough to take several full losses in a row.

The great thing about hedging is that you can break up your losses into smaller pieces and roll them off at a time that's convenient for you. 

That can make your losses easier to handle.

More Consistent Returns

I've heard of traders who claim that they are net profitable every day, using hedging.

Although I haven't verified that claim personally, I believe that it's certainly possible.

I do know however, that hedging can be profitable every month, and possibly even every week.

It just depends on how you implement hedging and how much time you have to trade.

Contrast this to other trading methods where it can be easy to have a down month and very easy to have a losing week.

Obviously, hedging is not a holy grail trading method that will guarantee profits.

You will have to put in the time and effort to get good at it, just like with any other trading method.

But in my personal experience, it can be a very consistent trading strategy, when you know what you're doing.

Scalable Across All Time Frames

Hedging is a method that can legitimately be used on all time frames.

I've bought trading education courses where the instructor says that their strategy works on all time frames.

But when you actually backtest it, you realize that most of the time, that's not true.

There are a few stop loss strategies that do work across several timeframes, but in my experience, they are very rare.

In reality, most trading strategies work best on one or two timeframes. 

With hedging however, it can truly be used on all timeframes because it's a framework and not a strict set of trading rules.

No Stop Loss to Trigger

Many traders complain about their stop loss getting triggered prematurely.

This is a legitimate concern when you use stop losses.

That's why many professional traders don't use stop losses.

A legitimate broker isn't going to trigger your stops intentionally. To find out who does, read this.

But even if you put your stop loss in the exact right spot, you can still get stopped out unnecessarily.

Here's how…

Variable Spreads

The spread can differ greatly between brokers.

So if you follow a trading strategy that says to use a 30 pip stop loss, you'll get stopped out a lot more at a broker that has wide spreads.

But if you don't use a stop loss and hedge instead, you cannot get stopped out, no matter how wide the spread at your broker is.

Interbank Market

After the New York session closes, the Forex market goes through a period called the interbank market where the majority of foreign exchange trading transfers from New York to smaller markets like Sydney.

Spreads get really wide during this period and can take out your stop loss. Here's an example of how dramatic the difference can be.

So if you're using a stop loss, you could easily get stopped out if your stop is too close, or you're trading a pair where the spread gets really wide.

However, if you don't have a stop loss and you're using a hedge instead, then you simply cannot get stopped out.

Market Volatility

The final way that you can get stopped out before you expected, is high market volatility.

If you've been trading for any amount of time, you've probably seen something like this.

You went long and thought your stop loss (red line) was safe, but a temporary price spike takes it out. Then it goes in the direction that you expected.

The reality is that these spikes do happen often and the only way to manage your risk without getting stopped out is to use a hedge. 

Adjustable Risk

When you use a stop loss, you have a fixed amount of risk on a trade.

Don't get me wrong, that's generally a good thing.

But hedging can provide more fine-tuning, in terms of how much risk you want to take on a trade. 

For example, let's say that you want to go long here. If you're wrong about the trade, you're going to consider hedging at the red line.

Now if price gets down to the level where you think you're wrong about the trade, you have the following options:

• 0% hedge (e.g. 1 lot long, 0 lot short): You are very sure that price will move up and you can sit around and watch the chart.
• 25% hedge (e.g. 1 lot long, 0.25 lot short): You are pretty sure that price will move up, but you want to have a little downside protection.
• 50% hedge (e.g. 1 lot long, 0.50 lot short): You think price will probably go up eventually, but you aren't sure.
• 100% hedge (e.g. 1 lot long, 1 lot short): You don't know where price is going to go, so you want to “pause” the loss until the price action becomes clearer.
• Or anything in between!

Having a partial hedge gives the market room to move, while limiting your loss. If you are partially hedged and price ultimately moves in the direction you expected, you still make money.

When you use a stop loss, there can only be 2 results…gain or profit.

With hedging, there are many shades of gray.

More Flexibility

I would say that hedging is probably the most flexible trading method around.

It's also one of the purest forms of price action trading, if you don't use indicators.

However, the great news is that you can still hedge, even if you use an indicator based entry strategy.

Some traders have told me that they trade a standard trading strategy with indicators, but they use hedging to exit the trade, instead of a stop loss.

Hedging also allows you to make money in both directions at the same time. You don't only have to be long or short, then wait for a setup in the opposite direction.

You can make money when the price goes up and down.

So if you don't like being confined to a specific set of rules all the time, Forex hedging might be the alternative that you've been looking for.

Earn Positive Interest

There can be times when you can actually make positive interest every week by holding a hedge.

This will depend on the interest rate environment between the central banks, but it's possible to hold a partial hedge and earn interest.

For example, the swap on the USDJPY is currently 11.55 on the long side and -19.38 on the short side.

So if you held 1.0 standard lot long and 0.25 short, you would be partially protected if price drops.

But the great news is that you would be earning net positive interest on the hedge. 

In fact, you could be 50% hedged and still be making a small amount on the swap interest.

To me, this is the closest thing that you'll get to passive income in Forex trading.

Now you should obviously do this in an area on the chart that looks like a good place to go long. If you get a good entry and price stays above your entry price for a long time, you simply accumulate profits.

Just be sure to track the swap rates of the currencies you trade because they can change suddenly. 

Be Unpredictable

This might sound like a bad thing, but it's actually a very good thing.

In a world where AI and algo trading is becoming increasingly popular, it's becoming easier to figure out the mechanical trading systems that successful traders are using.

If enough traders start making money with a particular trading strategy, someone somewhere in the world will figure out how to reverse engineer it and turn it into an algorithm.

If enough money starts getting traded with these algorithms, the systems will start to lose their profitability.

I know that those are a couple of big “ifs,” but it can happen, especially with the power of computers nowadays.

However, since hedging does not rely on a mechanical set of rules, it cannot be reverse engineered and is more likely to work in the future. 

Hedging will also allow you to adapt to changing market conditions, so you won't get stuck with a trading strategy that stops working.

More Fun

I feel that hedging is also more fun than other trading strategies because it's like figuring out a puzzle.

You have to figure out how to get out of a hedge and get to flat as soon as possible. There are many ways to do this, and working through the options is a fun exercise.

Contrast that to following a set strategy every day.

You follow the same rules and there is no variety.

Nothing wrong with that obviously. It's great when you can rely on a trading system to make money.

But some people might get a little bored.

So if you have trouble motivating yourself to trade, even if you're consistently profitable, then hedging might be a great way to keep your brain engaged in the process.

Final Thoughts

Hedging can be a great way to trade Forex.

It's not for everyone, but if you resonated with the reasons above, then it could be a great method for you.

They key is to give it a try in a demo account and see how you like it.

Also be sure to download my free guide to Forex hedging here.

The post Advantages of Forex Hedging vs Stop Loss appeared first on Trading Heroes.

One of the “golden rules” of Forex trading is to always use a stop loss. But is a stop loss always necessary? Certainly not.

Forex can be traded without a stop loss, while still using proper risk management, through the use of hedging. By not using a stop loss, traders can avoid getting stopped out by rollover and volatile market conditions. 

See hedging in action in this video. Don't get me wrong, stop losses are an excellent way to limit risk.

But there's a more creative way to limit risk and make money on both sides of the market.

Can You Still Limit Risk Without a Stop Loss?

Of course.

But like with anything else in life, there are trade offs.

The solution to trading without stops, while maintaining proper risk management, is to use hedging.

When you hedge, you hold long and short positions at the same time.

A hedge effectively acts like a stop loss, but also allows you to potentially profit on both the long and short sides, as price moves up and down.

Yes, You can do this in a US Forex Account

Before you write this off because you're in the US, this can be done in a US account. You just have to know a couple of tricks, which are perfectly legal. 

The first trick is that you have to separate your longs and shorts into different accounts. Many brokers make it easy by allowing customers to open multiple accounts or sub accounts.

Another thing that you have to do in order to hedge in a US account is to enter position sizes that are different. Using nano lots makes this easy, without taking on necessary risk.

When you do these 2 things, it's easy to hedge, even if you're in the US. To learn more about how to hedge in a US account, read this tutorial.

Why You Might Not Want to Use a Stop Loss

Stop losses work well for most traders. but there are a couple of reasons why you might not want to use a stop loss. Let's go over them here.

Rollover Can Stop You Out

When the New York session closes, the spread increases significantly for about 30 minutes. Here's and example of how this works. The red and blue horizontal lines are the bid and ask lines.

After New York closes, the lines are close together. The box on the the right side is an indicator that shows end of the New York session.

But during rollover, which lasts for about 15-30 minutes after the NY close, the distance between the lines expands significantly.

You can see how many pips the spread typically is during these times, by looking at a historical spread tracker like this one. The spikes show the rollover times.

Ask your broker if they provide this data.

When price is really close your stop loss and rollover kicks in, you could get stopped out. If you have a pending order open, your order could also get executed.

So you need to understand when this happens and how wide the spread can get on the pairs that you're trading.

Greater Flexibility

If you don't like the feeling of losing money when you get stopped out, hedging provides an excellent way to flow with the market.

You can scale in and out of your positions, without having to use a hard stop loss.

Of course, this is assuming that you manage your positions correctly. 

Trade Forex Without a Stop Loss by Using Hedging (get the guide)

You can limit your risk without a stop loss by using Forex hedging. This type of hedging works best in Forex.

I don't know of any other market where it's so easy to incrementally close and add to your trading positions.

To get started with hedging, get our free Forex hedging PDF guide.

Final Thoughts on Trading Without a Stop Loss

So as you can see, it's possible to trade without a stop loss, while still managing your risk.

For most traders, the best way to manage risk is to use a stop loss. But some traders like the flexibility that hedging can provide.

The herd (most people) will tell you that you always need a stop loss. As I've shown here, that's not always the case. Learn to be an independent thinker, and you'll spot opportunities that others are missing. 

If you want to learn more details on how to hedge, keep an eye out for our new Zen8 Forex Hedging course that will be coming out soon.

The post How to Trade Forex Without a Stop Loss appeared first on Trading Heroes.

In this post, I'll explain how the carry trade works in Forex trading, the risks and the benefits. I'll also show you how to backtest it, if this is something that you're interested in trading.

The Carry Trade Explained

A carry trade is when you borrow a currency that has a low interest rate, then use that money to buy another currency that pays a higher interest rate.

You make money on the difference between the interest rates.

In order to see the interest rates for each currency, you can look at any up-to-date list of central bank interest rates.

Here's a good one from FXStreet.

For example, if you did a carry trade where you borrowed Swiss Francs and bought US Dollars, you would be making money on the interest (also known as rollover) because the interest rate of the Federal Reserve is higher than the interest rate of the Swiss National Bank.

How much would you make, you ask?

Well, you can just jump over to a rollover calculator and figure it out. Most brokers have one.

This is an example from Oanda.

So if you went long a standard lot of 100,000 currency units of USD/CHF and held it for 24 hours, you would make $6.16 in interest.

One important thing to note is that the interest rates listed on the Oanda website are different from the actual central bank interest rates.

This is because all brokers reduce the interest rate on both sides as a transaction cost. It's like the spread on a trade.

Check with your broker to see their rates because it could be very different from the central bank rates. 

But it sounds like easy money, right? You just sit around on the beach and collect the interest…like a bank.

That's what some websites would like you to believe.

But it's not really that easy.

Here's why…

Is the Carry Trade Safe?

I cringe whenever I see websites mention that the carry trade is low-risk.

It's not.

You can actually get into a lot of trouble with the carry trade, especially if you are leveraged.

When I interviewed professional Forex trader Kim Krompass, she mentioned that her first big blowup happened when she was only doing carry trades.

The reason it's not safe is because although your interest rate is risk free, there is still position risk in your trade.

Let's say that you went long USD/CHF, like in the example above…

…then this happened.

That's about 1,800 pips in a matter of a few hours. If you were long a standard lot (100,000 units), you would have been down approximately $22,000 during that move. 

At $6.16 per day in interest, it would take you almost 10 years to make up that loss.

As you can see, the carry trade is far from risk-free. 

However, if you manage your risk properly and enter the market at a good spot, it can be possible to build up a nice interest-bearing position, while minimizing your position risk.

If you want to learn how I do this, check out my Zen8 trading method.

Now that you understand how the carry trade works, I'll answer a few commonly asked questions about this trade.

What is Positive Carry?

Positive carry means that you are making money on the interest rate differential between the two currencies you are trading. Negative carry means that you are losing interest on the trade.

Remember that positive carry should never be an excuse to stay in a losing trade.

Always consider your position profit or loss first. 

Who Should Worry About Negative Carry?

If you are a day trader or trade short-term, then you probably don't have to worry about negative carry. However, if you are a position trader and will hold your position for months or even years, then rollover needs to be considered because the interest can add up.

What is the Japanese Yen Carry Trade?

The Yen carry trade refers to a trade where you borrow Japanese Yen and buy higher interest rate currencies like the US Dollar. This trade was popular in the early 2000s. It's said that many Japanese housewives used it as a way to invest their family's money during a time of zero interest rates in Japan.

Should I Trade the Turkish Lira?

At this point, you're probably looking at the interest rates of central banks around the world and trying to figure out the biggest spread. Naturally, the Turkish Lira stands out because at the time that this blog post was first written, the Lira has an interest rate of 24%.

Well, it's high for a reason…

Countries with higher interest rates are generally less stable. Therefore, they also have larger position risk because big moves can happen suddenly, liquidity is lower and spreads are wider. 

Here are examples of countries with higher rates:

• Russia: 7.75%
• Mexico: 8.25%
• Egypt: 14.75%
• India: 6.25%

Even though it's tempting to trade these currencies, the risk isn't worth the reward. Stay with the major central banks, the carry trade is risky enough.

Final Thoughts on the Carry Trade

So that's how the carry trade works. Now that you understand the benefits and downsides I hope you can use this information in your trading.

The carry trade isn't for everyone. But if you manage the risks, it's another trading strategy that you can add to your arsenal.

As always, be sure to backtest the carry trade before ever trading it live.

If you have any questions about the carry trade, leave them in the comments below.

The post How Does the Carry Trade Work? appeared first on Trading Heroes.

(Yes, you can do this in a US account, I'll show you how later in this post.)

A couple of months after I started experimenting with hedging, my friend asked me to teach him how to trade Forex.

But there was one condition…

He wanted to learn a strategy that was super conservative. Something about making it easier to explain to his wife.

Fair enough.

I saw the potential in hedging, but it still needed more forward testing.

So I told him that I have a method that could fit his criteria, but it still needs some testing.

I welcomed him to test it with me…

Even if it didn't work, he would learn the basic concepts of Forex trading, get practice executing trades and gain a better understanding of what type of strategy would suit him best.

He was game, so over the next 3 months, I went over to his house 2-3 times a week and we traded the London open. He traded a demo account and I traded a small live account.

…and guess what?

We both made money at the end of…every…single…month.

(past performance does not guarantee future results)

At that point, I was confident that it worked and my friend had a firm grasp of the concept, so we stopped meeting up.

I traded it for another 3 months and I was profitable during those months too. 

Then I stopped trading it…cold turkey. 

Later in this post, I'll share with you why I stopped.

I'll also share why I started trading it again. But before that, I'll show you the method and help you figure out if it is for you or not.

[toc]

Is Hedging For You?

But enough about me, is hedging for you?

It depends on your personality.

Unlike other traders on the internet, I will never blindly tell you that any one trading strategy is the only one you need, because that is simply not true.

The key is to figure out your Trading Personality first, then learn strategies that are a good fit for your personality.

It's like driving a Ferrari…not for everyone.

It's a small shift in where you focus your attention, but it can have a huge impact on how quickly you progress as a trader.

You can spend years spinning your wheels and chasing shiny new trading systems or you can become more aware of what you are good at in the beginning and focus only on those types of strategies.

So if hedging is something that resonates with you, then keep reading.

However, if you still think that hedging is dumb, then stop reading now and go find another strategy. I won't be offended.

Also remember that this is the way I trade it. There are many other different hedging methods out there.

So if you see a way to improve on this idea, go for it!

The Biggest Benefit and Drawback of Hedging in Forex Trading

If you are considering using my Forex hedging strategy in your trading arsenal, then you need to understand what you are getting into.

Regardless of what you have read before, there is no such thing as a “sure-fire” way to profit with hedging.

There are no free lunches in trading.

Every benefit of a trading strategy has a corresponding drawback.

Biggest benefit of hedging: Consistent returns (when done correctly).

Biggest downside of hedging: Low returns per month, so you need a fairly big account or trade for investors if you want to trade it full-time.

Alright, if you are still reading, then you are probably into this kind of thing.

…or at least you are curious.

Before I show you my hedging method, let's get a few definitions out of the way. If you already understand these concepts, then skip down to the section on The Core of My Forex Hedging Strategy.

What is Hedging a Position?

Hedging is when you hold a long and short position in the same currency pair, at the same time.

This may not make sense at first because you don't make any money if you do this. But hedging can be a great way to limit your risk, while the market figures out which direction to go.

Once the market “shows its hand” and starts trending you can start to profit from your winning trades and minimize the losses from your losing trades. Partial hedging can also be used to reduce your loss if you are wrong about a directional trade.

Why Hedge?

The bottom line is that nobody knows, with 100% accuracy, what the market will do next.

Therefore, holding long and short positions at the same time can allow you to profit from price movements in both directions.

If you use my method, you can also profit while you reduce your exposure to your losing trades.

How to Hedge in a US Account

This video is a little old, so bear with me. The concepts are exactly the same, just the platform is different.

Instead of using the Java platform, I now use TradingView.

The result is the same…you can get around the hedging and FIFO rules.

So if you live in the US, you can do this too.

The Core of My Forex Hedging Strategy

I call my Forex hedging strategy Zen8.

It is super flexible and there are a ton of nuances to this method. I will share these details with you in later blog posts.

But in this introductory post, the most important thing that you can learn is the simple concept of the Roll-Off.

This is the core of my Forex hedging strategy and this one idea alone is very powerful.

Here's how it works:

When you close a winning trade, you will Roll-Off 50% of your gain from your losing trades.

So you still take a loss from your losing trades, but you do it at a net profit.

To get the complete guide, download the PDF here:

Roll-Off Example

For example, if you closed a long trade for a +$500 profit, you will close, or Roll-Off, a -$250 loss on your short position immediately after you close your long trade.

This way, you will still have a net profit of $250, but you will also reduce the lot size of your losing position.

From there, you can put on another long position to hedge your existing short position. Since your short position is now smaller than it was originally, you have successfully reduced your risk to further adverse moves.

Then you keep working back and forth between hedging and doing Roll-Offs until you are able to close all trades.

Your goal in Zen8 is to get completely flat or have no open positions. This allows you to take a break and find a good spot to get back into the market again. 

Benefits of Zen8 Over Other Hedging Methods

Other hedging methods will take more trades (or even double down) to offset losing positions. In my opinion, that is the worst thing that you can do because you will eventually get stuck with a huge losing position on one side of your books (buy or sell side).

I've seen a couple of high-profile hedgers go down this way. 

But if you are diligent about doing your Roll-Offs and continually reduce your position sizes (even if the profits are small), you will be able to keep your risk low and your returns consistent.

How to Get an Exact 50% Roll-Off

At this point, you may be wondering how to Roll-Off exactly $127.32.

The answer is nano lots. They allow you to custom tailor your hedges and Roll-Offs, even with a tiny account.

If you start trading a large account, then you don't have to use nano lots. But until then, I would highly suggest that you use them because they give beginning traders a huge edge and makes this hedging method possible in a small account.

How to Get Started with Zen8 Forex Hedging

This trading method can be backtested. But this is one case where I believe that it's actually more beneficial to open a demo account and start beta trading it as soon as possible.

To get maximum benefit, you should do both at the same time. 

Backtesting works very well when you have a defined set of rules for entry, exit and trade management. However, given the highly discretionary nature of this trading method, I believe that it's far better to just dive into it.

How will you know when you are ready to stop trading in a demo account?

That's entirely up to you. But I believe that a good rule of thumb is if you are able to get yourself out of a bad situation at least twice, then you are probably ready to go live with a very small live account.

I would define a bad situation as having a position that is down 500 pips or more. You learn a lot about how to be a good hedging trader when you are stuck in this position.

You might even consider putting yourself into this situation on purpose, so you understand why should should avoid getting too far in the hole. 

Which Pairs to Trade?

It can be tempting to trade several pairs at the same time.

I've found that sticking with one pair is the best way to trade Zen8…at least in the beginning. This gives you enough margin to safely work your way out of trouble.

You can trade whichever pair you are most comfortable with. However, I would suggest staying away from pairs that have a large spread or are highly volatile.

Where to Enter the Market?

In reality, it doesn't matter. That's the beauty of hedging.

Seriously.

Hire a monkey to pick your entry point. Have your kids pick an entry. Use Tarot cards.

I will probably get some blowback from that statement.

But if you think I'm nuts, then you don't truly understood what I have written above.

Go back and read the Roll-Off section, then try it in a demo account.

That being said, you will make your life easier if you choose a high-probability countertrend turning point. Again, just pick one…support and resistance or RSI are good places to start.

Position Sizing

Start waaaay smaller than you think is safe. A good rule of thumb is to calculate what would happen if your position was down 1,500 pips.

This could happen, so be prepared. Again, you will need to demo trade for some time so you can learn how to get out of these situations.

That said, I believe in having a 2:1 hedge, at most. If you are unsure about the direction of the market or you want to walk away from your trades for awhile, then it's better to have a 1:1 hedge.

Again, this is a personal preference, so do what works best for you.

Start with 1:1 and go from here.

The Worst Thing That Can Happen in Zen8 Hedging

Without a doubt, the worst thing that can happen to you in Zen8 hedging is being stuck with a large position that is down 500 pips, or more, on one side of your books.

I've been there and it SUCKS.

For example, if you have a large long position that is down 500 pips and you are flat on the short side, it will take much longer to Roll-Off enough profits on the short side to close out that 500 pip deficit.

You might think that the worst thing that can happen is the market moves violently, like it did during Francogeddon. That is certainly a risk, but if you are properly hedged, that shouldn't affect you.

The losing position will be offset by the winning position.

Download the Free Zen8 Forex Hedging Strategy PDF

To get more details on my Zen8 hedging method, click the button below to download my free Forex Hedging Strategy PDF. In this PDF guide, you will learn things like:

• My favorite pair to trade with Zen8
• What to do when I picked the wrong market direction
• How to take advantage of interest rollover
• And more!

Why I Stopped Hedging (and Why I Started Up Again)

The reason that I stopped hedging, and started up again, can be summed up in one word: mindset.

Our minds are funny things.

They can cause us to do things that move us away from things that we want and towards things that bring us pain.

Someone in my mastermind group pointed out that some people have a subconscious need to solve problems. Once they solve a problem, they get bored and look for another problem to tackle.

I immediately identified with that statement and realized what I was doing.

So if you have some success with this hedging method, but you start to have some doubts, then ask yourself why you are going to quit something that's working.

Here are the reasons I told myself that I should stop trading Zen8:

It's Too Stressful

My stress was self-imposed. I was micro-managing my positions and was always anxious about them. Once I adopted more of a swing trading mindset, hedging became easier and more fun.

It's Not a “Real” Trading Strategy

No stop losses, are you crazy?

Conventional trading wisdom says that you always need a stop loss. That is true for the most part, but I've learned that there are exceptions to every rule.

This is one of those exceptions. If you are properly hedged, then stop losses actually aren't necessary.

The Gains Aren't Worth It

Another reason that I stopped trading Zen8 is because it's a low return trading strategy. I was stuck between trying to learn how to build a small account and how to build a track record to attract investors.

Depending on what day of the week it was, I would lean one way or the other. That was a poverty mindset.

Why not do both?! That's an abundance mindset.

Why I Started Up Again

Fast forward to 2017 and I went to the Truth About FX Conference in London. One of the speakers was Gonçalo Moreira, the head trader at FXStreet.

You can watch his trades in real-time here.

His shared his Coastline Trading Strategy in his presentation and it was very similar to the way that I had been hedging.

He started trading this way because he noticed that a lot traders who won online trading contests were hedgers. That's when everything clicked for me. 

Gonçalo's track record and research finally gave me the validation that I needed to continue trading my Zen8 method. It's weird…even if we see a method working, sometimes we need validation from someone else to start trading it.

Anyway, I'm grateful to Gonçalo for sharing his method. I also encourage you to keep learning new things and attend trading events.

Here are my results since I started trading it again.

Remember that with my hedging style, I'll never have a huge winning month. But I'm going for consistent profits of 0.5% to 2% per month.

Conclusion

A word of warning about this method…

It can be very easy to start seeing profits right away. This can lead to Acute Cranium Enlargement (ACE) and taking oversized positions.

If that happens, then you are in for an education in digging yourself out of a deep hole. It's possible, but it's also very painful.

Trade conservatively and Zen8 can be a lot of fun.

Get cocky and it can become a total grind and you might feel like poking your eyes out with a rusty nail.

So start small in a demo account and figure out what works best for you.

Happy Hedging!

If you want to learn more about how to hedge in Forex, join my Zen8 Forex Hedging Program.

The post My Best Forex Hedging Strategy for FX Trading appeared first on Trading Heroes.

Coastline Trading is probably nothing like you have ever seen before. It breaks all the “rules” of trading and it still makes money.

You could call it the “bad boy” of trading systems. 

If there is anything that I've learned since starting this site in 2007, it's that there are some trading methods that do not fit neatly into the trading rules that you read about online or in books. Granted, a smaller number of people are successful with these methods because they are so different.

Nonetheless, for certain personality types, this can work.

So what makes Coastline different? 

Well, on the negative side:

• It has no stop losses
• It has permanent drawdown

But there are some big upsides:

• You don't need to time the market. In fact, a random entry can still make money.
• When traded correctly, it can be very consistently profitable.

…wait, rewind…

No stop losses? Isn't that why most traders blow out?

Usually.

But I'll get into how that can be avoided in this method.

So if you are tired of trying to time the market exactly, then this might be a trading style that you want to explore. Like with any other trading method, there are risks associated with this method too.

Remember, there are no free lunches in trading.

However, if this still interests you, then keep reading…

Before we get started, my goal in writing about these different types of trading systems is to expose you to different trading ideas. It is your sole responsibility to figure out if this system fits your personality or not. I'm NOT saying that this is the best trading method in the world. But for the right personality type, it could be a great fit. 

Coastline Trading is…

Simply put, Coastline is a hedging strategy.

But those never work, right?

Depends on who you talk to. 

I have seen it work in a few instances. If you look up FX Viper, he is another high-profile hedger that manages money (check his YouTube videos).

Back in 2011, me and a friend also came up with a flavor of hedging that works too.

So I know that this can work.

Coastline Trading is the brainchild of Gonçalo Moreira, currently THE trader at FX Street. He trades the company's money with this method and teaches it on the website.

Since it is a hedging strategy, you don't really need stop losses. You just need to understand net exposure and stay well within margin limits.

How did he come up with this method?

Gonçalo did his own study of the past winners of trading contests and he found that many of them traded a very similar system. So he reverse engineered the method and came up with what he calls Coastline Trading. He also added some safeguards and monitoring methods that help you understand your risk at all times.

Now, you are probably thinking…

But what about traders in the US? They can't hedge right?

Not so.

This tutorial will show you how to do it.

Since this is Gonçalo's proprietary trading strategy, I can't give too much away here. But if you are interested in learning more about it, you can listen to his conference presentation or head on over to his homepage on FX Street.

There is a lot of information on the website for free, including some webinars that he did.

Backtesting the Coastline Trading Strategy

Yes, this strategy can be backtested. I confirmed this with Gonçalo in person. 

He did a lot of backtesting before ever trading real money.

…and if you are interested in this strategy, this is a must.

Since this method doesn't have set entry and exit rules, backtesting is more for practicing how to get out of bad situations. You should push the limits of the system in backtesting. Then you will understand where to set your risk boundaries in live trading.

Conclusion

I hope that this trading method gives you some ideas. It may not be a trading method for you, but I can see where it could be a great compliment to other trading methods.

There is much more to it than I have explained here, so be sure to head on over to Gonçalo's page to learn more.

Happy trading!

P.S. – If you want to learn my style of hedging, get it here.

The post The Coastline Trading Strategy: The Bad Boy of Forex Trading Systems appeared first on Trading Heroes.

If you wish that you could implement Forex hedging with a US Forex broker and not have to follow the FIFO rule, then this post is for you.

There are ways to legally get around both of these restrictions, if you do a little advanced planning.

Before I get started, please read this entire post, especially the warning at the end.

These are advanced tactics and definitely not for beginners!

Even if you are an advanced trader, I would not recommend using these tactics unless you have a clear strategy that you have tested and you are comfortable with.

Doing this is actually pretty simple and if you thought about it long enough, you probably would have come up with this on your own.

But if you haven't, then keep reading because I will show you exactly how I do it.

If you still don't believe that this is possible, then I have also included a video demonstration.

As you know, things may change over time and this may not work at a later date.

So if you are interested in doing this, be sure to test it in a demo account before you use it in live trading.

What do FIFO and Hedging Mean?

If you are new to trading, let me explain these two concepts really quickly.

Here are the informal definitions for each term:

• Hedging: Holding both long and short positions for the same currency pair, in the same account.
• FIFO: Stands for: First In First Out. If your broker is required to adhere to FIFO, then for each currency pair, they must make you close out your oldest trades before you can close out trades that you opened more recently.

Traders in the United States have to adhere to these rules, per US law.

These laws were created because allowing hedging and non-FIFO trading can be confusing, especially to new traders.

But if you are a more advanced trader and can handle these more complex trades, there is still something you can do about it.

How to Forex Hedge in a US Based Account

Hedging Forex trades is actually quite easy, just open two different accounts…one for longs and one for shorts.

The key to doing this safely is to remember which account is which.

If the balance one account gets low and the other starts racking up profits, just transfer money between the accounts to balance them out.

Make sure that your broker allows you to transfer money between accounts.

I don't see why this would be a problem, but you never know.

My broker is Oanda and by using their Java trading platform, I can open one account in one browser like Firefox and use another browser like Safari to open another instance of the trading platform and have the other account open at the same time.

Because I need to keep all of the longs in one account and all of the short in the other account, having a different background color for each account helps me keep track and reduces order entry errors.

Here is an example:

How to Get Around FIFO and Forex Hedging

Just like with hedging, we are still subject to certain rules, but if you know the workarounds, you can take advantage of them.

The process does take a bit of advanced planning, but it works great.

I don't mind so much that you cannot hedge, because I don't do it.

But I am really against the FIFO rule.

To me, it does more harm than good.

But that is almost irrelevant because I know how to get around it.

The trick is to use different sized lots.

The rules state that if a previously entered position is of a different size than later positions, it is not subject to the FIFO rules.

Since Oanda allows nano lots (which is awesome because it significantly reduces your risk, especially in small accounts), you can enter different lot sizes without it significantly impacting your risk.

Here is what I mean…

For example, the smallest lot size most brokers allow you to enter are micro lots, which are 1,000 currency units.

However, since Oanda allows nano lots (1 currency unit), you can enter a second position at 1,001 units and a third position at 1,002 units.

Because they are all different position sizes, you are allowed to exit the 1,001 unit position and the 1,002 position before the 1,000 unit position.

You just have to do some advanced planning when it comes to your order entry.

Break down your positions into unit sizes that you want to incrementally exit.

So if you have a total position size of 10,000 units, you may want to exit at 1,000 unit lots, so you would have to enter 10 separate positions to allow for smaller exit sizes.

Keep in mind that if these are sell orders and you accidentally enter a buy order for that pair in that account, it will still subtract those units from the oldest open position.

So in our example with the three positions, if you accidentally bought 100 units, it would be subtracted from the 1,000 unit position, giving 900 units after the mistake.

Here is what it would look like with the first two positions:

When Hedging in Forex Doesn't Work

The hedging workaround should work for most brokers, but test it out in a demo account before you proceed.

Do not make any assumptions.

There are some brokers and platforms for which the FIFO workaround doesn't work. In fact, there are probably a lot of brokers where it doesn't work.

For example, when I looked at the proprietary FXCM trading platform, they blend trades together and they do not allow nano lots, so you could not use this method.

Even if they did allow nano lots, instead of having two positions of 1,000 units and 1,001 units (like with Oanda), you would have one position of 2,001 units at the average entry price.

So even if you did only want to exit the second 1,001 unit trade, you wouldn't be getting the entry price for that first order.

The entry price would be the average of both positions.

Let's take a look at a (very) simplified example…

If you entered the first 1,000 unit short position at 100.00 and the second 1,001 position at 105.00, you would have a total blended position of 2,001 units with an average price of 102.50.

If the current price is now 104.00, you could not exit the 1,001 unit position at a 100 pip profit.

Any exit of this position would incur a 150 loss.

When we are forced to take off the oldest position first, there is no opportunity to take some profit off the table on the more recent trades and wait for the older position to become profitable.

Yes, it is true that blending and not blending positions is theoretically the same thing at the point in time when a partial position is closed out. 

But in reality (the case above, for example) it would show up as losses on our P/L when it could have been a profit.

The bottom line is that if you want to do this, be sure to test out a demo account with a prospective broker first.

There is no use in going through all the trouble to register and fund an account, only to find that your broker blends positions or does not allow different position sizes.

Also keep in mind that your position size might not require nano lots.

If you are trading 100,000+ unit positions, an extra 1,000 unit micro lot might not make much of a difference to you and you might still be able to use this technique.

It's all relative.

Don't Believe Me? Here's Forex Hedging and non-FIFO Trading in Action

Alright, check out this video and I will show you how this works in more detail.

A Final Word of Caution on Hedging Forex and the FIFO Rule

Although I don't agree with the US laws on hedging and FIFO, they are designed to protect traders from themselves because hedging and managing multiple positions can get complicated real quick.

They are advanced strategies and should only be implemented after you have a firm grasp of the basics and actually have a trading system.

Even then, these strategies may not work with your systems and your personality.

So the bottom line is that just because you now know the workarounds, it doesn't mean that you should use them.

Again, these methods may not work with all brokers.

Always test your ideas in the lab and in a demo account first!

The post How to Get Around FIFO and Hedging Forex Trades With a US Broker appeared first on Trading Heroes.

Since the NFA changed it's rules on FIFO and hedging Forex, we are not able to take opposite trades in the same currency pair, in the same account. I did get a couple comments on this blog about how it's unfair and how the ‘man' is trying to screw them, boohoo, blah, blah, blah.

This didn't bother me at first because I never hedge just for the sake of hedging. I believe that hedging can work for some people, but many times it's just a sign of indecision.

However, during the course of normal trading, I have realized that there are times when I see a good scalp trade in the opposite direction of my longer term position. Having only one account with the new rules does not allow me to take that second trade.

So what is the answer? Cry about it to anyone who will listen?

Of course not…

Why You Should Use a Forex Sub-Account

Just open a second account or a sub account, depending on your broker. It may be more beneficial to open an account at another broker just so you have a backup in case your primary broker is down for some reason.

However, if you are strictly using a hedging strategy, a sub account would probably be best because there will probably be a variance in spreads between brokers, which will eat into your profit.

Oanda features sub accounts so I can trade in different accounts on the same screen. Makes it very simple but you have to weigh the pros/cons of each broker. Your needs may be different from mine.

For example, Oanda has really tight spreads, allows variable lots sizes and is a reputable company, that is why I execute most of my trades with them.

The downsides are that they don't use the MT4 trading platform so I can't use any auto-trading programs in that account and their leverage is very low (compared to other retail brokers), only 50:1. That is fine for ordinary trading, but for more aggressive techniques, I need much bigger leverage.

For those reasons, I opened an Alpari-US account and will be reopening an IBFX account. The Alpari account uses MT4 and and pretty tight, stable spreads, so that is good for trading an autotrader program.

The IBFX account offers up to 400:1 leverage so that is what I need to trade the Counter Trend System. In this system, it is more important to me to have big leverage than to have the tightest spreads to avoid margin calls.

Conclusion

As you can see, sub accounts and multiple accounts can be VERY useful.

They are not only good for hedging, but can exploit the strong points of a broker, depending on your needs. I think the only people complaining about the new NFA rules are the people NOT making money.

I hope your trading is going well!

Update: Since this post was originally written, I've developed a hedging strategy. You can learn about it here.

The post The Beauty of Sub Accounts in Forex Trading appeared first on Trading Heroes.