It is not uncommon to see a Forex broker’s portal mentioning about hedging in their terms and conditions. In strictest terms, hedging is a process of mitigating the investment risk using a different class of asset. However, in Forex, the term hedging widely refers to holding mutually opposite positions in a currency pair at the same time. While there are traders who would argue indefinitely in support of hedging or grid strategies, the empirical facts prove otherwise. In reality, hedging or grid strategies will only make trading more complex as explained below:
The net position of a trader would be zero when there is a long and a short position in the same counter. However, the moment one of the positions is closed, the trader is exposed to the risk from the other open position. Thus, a simultaneous long and short position would be practically profitable only if a trader can forecast trend reversals with remarkable accuracy. Naturally, a trader possessing such a talent will have no need to open opposite trades in the same counter. Moreover, a trader who has both long and short positions should have to wait for weeks, if not months, to close both positions profitably. Just imagine the situation of a person who had taken both long and short positions, eight months back, in the EUR/USD pair at about 1.17 levels. He would still have at least the long position open.
Similarly, most of the grid trading strategies would call for doubling the order volume at pre-determined intervals. In a range bound market, as time passes, the trader will only pile up meaningless positions and ultimately lose control. Quite often we can see grid traders experiencing a single big loss that wipes out the profit generated from a series of successful trades.
Trading is all about capitalizing on the big price moves. By taking two mutually opposite positions simultaneously in a counter, a trader limits himself to being a spectator of the price action than being a part of it. Hedging and grid strategies do not allow the flexibility to react to sudden changes in the market.
There is invariably a spread involved when a long or short position is opened. Adding up more and more positions would only result in paying more to the market maker. In the case of an ECN account, the trader would pay more commission in the form of round-turn (lot) charges. Finally, when all the positions are closed, the trader would be left with a meager profit.
Carrying overnight positions would result in a net credit or debit charged against all the non-Islamic trading accounts. Thus, adding up positions through hedging or grid strategies would only result in paying large amounts as interest because of differences in swaps.
Most brokers limit a trader from withdrawing cash, when there is a hedged position in the trading account. Such a scenario would put a trader under tremendous stress.
Trading should be both profitable and enjoyable. Hedging and grid strategies ultimately make a trader mentally tired. Once the enthusiasm is lost, monetary losses would soon follow. Thus, it is always wise to apply simple trading strategies in a disciplined manner, without looking for tactics to beat the market for ever.