Hedging, traditionally is a way to protect your open losing positions by taking an opposite direction trade on the same or the cross-pairs, so that you get more time to re-analyze the markets, redesign your strategy and reset your take-profit targets. This is done in case of No stop-loss trading where the trader prefers naked positions with no hard and fast rule about their entries and exits.
To make it simple to understand, let’s say you have a LONG position on EUR/USD. The position continues to go in negative, so you decide to take an extra position on EUR/USD, this time SHORT. So you would have two positions on EUR/USD both in opposite directions, so either side movement is not going to affect your account balance.
What this does is that it gives you time to decide. Of course getting into a Hedge and coming out safely again is a challenge but the unique advantage is that it provides you time, as much as you want, so as to restudy your exit points for both. Your account balance will be safe till then.
This is only one way of Hedging, there of course are cross-hedges and circle-Hedging where you hedge your positions by taking counter positions on cross currencies and not this one only in specific, so a negative movement on one will be countered by a favorable movement in the other. This style of hedging is good for scalping in sideway moving market with the advantage that even if any sudden adversity (a sharp negative spike) comes, then also the account will continue to be safe. Your portfolio will either earn some profits or will hold all your positions in no profits. Cross Hedges do not go very negative, whatever may happen in the markets. It’s slow; it’s boring but definitely is the safest way of trading if you have reasonable monthly targets to achieve, while taking no or a very little risk.
Cross hedges do not have Stop- losses or any chart based take profit targets, they work only with the Currency pair behavior and its repercussions on the others. It’s the portfolio of Pairs that you choose that makes your Hedge and hence your profit target is your portfolio coming to profits, not your individual positions. Win rate on a system is not calculated here as you could have just a 33% win rate while closing 67% of your positions in losses but the overall results will be better than Bank. The Trading History will look like a pathetic mess but the profit results will surprise any seer. Those that you win will be all big huge trades and the ones you lose will only be small ones. Just as goes the old quote from the trading books’ Cut your losses short, Let your profits run’, Cross-hedge portfolio automatically deploys it even if you haven’t studied that principle before. You can simply make a cross-hedge and go out holidaying. When you come back, then your portfolio will either be where you opened it or will be in profits. The account will never be found fully blown, no matter when you come. The biggest advantage will be that whatever be the size of even the most unforeseen spike in the History and no matter how many Stop-losses in the world fail to trigger, your account will never be blown.
However, the caution is that you need to calculate your Lot sizes for each pair carefully. Each pair requires a proportional position-sizing so as to balance out the previous position. This requires understanding of mathematics behind currency valuations and lot sizes. This only comes with logical brainstorming and good mathematical abilities. Sure you can do it, try it, Good Luck!