Hedging Examples

Screen Shot 2014-06-17 at 11.12.19

Video Transcription:

Hello, traders. Welcome to the Pro Trading Course and the sixth module: Hedging. In this lesson, we are going to go through an example of a hedge I made on the US Dollar-Mexican peso and by looking at this example, you are going to see why it’s important to try to hedge those long-term positions as they go on to our hedging ratios.

So we are going to start by looking at the long position on the US Dollar-Mexican Peso. We were long right here around the 18 level and…well, we had our first target right here at the 1873 level. Remember that when you’re trading where when you’re [inaudible 00:00:44] trading, you have to pay attention to those technical levels and you have to take profit when you hit them because you don’t know if you’re going to bounce off of them. But the thing is that this technical level was not good for a hedge. Remember that our hedging ratios are above the 1618 extension.

So what we going to do here or what I did here is that I took half of a position for a 736 pip win. That’s a huge win in any forex trader’s book. But I took out half of our position, half of my position, and then I moved my stops to break even. I know that my stops are below this base right now, but this is after price moved up, retested the level and then moved on to my hedging ratio.

Hedging Examples

Now, I’m going to explain to you why I was looking at the 2272 extension as my hedging ratio. The reason is that we were trading inside of a channel, more like a pitchfork actually, and the 2272 extension hits perfectly with the pitchfork’s resistance. Now this is based on pure technicals, but I assure you that here, were a lot of sellers, and it really doesn’t matter if this level was profit-taking from long position such as mine or there were actual sellers in the market. The reaction in price is the same. It’s going to reject this zone and then it’s going to retrace.

Now, after price moved to my hedging spot, what I did is I took half of the remaining position so I was only writing a quarter of my original position at the 1926 level. But that is really okay because I had already made more than a thousand pips, actually, more than the 1200 pips on the long side. So I decided to take half of the remaining position and leave one-quarter of my initial position and move my stops to the 1860 level which is the next logical spot to move or to trail our stops. What happened is that we had this huge rejection candle. When this rejection candle appeared right at my hedging level, I went short. And when I went short, price moved to the zone of previous resistance which was my first target for the hedge. Remember that my stop loss was already here. So I took half of my hedge off because of the strength of the move down, and I decided to move my stops on the hedge above the previous retracement or the previous peaks. What happened is that I had a long position with my stops around the 1863 level, and I had a short position with my stops around the 1899 level.

Hedging Examples1

Now, this was the play. The play was, if price rejected this area and moved up, I was going to be taken out on my hedge on a small profit but the remaining of my long position was still in play for a move higher, for a move above this high and above the 1944 level. But if price drops suddenly, I was going to be taken out of my long position on a perfect win or on a great win, and I was still going to be writing my hedge now as my main short position. And what happened was that price retraced to this level and then dropped instantly taking me out of my long position and breaking with the channel. And now, the actual bias on the US Dollar-Mexican Peso changed to a bear bias, which was okay by me because I was already riding a short position from the highs of the move. So basically, this is how I hedge and how we have learned how to hedge on this module. And remember that you have to do this only on long-term positions.

Comments are closed.