Hi, I am a newbie in Forex trading. I am learning “Are You Doubling Your Risk Without Knowing It?”, and it’s mentioned in the course that
“buying (or selling) both EUR/USD and USD/CHF at the same time is usually counterproductive since you’re basically cancelling each trade out. Because the two pairs move in opposite directions like they hate each other’s guts, one side will make money, but the other will lose money. So you either end up with little gain because one pair eats into the other pair’s profits.”
So, it’s USUALLY counterproductive to have positions that cancel each trade out. This reminds me of what George Soros wrote in The alchemy of finance that
"As a general principle, I do not dismantle positions that are built on a thesis that remains valid; rather, I take additional positions in the opposite direction on the basis of the new thesis. The result is a delicate balance that needs to be adjusted from moment
to moment. If the balancing act fails to protect the portfolio, I have to cut back all around in order to assure survival. If the balancing act is successful, I gain liquidity without having to sacrifice desirable positions. To illustrate: if I start with a fully invested position
and then sell short an equal amount, a 20% decline, even if it affects the longs and the shorts equally, leaves me only 80% invested on the long side. If I cover my shorts at the right time, I come out way ahead, but even if I cover my shorts with a loss I am better off than if I had sold my longs at the wrong time. In practice, the operation is much more complex because the balancing act is not confined to the stock market. "
It sounds like George Soros may have proposed a productive position management method that involves cancelling trades out.
Q1: If I have two positions that cancel each other out, will they help me better manage my exposure like George Soros example?
Say, I long EUR/USD and long USD/CHF at the same time with the same units, when the EUR/USD goes down and USD/CHF goes up, I cover my long position on USD/CHF and makes a profit, and when the EUR/USD bounces back and USD/CHF goes down, I cover my long position in EUR/USD.
Q2: What does “but even if I cover my shorts with a loss I
am better off than if I had sold my longs at the wrong time.” mean? And how does he gain liquidity in this way?