I received the following question from a trader sitting with an underwater position.
I am long USDJPY above 155 and need some guidance. Could you give me some advice on whether to hold on or hedge it.
My reply: While our role is not to give specific trading advice, your question offers an opportunity to pass on some trading insights. I have outlined these insights in response to your question:
1. Take the word hope out of your trading dictionary. When hope replaces sound analysis, then you are no longer trading but gambling. You are hoping for a miracle. Sometimes it works out but more often than not you will be sitting on a loser, hoping it does not turn into a disaster and missing out on trading opportunities.
2. Each day you need to treat your position as if it is a new one and ask whether you would be willing to go long (in this case) at current levels. If the answer is no then you have made your decision. The same can be said when you have a winning position but it is an easier decision as you can always protect your profit with a trailing stop. Your position is being marked to market even though your book equity may not be changing until you close it out.
3. Don’t hedge a loser if you are doing so just so you do not have to book a loss. Too many retail traders do this and wind up compounding a loser by putting themselves in a position where they are being forced to trade from the wrong side when the trend points the risk in the opposite direction. Think about it. You are making trading decisions based on your hedge and not on what the market is telling you. More times than not you will wind up losing even more as well as paying away the spread.
The bottom line is to say to yourself would I put on this position if I was starting with a clean slate today? The answer will dictate whether you hold the position or not.
Note, that retail forex hedging is not permitted in the U.S.,
Contact jay@localhost with any questions or comments
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