The P3 strategy was my first contact with hedging trading currencies. I would like to thank the author of http://www.forex-central.net/sure-fire-forex-hedging-strategy.php article to introduce myself on hedge. Therefore, there was some modifications like: We do not use stop loss or take profit and range has been change dynamically according to volatility. Also, known as x3, it consists in triplicate initial volume.
Thus, like any other hedge strategy, there is a huge risk in case of lack of discipline and knowledge involving limitation and pair chosen for trading. Hence, make sure to select the correct pair considering volatility, time, volume and so on.
Basically using P3, the trader will add orders respecting the range, space between buy and sell orders placed, triplicating (x3) the volume expecting volatility. It has been demonstrated on image attached below:
Considering the example above, initial order to buy 0,10 lots at price 11200 was executed. However, price fell and sell order with 0,30 lots at price 11100 has been implemented. Thereby, the difference between buy order and sell order is the range of 100 points (10 pips). Hence, orders will be placed respecting the range until get profit. It works like an infinite looping.
Still considering the example, the price rose back to 11200 again and another buy order with 0,80 lots at price 11200 was added. At this point, there are 0.90 lots buying and 0.30 selling. It means, triple of lots buying; and it happened, and after 50% of the range set, we have our balance =0; any movement beyond 50% of the range (10pips), we will start make profit considering the difference of lots. In this case, each pip with 0,60 (Buy 0,90 – Sell 0,30).
Initial order to buy 0,01 was executed at price 114330. Following the P3´s logics, price fell to 114230 and a sell 0,03 order was added. Price rose back to 114330 and buy order was added 0,09. Price back down to 114230 and sell order 0,27 was executed. Price increased to 114330 again and buy order 0,81 was implemented. After price moves 50% of the range (10pips), our balance is 0 and profit will be considering the difference of lots; in this case, total buying 0,90 – total selling 0,30 = 0,60 for each pip.
Examples of sequence of orders to be placed, always increasing / triplicating.
- Starting with 0,01 = 0,01 - 0,0 3 - 0,0 9 - 0, 27 - 0, 81, etc
- Starting with 0,03 = 0,03 - 0,0 9 - 0, 27 - 0, 81, etc
Once we have hedge orders opened respecting the range in opposite directions, we need to add the value considering the existent orders already placed. Then, it needs to be balanced to fit into whole schema. Basically, summing orders values properly in lieu of 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 P3 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.