I would have a basic question about Hedging. I am aware what does that mean. It means I am being in at least two OPENED opposite (short/long) positions at the same time on the SAME trading symbol. Different traders have different strategy of Hedging and also different goal of it. I normally do Hedging when I am extremely worried that my current loss of OPENED positions would equal (obviously in opposite +/-) balance on account. When this happens, trading account ‘‘explode’’ and all the money is lost. With idea of Hedging my goal is that whenever I see unwanted huge lose (incorrect direction of trade comparing to my entry), I enter the opposite position (short/long) on the same trading symbol.
Here the expectation is very obvious: whenever the lose in unwanted direction increases (position 1), the other, opposite, position comparing to position 1 gets either in profit OR reduced loss (position 2). So theoretically position 1 is going to hurt me even more but ‘‘signals’’ (at least philosophical effect) of position 2 are getting better (increasing of profit or decreasing of loss). Obviously this is changing all the time but theoretically when something hurts on one side, another benefits on another side, this at least partially says that because of those two Hedging positions my account is not going to ‘‘explode’’ yet. With term ‘‘explosion’’ i am referring to the worst nightmare of every trader - entire balance gone due to such huge loss of opened positions.
So before I start asking my question, I want to clarify again this example: position 1 is the one I opened on particular trading symbol at the beginning hoping it will go to wanted direction. Later I noticed my expectation was terrible wrong - trend in opposite direction causing explosion of account balance. Then I was forced to do Hedging in the opposite direction, hoping to make some benefit upon loss which is increasing. This position, being opened by me manually by force to keep my account alive, is position 2. So now I explained what do I mean with ‘‘position 1’’ and ‘‘position 2’’ terms and can finally start asking my question.
I was learning how to finalize procedure of Hedging so how to close either opened position 1 or opened position 2. Please kindly read again what exactly is position 1 and position 2 in previous paragraph. Confusing them will surely provide wrong answer from you. One of most important ideas in closing Hedging is to get entry line (entry = current market price at the time of opening the position) of position 1 and entry line of position 2 as close as possible together. This helps with getting out of BOTH positions sooner. In order to get both entry lines as close as possible together, I must wait that the profit of position 2, i repeat PROFIT OF POSITION 2 ( !!! ), comes to minimum. E.g. if I am in profit of position 2 for like 50 EUR (completely random example), I must wait so it comes to minimum profit like 1 EUR. So I still have some time to close the position (three mouse button clicks) to prevent closing in loss. According to my lesson learned, minimum profit is needed to get both entry lines as close as possible together. If I would close the position 2 ( !!! ) with high profit, I would make both entry lines even more far away which would result in even more trouble for Hedging.
So far I understand what I typed but my problem starts with the next step: According to what I learned, to continue working with Hedging, I must open same position 2 (if i did long, i must long again. If i did short, i must short again) AGAIN immediately or at least as fast as possible after I closed position 2. Here the Hedging process should be repeated again with goal of closing position 2 (that secondary position 2) with minimum profit again and so on until I don’t make benefit of both position 1 and position 2 (obviously latest position 2).
What I said in previous paragraph is still understandable but I don’t understand the following and need to ask two questions about that - they have different severity of problem:
Question 1: This question is less important but would still appreciate a lot your answer. Does it matter how profit comes to the minimum one? Or not? E.g. from loss (regardless how high) to minimum profit or from high profit to minimum profit? Note: I am assuming for the time period of my observation only. Obviously position 2 will be always opened with loss at the beginning only due to the different between bid/ask price. Just asking you for the time period when I look closely at what is happening. So I am asking if is important how (from where) does the price come to minimum profit?
Question 2: This question is extremely important as I am just few tens of EUR away from account balance explosion and since I am unemployed (no income) you can imagine how worried I am. Previously I said that new position 2 (same type so if i did long, i must long again. If i did short, i must short again) must be opened immediately or as fast as possible after previous position 2 with minimum profit was closed. But if I am really so fast as I am saying then price of opening position 2 will be very very very similar, sometimes even identical, than the price where I closed previous position 2. So if the closing price of previous position 2 and opening price of new position 2 are so much similar (sometimes even identical), where would I benefit here? The reason, which will probably help YOU in answering me, why I don’t understand is the following one: the location of entry both lines (previous position 2 comparing to new position 2) on graph will remain being on very very very similar, sometimes even identical, position on the graph. So I don’t understand how would I get position 1 ( ! ) and position 2 entry lines any closer doing what I described? Example: on the graph is shown entry line of previous position 2. When I close it and open as fast as possible new position 2 (same type so if i did long, i must long again. If i did short, i must short again) the entry line will remain being on VERY similar or even identical location. How would this be anyhow more close to the entry line of position 1? I repeat that the accurate way of dealing with Hedging (ultimate solution to close in best possible way position 1, where disaster happened, and position 2) is to get both entry lines, position 1 and position 2, as close as possible together but I don’t understand what I asked.
Your help would be much appreciated
thank you very much in advance.