How to use hedging and when to cut losses

Updated: Feb 26, 2020

Martingale systems that doubling positions may work but they need a large account and most important, you need nerves of steel. Most important rules for hedging systems:

  • Be conscious of round prices. You may use hundreds of indicators to trade, but keep in mind, human brain takes always the simplest way to achieve what it wants, therefore, round number divided by 100 or 500 are important. In most cases you will take profit or cut losses in these levels.

  • Do not double losing positions, instead hedged by increasing volume by factor 1

  • Always use stop loss for all your open positions

  • Secure your profits. When an open position or bundle gives you profit, secure a part of it

Hedging Example

TRENDpilot FX uses a very simple way to detect trend and open positions. It weights several major indicators like in does and builds an overall Buy/Sell score. No matter how high the probability for a trade to hit take profit is, it may go wrong. Therefore, we hedged large trend corrections. Bellow is our interpretation of the hedging paradigm:

Drive Order

Trend (buy or sell) detected. The position is placed within the body of the trend, not at the beginning (i.e. when moving average crossing) and not at the end when moving averages tend to cross back again. Most of the drive order are hitting take profit with no need of hedging.

Action: Check if trend still intact.

First hedged order

Trend takes a pause and makes a correction. This happens when sellers or buyer which entry earlier, are banking some profits.

Action: Check if trend still intact.

Second hedged order

Trend takes a larger pause and makes a larger correction. This happens when more sellers or buyer which entry earlier, are banking some profits.

Action: Check if trend still intact. Ask yourself if you want to keep hedging this position as the correction is large enough to launch a trend reversal.

Third hedged order

This is for sure not a correction anymore. This is a pivot point where the trend may change or continue after a larger pause in time (several weeks).

Action 1: Check for round prices, divisions of 50, 100 and 500, i.e. if you are short on EURUSD and price crosses and stays above 1.3, this is properly not going to come back very soon, you properly should close.

Action 2: Check what caused the trend to reverse and how long and strong the trend is/was. If an event (Like PMI) changes the trend direction, then properly it is a large correction and trend will be soon resumed as events don’t have the power to change already established trends. The only events may change the trend are rate cuts or hikes.

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