Transcription
Forex Trading is hard, really hard. And when I started out, I lost way more money than I ever made. Until I started hedging, and not just hedging, hedging in a very specific way. Edging with a strategy, hedging with a plan.
In this video, I'm going to show you four steps to a hedging strategy. I'm going to show you when to hedge, how to trim a hedge, how to squeeze a hedge, and how to build a hedge from the inside. It might work for you, or you might find something that you can apply to your own trading strategy.
So, the first step to Forex hedging is when to get into a hedge. I'm going to give you an example. How many times have you had a market go up, pulls back, goes up, pulls back, goes up, pulls back, and now the FOMO is starting to set in? Now you're like, "This thing's just gonna go up forever! I want to get in! I'm trading this pullback." So on this pullback, you decide to get in the market. That's the blue line. You're entered, you're in, you're going long, you're shooting to the moon, and you're gonna make a gazillion dollars.
Well, how many times have you picked up this market? It gives you a little teaser and then goes south. If you're anything like me, this happened like almost all the time. Way more time than it ever just went up and made a profit. And when it did, I was always quick to take it because you're so nervous that it's gonna tip over, right? That's where hedging comes in. It gives you peace of mind and a little bit of flexibility.
Here's the rule on when to get into the hedge. So as soon as you enter into the market, right here, you're gonna find where 30 pips is. 30 pips below it is where you're going to set a stop sell order. Basically, it's your stop at 30 pips. We're gonna put a red line. This is our stop. So if the market comes down and hits this, it will pick up an equal shared stop order, and then you'll be hedged. The most you're out is 30 pips, the difference between the two.
So if the market comes up, it gives you a little teaser, and then tanks like it always does and goes straight down, you're now hedged at 30 pips. Every time you enter a position, this is something you need to do: put a 30 pip stop buy or a 30 pip stop sell in the opposite direction. And that way, if you're wrong, which you're probably going to be wrong at least 50% of the time, you don't have to make any any decisions. You don't have to decide where to put a stop or have a mental stop. You're automatically have chosen 30 pips. From here, I'm going to hedge this position.
All right, so now you have found yourself in a hedge. What do you do from here? This is probably where most people fail hedging: what do you do once you have two equal shares going in opposite directions? None of them making money, and none of them losing money. But how do you get out of the hedge?
The first thing you want to do is you want to find 40 pips below where the hedge mark is. This is your target profit, 40 pips. It's a little bit more than the spread on the hedge, but it's not so far out that you don't have a chance of getting there. You don't want to set a target profit so it automatically kicks it out. This is just a target range. So you're in your hedge and you go to bed overnight and wait to see what the market does.
The next morning comes up, comes down, comes up, comes down. And when you wake up, this is where the market's at. It's below 40 pips. So it's at least 40 pips in the money. In fact, it's a little bit more. So we're gonna draw that down. You're actually 73 pips in the money. That's awesome. That's better. This is where you're going to take profit. We're going to close our hedge at this green line. We're going to close this bottom position.
You've got a hundred thousand units. Each pip is worth ten dollars. And a hundred thousand units, and you've got 73 pips. So 10 times 73 is 730 dollars. But you also have a loss. You have a loss on the top side. This hedge is 73 plus the 30, 103 pips out of the money at ten dollars a pip. You have 10 times 103. So you have a thousand thirty loss, and you have 730 in profit.
So now what you're going to do is you're going to trim the hedge. I've designed a little bit of a calculator to help plan this out. But you've got a hundred thousand units, and minimum you're looking for 40 pips. That would have been four hundred dollars. We actually got into the money, seven hundred and thirty dollars. We're only going to put a hundred dollars in our pocket. Whatever the amount of units you have, that's how much money you're going to put in your pocket. So if you have a hundred thousand units, you're gonna put a hundred dollars in your pocket. If you had fifty thousand units, you're gonna put fifty dollars in your pocket. And then the rest, you're going to apply to the outside hedge.
So in this case, we have 730 dollars in profit. We're gonna keep a hundred bucks, and we're gonna apply 630 dollars to the outside hedge, which is the top line, our original position. So that original position was out of the money, a thousand thirty. We're gonna apply six hundred thirty dollars to it, which means we can close sixty-one thousand one hundred sixty-five units of that top position. Let me show you what that looks like on the charts.
We originally had a hundred thousand units. We're going to close 61,165, and we'll have left 38,835. That's what we'll have left on the top position. We're going to close this guy, close 100%. And this will give us a one hundred dollar profit. Our original position, we had a hundred thousand units. We close 61,165, and we have 38,835 units left. We closed a hundred percent of our hedge for a hundred dollar profit. So net, we're up a hundred bucks, and we have a we have less than 40% left of our original position.
Now you have to re-hedge or re-put a stop hedge for the balance that's left. So how you do that is wherever you close the position, or wherever the market is, you're going to go down and find 30 pips, just like we did on the original position. We're going to put a line right there and call that red, and that is going to be our next stop hedge. Now, if the market comes down and goes through this, we will pick up that hedge and repeat the process.
We have 38,835 units still left on the long side, and we have 38,835 units that is now hedged. And these two are a total of 133 pips apart. You go to bed. The market comes up, goes down, and it ends up down in this area right here. Now it's in the money. Is it more than 40 pips in the money? 58 pips in the money. So we're we're in the money. We're good to go. We're going to close that position for a profit. Close 100% of this, and we're going to put 38 dollars in our pocket. We have 38,835 units. So we're going to close and keep 38 dollars as our net profit.
Our total profit for this position is 3.88 times 58. So we have 225 dollars of total profit, and we're going to keep 38 dollars of it and apply the rest of it to this outside hedge. So we have 38,835, and we've got to calculate how far out of the money that is for a total of 193 pips out of the money. It's 748 dollars and 84 cents. Thirty thousand seven hundred forty-nine out of the money. And we're gonna apply 187 dollars towards us. So we're going to close 9,698 units and 100% of the bottom hedge. That will look something like this. We're gonna close 9,698, and we'll have left 29,137. We're closing this guy, 100% of it, for a 38 pip or a 38 dollar profit.
So now, after it's all said and done, we're down to 29,137 units. We've made 138 dollars on the way down. And the next thing we need to do is set our stop hedge, our stop order down at the bottom for 29,137. You're gonna find 30 pips below the market, and we're going to set a sell stop order right there. If the market comes up and then goes down, it'll activate that. Or it might come down to here and then bounce. We're going to cover what to do if you do not pick up your stop sell at the bottom. That's when we squeeze the hedge.
Let's talk about squeezing the hedge. Okay, so now we're going to talk about squeezing the hedge. The market has worked its way down, you've made 138 dollars net profit, and you have a 29,137 unit position left on the top with the 29,137 unit position at the bottom. But the market didn't open it. That's just a stop order, and the market is going to bounce, and it's on its way up. This is where you're going to squeeze the hedge.
So from here, it's going to go up, it's going to come down, it's going to go up, it's going to come down. Let's say it gets to right there during the night. What you want to do is maintain 30 pips from wherever the market is. So if the market's right there, you're going to be 30 pips below that. That's where you want your stop to be. So all you do is just continue to work this up. It's more like a trailing stop. So every time the market moves and you have an opportunity to squeeze that just a little bit, do it. All you're doing is minimizing the spread and the risk of that 29,137 unit position left in place. You can squeeze that until it either closes and comes up and goes into profit, or until it comes back down and hits it. Either way, it doesn't matter. You're just squeezing that position as much as you can. More than likely, you'll squeeze it, it'll come up, and go back down and hit it. At that point, you're just back to trimming the hedge. Nothing has changed other than you've narrowed the gap on how far apart that position is.
Now we're going to talk about building from the inside. So the question is, what do you do when you have a 223 pip spread and the market is trending in the middle? It's easy when it's going out, you can trim from the top, or when it's going down, you can trim from the bottom. But when it's in the middle, you're kind of stuck. So this is going to be how you build from the inside.
We're going to open a position right here, and we're going to go short. Market's coming up. We think it's going to hit this uh resistance and turn and come back down to the bottom. You now have the option of choosing how many units to open that position with. Remember, your margin is at a hundred thousand units. You're down at 29,000. So you've got some margin back to work with. I'm going to open up this position with 50,000 units.
Now we've got to protect that position with an upside hedge. So 30 pips up, this is where we're going to put a buy stop for a hedge. Make this blue because it'll be long if it hits it, and that will be an inside hedge. Okay, so you put that in. Market comes up, and now the market goes down, which is perfect. We did not pick up this upside hedge, so it's still a pending order, and we're down here.
When we wake up the next morning, the main thing we want to make sure is we're at least 40 pips in the money. Perfect. We're 48. So we've got a good amount of profit right there. We're going to close that position right there. We're going to make that green because that will be a closed position. Now, remember, we didn't pick up this upside hedge, so we can delete that. Never came into play. And we have this 50,000 unit position that is 48 pips in the money. So 5 times 48 is 240 dollars of profit. And we're going to pocket 50 bucks.
The next thing we need to calculate is how far out of the money our top side position is. Because we're short, we're going to apply this money to the long side. This is a 169 pips out of the money, it looks like. So you've got 2.91 times 169. So we're 491 dollars out of the money on that position. So let's just plug that in. 29,137, and we're uh uh what was that? 491, or 491 dollars out of the money. We've accumulated 240 dollars in profit on our new position. We're going to keep 50 and apply 190 dollars to this position. So we'll close 11,275 units of that top hedge.
So this is what that'll look like. We're gonna close 11,275, and that will leave us 17,862 units on the top side. Now this 50,000 unit position is going to be closed 100%, and it will give us a fifty dollar profit. Okay, so we're gonna apply that right there, and we're going to close these positions.
Okay, so now that everything has closed and you've accumulated a 50 profit, you have a small difference. You're holding 17,862 on the long side and 29,137 units on the short side. So you've got to protect that short side. We're gonna find 30 pips above the market, and this is where we're going to enter a buy stop order, and that's going to be for 11,275 units. If the market comes up and hits that, you will now have equal units on the bottom side to match your units on the top side.
I hope you found this useful. Hedging is actually a ton of fun and can be a very successful trading strategy if you continue to trim down those positions to where your margin is not so far extended. It gives you an opportunity to enter back in different trades and really minimize that risk while continuing to making some profits along the way. For me, it has been a game changer. One thing to think about: this is not going to have nearly the size of profits as some other trading strategies, but for me, it was worth it because I was not having the losses to go along with it. Maybe you found something useful here and you can apply it to your trading strategy so that you can find a way to make consistent profits. Good luck.