BarroMetrics Views: The more things change, the more they stay the same
Flashback: When I first started trading some 45 years ago, a very popular seminar was doing the rounds. The promoter promised ‘no loss trading’. His strategy called for ‘hedging’ a loss. By that I mean, you would take the side of the open position and hold it as an open position.
For example, I sell the AUDUSD at 0.7380. The pair moves up, and at 0.7410, I buy. Effectively that’s a loss of 30 pips. Instead of taking the loss, I hold open positions of short at 0.7380 and longs at 0.7410.
At some point, I lift the ‘hedge’ for one leg (usually the one in profit) and look for the other to retrace to breakeven. In Figure 1, the hedge is created in the ‘recover zone’: we have bought at the buy level and sold at the sell level. The market moves to the Profit Target, and we lift the buy leg. When the market moves to at least the recover zone, we lift the sell leg, thus allowing the trade to reduce the loss or to even breakeven on the trade.
I’ve done countless stupid things when trading, but accepting the ‘hedge’ insanity is not one of them. The fact is when you have a ‘buy’ and a ‘sell’, you have a closed postion, period. Moreover, when you ‘lift’ a leg, you are, at that point, instituting a fresh trade. To think otherwise is to engage in a self-deception of massive proportions! For example, when you lift the buy leg in the example above, you are in fact going short at the new sell price.
Flash forward: The insanity continues.The
The other day I found that MT4 does not permit part exits of open positions, unless you use a market order – which means we need to be sitting in front of the computer to exit part of our position.
BUT MT4 does allow hedging!
Now if there were a demand for partial exits, I’d expect MT4 to provide it. The fact that it does not, but does allow for hedging, tells me much about the way retail trading is being conducted. No wonder over 90% are losing – they refuse to accept that losses are an integral of trading. As traders, our only choice is to limit losses; we cannot eliminate them.
FIGURE 1 Hedge Strategy