As widely taught by educators, financial analysts, and other traders, the easiest way to protect ourselves from losses is to use a Stop-Loss order.<\/p>\n
A stop-loss order will close your trade at a specific price set by you to limit the loss in case the trade becomes invalid.<\/p>\n
However, there are a few drawbacks to the Stop-Loss:<\/p>\n
Another way of doing this is Hedging.<\/p>\n
Hedging occurs when a transaction is entered to reduce exposure to a prior trade turning against you and eliminating profits or increasing losses. Hedging is done to decrease the risks and hold a position until the markets begin to move in the original trade’s favored direction.<\/p>\n
Let’s assume you are buying Gold and your analysis tells you that you are wrong buying gold at the current price once it falls by $2, so\u00c2\u00a0the logical place for a Stop-Loss order would be -$2 from the current price.<\/p>\n
Instead of realizing\u00c2\u00a0the Loss, we waited for the market swing out for a fraction of the cost.<\/p><\/blockquote>\n
What are the differences in costs?<\/h5>\n
STOP-LOSS Order:<\/p>\n
\n
- Realizing the Loss happens instantly on your Account balance.<\/li>\n<\/ul>\n
HEDGE Trade:<\/p>\n
\n
- You will need to have double the Margin available to execute a Hedge trade.<\/li>\n
- The spread of the new trade.<\/li>\n
- Commissions of the Hedge Trade.<\/li>\n
- Swap for both trades as you will be holding them much longer.<\/li>\n<\/ul>\n
Lets Compare with a Practical example:<\/h5>\n
\n
- Assuming your account balance is $3000,<\/li>\n
- Risk per trade is 1%<\/li>\n
- Setup in question has a Risk to Reward Ratio of 1:1<\/li>\n<\/ol>\n
StopLoss Scenario:<\/p>\n
\n
- The $30 Loss of will be deducted from your account balance instantly.<\/li>\n
- Re-entering the trade once the price comes back, you will have to pay commissions and spread again.<\/li>\n
- Once the trade played out as expected, you will have a winning trade of $30.<\/li>\n<\/ul>\n
Hedge Trade Scenario:<\/p>\n
\n
- You will need double the margin to execute the hedge (approximately) as you have 2 trades running at the same time.<\/li>\n
- The Hedge position will cost you another set of Commissions and Spread, and a possible Swap.<\/li>\n
- Assuming the hedge is closed with a $5 Net-Loss and your trade plays out as expected afterwards.<\/li>\n<\/ul>\n
Lets Sum things up:<\/h3>\n
The traditional Stop-Loss Order way resulted in:<\/p>\n
\n
- $30 Loss (by Stop-loss) + $30 Gain after re-entering the trade<\/li>\n
- Total Gain: $0<\/strong><\/li>\n
- Total Loss:\u00c2\u00a0$0<\/strong><\/li>\n<\/ul>\n
The Hedge trade way resulted in:<\/p>\n
\n
- $5 Cost of the extra trade\u00c2\u00a0+ $30 Gain from the original trade<\/li>\n
- Total Gain: $25<\/strong><\/li>\n<\/ul>\n
<\/p>\n
Additionally, Hedging provides psychological relief, as the loss is stopped (for now), so you can spend time (hours or even days) to make up your mind, make a better plan and execute, or just close both positions on realizing that the trade was just wrong.
\nThe point, however, is that you do not have to make this decision in real-time anymore, which removes the pressure and lets you do the good old “sleep over it” without being broke the next day.<\/p><\/blockquote>\n
\n<\/p>\n
I can practically feel the trolls turning up the engines on this one… so here is a short disclaimer.<\/h5>\n
SwingFish does NOT provide any Advice in how to trade and how to manage your losses!<\/strong>
\nThis category simply shows that there are other things you can do besides what is taught to you by the general public.
\nThis post is to show the interested Trader other\/alternative and cheaper ways to manage your risk and losses.<\/p><\/blockquote>\n<\/p>\n","protected":false},"excerpt":{"rendered":"
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