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Hedging Trade

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Hedging Trade

One requirement on Silver Level 1 is to make a profit of 25 pips or more on 5 trades held over 24 hours. Achieving that requires looking to the higher time frames but also requires a strategy to hold your position despite large adverse price excursions. I initially used wide stops in a strong downtrend. While I had some gut-wrenching adverse excursions along the way, I hit my target on 3 trades, but then the market changed character as it became choppy and began to retrace.

To get my remaining 2 qualifying 25-pip, 24-hour trades, I entered several trades in the direction of the current uptrend and experienced a very rapid positive move, giving me an open profit in a few minutes of over 100 pips (20 pips each on 5 positions). I knew with such a rapid move, price would retrace. The question is how far it would retrace. Had it not been for the 24-hour hold requirement I would have taken my profit at that point and quit for the day, but to achieve a 24-hour hold, I had to stay in the trade. That decision proved wrong as price retraced all the way to my entry and beyond to stop out with a large loss. Profit had turned to loss, a catastrophe!

A week later, I got my remaining two 25-pip trades in 24-hours, but as I reflected back on what happened on the day I turned gain into loss, I realized that there had been a better way to trade that move. After such a large rapid rise, I should have entered some hedging trades. The gain on those would have offset my profits lost in the retracement on my original positions, and when price continued on past my original entry, I could have exited my original trades and continued with the hedging trades. Had I done that the previous week, I would have kept my 100-pip profit on the original move, and made 150-pips additional profit (a 30-pip gain on the 5 hedging trades) in the subsequent downtrend, making the entire day a huge success!

I don’t’ currently think I would use hedging trades very often in my trading – that would have been the first time - but that was one situation where it would have made sense to do so.

Wed, 10/24/2018 - 5:50pm