Hedging strategy for EU Referendum trade?

Trading Discussion Risk Management Practices
1

I have been reading a little about hedging strategies. One that seems to have received some criticism is the “buy/sell” strategy of going short on the same pair you are going long on (or vice versa).

I realise you would be paying double on the spread if you do this, but might it work as a hedging tool around a specific time when markets will drastically strengthen or weaken - like next week’s EU referendum next week (provided stop-losses are used)?

For example, I let’s say you go long and short on GBP/USD at the same time, and put stop losses on each sides of the trade.

I realise the increased volatility means stop losses on one (or even both) sides of the trade might get triggered prematurely, so let’s presume we don’t use very high leverage of 200:1 or more to prevent that from happening. Let’s say I use leverage of no more then 50:1.

Provided we believe GBP will either rally or drop significantly in value following the EU referendum vote on June 23rd (something I believe is a pretty sure-bet) surely one of those positions will go on to accrue profits while the other closes out when its stop loss is triggered.

Granted there may well be more than usual slippage in such volatile circumstances - but even if up to 100 pips is lost in slippage (which I would think is a lot even in such circumstances), I’d imagine the number of pips gained from the winning trade should be greater given the exceptional nature of the circumstances.

Now I’m fairly new to forex. I am still using a couple of demo accounts and was thinking of live trading a small sum of money for a couple of months as a next step – so please feel free to rip my little hedging strategy to shreds if it doesn’t make sense, or if I’ve missed something.

Given the extraordinary nature of events that are the UK’s EU referendum, I am tempted to make a larger than normal trade around the referendum, nothing too crazy, maybe something between £1000 - £2000 of my own money.

What do you guys think? Will any of you be trading the news in the run-up to, or after the referendum vote? If my thoughts on hedging could work, would they work with both a Market-Maker and ECN provider, or just ECN?

Thanks!

2

Rom, respectfully, if someone who’s [I]new to forex[/I] really needs a “hedging strategy”, it’s a [U]sure[/U] sign that he’s trading when he shouldn’t be, and/or in a market he shouldn’t be.

The overwhelming majority of retail traders who are using hedging strategies aren’t benefitting from them, overall: the best outcome they typically achieve is just an increase in their overall dealing-costs (and that’s including plenty of [I]experienced[/I] traders).

Don’t even think about it - is my advice. Stay out of the markets, or use a demo account, if there are genuine, specific reasons for greater uncertainty than usual.

3

Hedging works much better on the equity market, and only on certain situations too.

4

A strategy like this would be a slippery slope. You’d eventually hedge yourself in to a stop out.