The hedge P1 is also known as Recovery Zone, Hedge x2 strategy. Indeed, it is a good way to increase your capital due to consistency and profitable trades since the risk management and margin are put as first concern to be respected. If you have enough discipline and margin to accept highest drawdown, the hedge strategy can do the rest of the job in terms of capital management.
However, some quantitative studies were made to adapt the hedge strategy to Brazil´s market. Thereby, we would be able to confirm that the strategy is profitable and has dependencies involving volatility and timing. Similarly, it can blow up the account balance during consolidation or flat periods.
Basically, it works doubling one position against another position using a fixed range of points on same symbol. For example:
The order to buy 0,10 at price 11200 has been executed initially. The price fell to 11100 and another order to sell 0,20 at price 11100 was executed. Thereby, the difference between buy order and sell order is the range of 100 points (10 pips). Therefore, we will place orders to buy and sell respecting the range of 100 points until we get the profit. It works like a infinite looping.
Still considering the example above, after sell order at price 11100 be executed, the price rose again and we had to buy 0,30 at price 11200 to balance our position, thus, in total we got 0,40 lot buying and 0,20 selling.
Profit will happen when the price moves more than 100 points, it means, if the price goes up to 11300, the balance will be = zero, because, we have 0,40 buying and 0,20 selling respecting the range of 100 points, but, if the prices move up more 100 points (11400), would have profit of 100 points with 0,20 lot, because, we have the total of 0,40 buying and 0,20 selling with 100 pints of range (difference). Thereby, we would get the total movement of the price 200 pips – 100 pips (range) =100 points with 0,40 buy – 0,20 sell = 0,20.
Examples of sequence of order to be placed, always incresing / doubling.
- Starting with 0,01 = 0,01, 0,0 2, 0,0 3, 0,0 6, 0,12, 0, 24, 0,48, etc
- Starting with 0,03 = 0,03, 0,0 6, 0,0 9, 0, 18, 0, 36, etc
Once we have hedge orders opened respecting the range in opposite directions, we need to add the value considering the existent ordesr already placed. Then, it needs to be balanced to fit into whole schema. Basically, summing orders values properly in lieu add “dry” orders to misbalance the hedge.
Certainly, like any other strategy created and being used in stocks, Forex markets, there are a lot of risks associated. The main risk using hedge strategy would be the lack of stop loss; yes, there is no stop loss. When should I use stop, then? Using P1 strategy, literally, the stop will be executed when the trader figure out that stop is needed due to margin, number of lots executed, negative balance and so on. Hence, we can go over through some emotional and psychological concerns, but it is not the focus at this moment.
Make certain to respect the size of the lots and margin always, because, one stop loss can be enough to blow up your account.