Hedging strategy using buy and sell limit orders
This video is a follow on from Hedging – Making money no matter which way the market moves and Hedging Strategy Via The Ascending Pennant Chart Pattern.
The idea in this series is to incorporate a secondary backup, or insurance policy type trade, in order to maximize the possibilities of breakouts from well-known, tried, and trusted chart patterns that professional traders use. And these setups are better suited to the 15-minute, 30-minute, and 1-hour time frames, where you might expect a larger amount of pips to be made in a trending, or reversing market.
Example A is a 1-hour chart of the GBPUSD pair, but this set up works with any forex pair.
Example B shows that after an initial push higher, price action consolidates in a sideways move and this consolidation is confirmed by at least two attempts to push higher than a horizontal line of exchange rate where price action is rejected and which acts as a line of resistance and at least two pushes lower on a separate horizontal line of the exchange rate which was met with a line of support.
While this see-sawing between the resistance and support levels may continue for some time, one thing is for sure, that eventually, price action will either break to downside or break to the upside.
Now let’s look at Example C. This is where we will set up our first limit order. Firstly, price action appears to be fading to our support line, as defined by the green line. This fading of price action means that we are more likely, at this point, to see a breach of our support line and a continuation in price action in a downwards direction.
Therefore we have placed a sell limit order a couple of pips below the support line with a stop loss a couple of pips above the resistance line.
Now we must turn to example D, which is our secondary backup buy limit order, which we believe would be a good insurance policy should price action break the resistance line and move in an upward direction.
In this situation, we simply set our buy limit order a couple of pips above the line of resistance with a stop loss a couple of pips below the area of support.
The idea regarding our hedging strategy is to prime everything in readiness for where we believe the price action will go due to our technical analysis and also to set up a secondary trade in the reverse direction as a backup or insurance policy in case price action reverses in the opposite to the direction where we believe price action will go.
Obviously, it is possible that both trades could be executed and therefore we would advise that you keep an eye on the trade and should both trades be executed and where one triggers a stop loss, the profit target from the secondary trade should be at the very least the amount that was stopped out on the first trade, in order not to adversely affect your profit and loss.