Forex Hedging: I have seen the interconnected system of coverage (hedged grid system) been used successfully (and highly unsuccessfully) over the last years. Unfortunately the failures tend to discourage traders to take advantage of this great system. I have found that the failures are mainly caused by ignorance, impatience and greed (common reasons for business failure).
In short, the interconnected system uses the following methodology. You start by buying and selling a currency. When the price a predetermined distance (grid leg) you put money in the positive leg moves, leave the negative leg and buy and sell again. Sooner or later the system goes positive and you put money into the system when it is positive.
This is a brief summary of the content of our course of interconnected free trade coverage available in expert-4x.com. Please refer to this course for more details of how money is made. The attraction is that the system is reasonably mechanical, can be programmed and does not take much supervision as exclusively entry orders are used.
Money is made when the price makes a delay of 100%, 50%, 33% at various levels. This is starting to look a strategy that supports the Fibonacci concept. The network system (grid) is also based on the nature of the market to trade off 80% of the time, and 20% of the time trend. The dangers are that if the price does not delay and follow the trend. Grid system can not make money in a trending market – period. One has to realize that. Therefore, you need strategies to minimize damage during these periods: –
First- I found that the biggest mistake made by traders is that they select a very small sizes foot grid Pore example 20 to 30 pips. This is a recipe for disaster. The trick is to use big leg sizes between 150 and 300 pips. What this does is that sometimes a phase trend in circulation becomes a sideways market. Normally I use 300 pips for the GBPJPY and 150 pips for the EURUSD for example.
Secondly- there is no rule that says that the legs have to be the same size. So I can change leg sizes in trending markets to be even bigger. If I started with 150 for the first leg to leg go to 200 second and 250 for third leg, etc. This makes sure that I am carrying less loss making transactions in a trend.
Third – it is sometimes desirable to increase the number of lots with the trend compared to the numbers against the trend in a good trend. But be aware you have the same number of transactions of sale and purchase. All you have done is you lock in your current status in a 100% coverage.
Fourthly – This is the largest and most important I have personally done in my grid trading strategy change. Always put the money you in all your transactions when the system is positive and when the price reaches the end of one leg of grid. By putting the money you reduce the risk of carrying negative lots in a trending market. This also gives you an opportunity to reassess market conditions.
Fifthly: – Putting money into a new beginning is always an option. One of my strategies is to cash in all my open positions when the third leg grid is reached and start again. Experience has taught me that this is a short term pain that goes very quickly and soon forgotten.
People who have traded the grid system will immediately see how the above approaches will reduce the risks of exponential losses increase in a strong market trend. She has numerous examples of successful applications of grid trading.
This article is part of a series and many more will follow on Grid trading, money management and Forex trading strategies.