When To Hedge and When Not To Hedge

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Video Transcription:

Hello, traders. Welcome to the Pro Trading Course and the sixth module, Hedging. In this lesson we’re going to teach you when to hedge and when not to hedge because it is important to understand that you cannot hedge every position that you take. In fact, you are going to be hedging less than 10% of your positions.

And the reason is because if you start trying to hedge every single position, well, you are going to end up losing money because most of your positions will go above or will go beyond those areas where you are trying and looking to hedge, and they will hit those stop losses. And by hitting those stop loses they will erase some of those profits that you are making with the actual trade.

When To Hedge and When Not To Hedge

So we’re going to go back again, and I’m going to look at the U.S. dollar/Japanese yen. And right here we assume that we had a short position on the US dollar/Japanese yen at around 109-83. So what I’m going to do, I’m going to go ahead and put on my stop losses where they originally were, and of course, this is the area where we hedge, okay?

Now, this is an excellent hedge, and the reason this is an excellent hedge is because we already went 260 pips in our direction, which is a very big move. Not only that, but we have retraced more than 200% since the last time price retrace. Now, let me rephrase that. We have moved more than 200% since the last retracement.

The last retracement price was when we rode to the downside and we went ahead and retested the broken zone right here. I’m sorry. Let me put this again above our entry. So this is the area that was retested. and as you can see we already moved more than 200% in the direction of our trade, which means that by moving more than 200% it is normal that price is going to be retracing more deeply. In fact, we have retraced 327-2 at the area of rejection.

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Now, by calculating the move of the…well, the actual moving price from the last retracement you can know for sure if we are in a zone where price is going to retrace deeply, all right? And the reason we kneed to know if this is a zone where price is going to retrace deeply is because if we find that zone, it means that they are going to be, in this case, buyers.

If we are long we are going to find sellers. We are going to find an adverse pressure to our trade, which will make price to retrace deeply, and we want a deep retracement when we are hedging, all right? And not only that, remember that if we are in an area the price is probably going to bounce from, because like in this case we are finding buyers, those buyers might push price above our stops and above our actual entry, and our hedge will become now our position.

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Remember that this is why we hedge. We are not hedging to make 20 pips on each retracement. We are hedging because we are protecting our trade from adverse pressure. Now, if we go ahead and take this Fibonacci retracement, and let’s assume that we missed this entry and right now we are short from this area right here. Let me move the entry to the 109.053 zone and let me move the stops above the previous high.

You can see this is where we found buyers, we’ve made a new high, and then we continue to the downside. So in this case let me just…like this entry because we are not hedging just now. In this case we are in for just 139 pips. This means that price has moved 139 pips from our entry. It really doesn’t matter how much price has moved, we need to take half more [SP] position here because this is a very strong area.

We already know this. But what we didn’t know is that we cannot hedge our position at this area. If you hedge your position right here, you are hedging at 100% retracement and basically you are burning money, okay? Why? This is not a good place to hedge because we have not hit the hedging limit just yet. Now, I’m going to go ahead and move to the daily chart and look for maybe areas or around these hedging retracements, all right?

I think we can find one right here if we take this. Low let me just change the color to red, and go back to the beginning of the chart. If you can see here this new area that we just found, let’s go back to the hourly, this new area that we just found is right at the 200, at the 200 retracement, from…well, at the 200 move from this retracement.

Now what we need to do is not to hedge here, but take half of our position, move our stops to break here, and if we have a retracement, well, so be. It’s a small trade but we are looking for a move to the downside. If this doesn’t happen we are going to be taken out on a very small profit right here. But if we break to the downside we are going to hedge right above here, at this 106-35 level, which confluences with our 200 retracement.

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It’s very, I mean, it’s probable that we are going to find buyers at the 161-8 just like we did right here. You can see we did find some buyers at the 161-8. But our hedge zone, if you want to call it that, is this one right here, around the 106-35. And the reason is that it is very possible that price is going to hit this zone then retrace back to the 107 for a new setup for a short opportunity.

And the reason we think that that might be possible is because if you go ahead and grab the default or the Fibonacci retracements you can see that if price retraces back to the 105-65, it’s going to be retracing 50% of the move from the 109-15 to the 106-198, which is completely a normal retracement for a move of around 290 pips. So basically you are not going to be hedging if you don’t hit the hedge retracement levels.

And if you just, well, if you just got into your position and are in a day trade, you are not going to be hedging at all. But if you are in a position that it’s only 139 pips, you are not even at 100% retracement, well, you are not going to hedge. You are going to wait for price to hit your hedges, your hedges ratios, and you are going to find confluence with strong levels on higher time frames.

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