What is Hedging ?
News Hedging : Retail investor’s guide to Make, keep and save profits from news.
“Hedging is used by traders if they are not sure about the future course of the market, and if they anticipate massive swings on either side of their trade position due to unpredictable news outcomes. – orexbonuses.org.
In Forex market, you want to be first to be notified about and first speculate the news. After all it can build a trend for you to ride as well as kill the trend you are already having fun ($$$) with. And because no one knows what the US President is going to say or how much interest FED is going to decide and all other news alike. Different news have different impacts on their relative currencies. Anyways, all of them have one thing in common – They are unpredictable in nature.
At Carlos and Company our researchers keep their eyes glued to their news screen when it’s “The Time” and building synopsis, studying after effects, releasing signals, putting trades, making and saving already made profits. You may be thinking… Wait a minute!
Saving profits? Really…? (This was me a while ago, a typical new comer who has started to make some money trading and still learning)
Yes I am aware of what I am saying and be with me to “make more and save your already made profits”.
And to use hedging you do not need to be a “Wizard of charts”, because I am
going to tell you step by step what you can do to make everything simple and make profits all the time. (Or you may talk to one of our market experts here at Carlos and Company – www.carlosandcompany.com)
As the title goes this article is divided into two parts:
A. How to Hedge the news (use the news) to make profits.
B. How to hedge the news to protect your profits.
Lets dive deep into News Hedging
A. News Hedging to make profits – To do news hedging for profits you will need to be prepared in advance.
Steps to preparation –
i. Decide what news to hedge – To decide on what news to hedge, hop on to foraxfactory.com and there you’ll find date wise news release schedules. Get to “today’s date”. Their you’ll three colors of folders.
* Yellow: Least impact news.
* Orange: Medium Impact news
* Red: Critical and high impact news
Our motto here to look for news which have enough impact on that particular country’s economy and which gives the current direction of any nation’s economy or which covers particular events happened in a country. Means is it growing forward of falling behind. This positive or negative news strengthens or weakens the currency.
i.e. – *news analysis*
ii. Decide your pairs you want to work with – Now as you have checked what news are going to release on a particular day, decide what pairs are going to be most impacted and what you should be choosing. Decide the currency pairs which are related to the news marked in red. *Image*. Anyways, choose a currency pair which is already showing movement or the ones sitting at strong support or resistance levels.
eg – lets say news are going to be released about any of the major currencies and every folder you see is yellow. What do you you do then ?
For those who are picking news to trade/hedge are mostly wrong. And those who are staying away are mostly right. Mostly because in trading nothing is black and white. Anything can happen anytime. Just like Yellow we also don’t advice to trade brown folders. Now you are left with red folders. These are most impactful news releases. You can see what currency that particular news going to affect and what source that news is coming from. (Source are not website they are published on, but the institute which are releasing them like major banks like ECB, BOJ, BOC, FRB, MPC. These includes but are not limited to banks https://www.ecb.europa.eu/ https://www.boj.or.jp/en/ https://www.federalreserve.gov/.
iii. trade setup – Now it’s time to laying down your plan. By now you must have chosen the news, as well as the currency pair you want to trade.
Now, be attentive. This is going to get messy.
To hedge news you are always going to –
– Put two trades
– With the same lot sizes, and
– Around the same levels.
Trade setup step one – Decide on current levels of your trades and just make your best assumptions. based on the current levels without taking news into account. Here, if you are sophisticated enough you can also draw both of the positive and negative projections. Do this not before half or one hour ago.
Trade setup step two – take news into account and there you’ll see projections.
Trade setup step three – with a risk reward ratio ranging between 1:a.5 to 1:2.5 and setup two opposite trades (buy and sell) with current level.
iv. Impact Analysis – When you have setup everything, trust yourself and don’t disturb stuff in between. News events generally give rise to trends. In some cases big movements can happen even in one hour before range *CAD fluctuation image*, that’s why I have suggested to set up trade half to an hour before hand.
Now when the news event has happened you may see movement. So lets say that, that particular news was positive and market was bullish, Your sell position will be SL while the Buy trade will be TP. Same thing will be happen if there was negative impact or the bearish trend, your buy trade will be SL and sell trade will be TP.
V. Rinse and repeat – Don’t let go this trade just like that. Take notes, and try to improve levels and analysis in next trades.
B. News Hedging for saving your profits – News hedging is the art and science of keeping your already made profits safe. This technique is more helpful for long term investors who have trades already running in profits. And this type of hedging is like an insurance for your profits.
Let’s dive deeper…
i. Decide news to hedge – All the technicals for deciding news to hedge for saving your profits will be the same as I mentioned in the “Decide the news” in “hedging for profit” section above.
With a slight difference. This difference is choose news impacting pairs you already in.
eg – Let’s say you are holding a sell position for GBP/JPY. Keep an eye on every news involving Either GBP or JPY.
ii. Trade setup – As we have taken an example of GBP/JPY sell position, and you have made a 1000 pips already. and you feel that certain news can return the trend you are riding some hiccups or even reverse it. Now put the opposite trade of the one you’re already (a buy position for our current example of GBP/JPY sell position) with a certain Stop loss.
iii. Impact Analysis – The news you were trying to hedge may or may not effect the trend. But by hedging you are insuring your profits against uncertainty in the form of opposite trade. so if trend continues your hold position will be open and your new trade will hit SL. or if trend is reversed you can manually close your hold position and your profit is covered by this second trade.
BONUS CAUTION TIPS –
#1. No matter what you are doing market is never 100% sure. You may even lose both of the trades sometimes.
#2. Even though you are insuring your trades, there WILL BE A COST in terms of stop loss hit on secondary trade or maybe if trend revers you will gain or compensate your losses with the opposite trade, there will be cost in terms of swaps, spreads etc.
BONUS Bonus Tip – Once a Multi Billion Dollar trader said “5/1 risk/reward ratio allows you to have a hit rate of 20%. I can actually be a complete imbecile. I can be wrong 80% of time and still not lose.” – Paul Tudor Jones
(https://www.forbes.com/profile/paul-tudor-jones-ii/#1e3280bd719c) He is one of the highest paid Hedge fund manager in the world. What he is saying here is that you can put trades with risk reward of 5:1 and you’ll win more often because market will.
Conclusion – Market is never certain but there are some factors affecting the market. you can put those strong forces to your advantage with the use of news hedging.We have discussed here both the ways.
Either you can make profits. Or you can insure your profits against opposite trends.
let me know of what is YOUR idea of hedging?
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