short long

Short Long Hedge

for Forex

Also known as a direct hedge, this strategy involves opening a trade in the opposite direction of your current trade. For example, if you are long EUR/USD, then open a short position. Likewise, if short, then open a long position.

It may seem counterintuitive as the net profit will be zero. However, it allows you to hold your current position while waiting for the trend to reverse. Otherwise, closing the trade means accepting a loss.

Not all Forex brokers allow this type of trade.


Suitability:

all investors

All Investors

This hedge is as simple as it gets and suitable for all investors. Just be sure to understand all the risks.

Protection:

moderate

Moderate

While it does prevent the immediate loss from a poor position, the bid-ask spread could present a problem.

Cost:

moderate

Moderate

Issues such as leverage and the bid-ask spread could make this hedge expensive.


Example:

An investor is long EUR/USD for a few hours of morning upticks. At lunch, they get an alert that the position is dropping. Not wanting to close at a loss, they take a short position on EUR/USD. All while keeping the original long one.

The result is a net-zero profit. However, the bid-ask spread left a small discrepancy that will deduct when the short position closes.

That's the entire process. I told you it was simple. Just be sure to understand your broker's policies not to get hit with fees or leverage issues.


Resources:



© 2020 Todd Moses

The strategies discussed are for illustrative and educational purposes and are not a recommendation, offer, or solicitation to buy or sell any currency or to adopt any investment strategy. There is no guarantee that any strategies discussed will be useful. Todd Moses is not a licensed securities dealer, broker, or US investment adviser or investment bank.