What is hedging?
Locked Positions originated from futures at the earliest. Later, with the development of financial derivative products, they were applied to the trading of other products. Generally, it refers to investors who buy and sell contracts when the market shows a trend opposite to their own operations. Opening a new position that is the opposite of the original position is also called pair lock, lock order, or even better known as Butterfly Shuangfei. For example, if you have a long order for a certain contract before, you continue to buy a short order for the same contract; or you have a short order for a certain contract before you continue to buy a long order for the same contract.
In foreign exchange trading, a fully locked order refers to a trader making an equal number of open trades in the opposite direction in the same account. For example, a trader opens a position to sell 1 lot of EURUSD. After a period of time, the price trend deviated from the trader’s expectations, and at this time the trader decided to open another position to buy EURUSD. The end result is that the loss of the first currency pair sold is fixed.
The function of lock-up has been applied in most financial product transactions, and it can also be called lock-up, lock-up, and hedging.
For example: you currently have a long order for a product, and then you buy a short order for the same product, this is a lock-up. Similarly, when you hold an empty order in your hand and then buy a long order for the same product, it is also locked.
The foreign exchange lock-up is also proportional. If the number of long and short trades are exactly the same, it is fully locked. In this case, no matter how the market price fluctuates, your current floating profit or floating loss is fixed, but This is only a theoretical result. There are spreads in actual transactions, so there will still be some fluctuations in floating profits or floating losses.
Another possibility is that your current long position of gold is 1 whole lot, but you have made a 0.5 lot of gold short position. This is not a complete lock. We can understand that you only hold 0.5 lot of gold. More orders.
Classification of locked positions
The lock position is generally divided into profit lock order and loss lock order:
Profit lock-up refers to the fact that a trader’s open trade has a certain amount of floating profit, but the market may experience a short-term decline or rebound. The trader expects that the general trend in the future will remain unchanged, and does not want to easily close the original low-price buy order or high-price sell order. Position, while continuing to hold the original position, open a new position in the opposite direction.
Loss lock position means that the trader has a certain floating loss in opening a trade, but does not want to turn the floating loss into an actual loss, so while continuing to hold the original loss position, he opens a new position in the opposite direction in an attempt to lock in the risk.
Occupied margin calculation
Regarding the occupancy of the margin, the rules of the full lock-up occupancy margin of each platform are also different. There are three situations: no margin is occupied, unilateral margin is occupied, and bilateral margin is occupied (that is, margin is required for both orders).
Take a one-sided occupation as an example: For example, if you make a long one hand of a currency pair and occupy a margin of USD 1,000, then you short another hand of that currency pair at the same time, the margin will not increase to USD 2,000, but will remain unchanged at USD 1,000 . It should be noted that when locking a position, if the market spreads are enlarged (maybe due to rapid fluctuations or light transactions), then the account equity will decrease accordingly.
Of course, some platforms will also implement different lock-up policies based on the currency pair being traded. Some currency pairs lock up the margin, and some currency pairs do not use the margin.
Easy to lock and difficult to unlock
The basic rule of investment activities is to synchronize risk and return, that is, the risk is large, the return is large, and the risk is small, the return is small. Therefore, there is no way to reduce the risk and increase the return through certain techniques. From this perspective, locking will not be Investors reduce risks. On the contrary, on the basis of the original risks, new risks will be added, because no matter what the market is, unlocking is an extremely difficult challenge.
It is easy to lock a position and difficult to unlock, especially when a loss is locked. Traders who unlock and lock positions at a loss should pay more attention to their trading mentality, because there will be some psychological pressure to lock positions in the case of losses, and they will look forward to the future when unlocking, and even miss the opportunity to unwind.
Because unlocking is a very complicated project, coupled with the lack of experience of investors, they are not sure about the market, so it is easy to hesitate, and the unlocking work will be delayed again and again, resulting in increasing transaction costs. This transaction cost Not only explicit costs, such as overnight interest and time costs, but also hidden costs, such as the continuous rise or fall of the market, which leads to the continuous expansion of the price of locked positions, which makes the difficulty of unlocking continue to increase. Sometimes even if the position is released, because of fear that the loss of the position in the other direction will increase, and there is a slight disturbance, the position will be re-locked, and the position will be locked in a vicious circle.
Why do we need to lock the position?
There are two reasons: lock up when you make a profit and lock up when you lose
Locking when profitable means that the current account is already profitable, but there may be a short-term callback or rebound in the following market, and the overall trend will not change. For traders, they do not want to close their positions due to short-term market changes, so they will open an opposite order while retaining the original order. When the short-term market is about to end, throw away this reverse order. This will not only make short-term market profits, it will not affect long-term trading strategies. And the immediate market reversed, at least we still locked in the original profit.
Locking a position at a loss means that there is a floating loss in the current account, and the trader does not strictly implement the stop loss, and does not want to turn the floating loss into a real loss. Therefore, in order to temporarily relieve the pressure and prevent the loss from continuing to expand, it will choose to open a new reverse order. This seemingly simple operation becomes very complicated when unlocking.
What should I do if the foreign exchange is locked?
Compared with lock-up when profit is made, the mood of lock-up in loss is very complicated. Because no one is willing to face the loss, as the loss expands, they don’t want to bear this loss, and they can’t bear to cut the flesh. Moreover, the main reason for the loss of the lock order is that the trader did not strictly implement the stop loss, which is a wrong start in itself. If you go to lock the order again, you will add new risks on the basis of the original errors.
There are also locks in the event of a loss, because there is not enough funds to carry orders. At this time, there will be a slight illusion, thinking that the loss will be locked first. When the market reverses, throw away the order on one side, so that you can come back to life. Although it looks simple, it is a world of difference in execution.
As mentioned earlier, the loss lock order only temporarily relieves your trading pressure, and does not really solve the problem. Because when unlocking, you still have to make a choice, you have to consider which direction the order should be discarded first.
It was originally a state of loss, and the mood must be very bad. Under such a huge pressure, there will definitely be confusion, indecision, escape from reality, and self-defeating psychology. This further increases the psychological pressure for traders. In the case of extremely sensitive nerves, if the market changes slightly, it is very likely that they will make wrong decisions.
Especially when the market is in a volatile market, it is likely to disrupt your trading ideas, leading to frequent entry and exit. Obviously it has been unlocked, and the market continues to lock the position while worrying that the market is moving in an unfavorable direction. This will fall into a vicious circle, which will only increase more transaction costs or expand the amount of loss, and finally there is the possibility of liquidation.
Therefore, if the stop loss was executed resolutely at the beginning, it may only be a loss of a few hundred dollars. An irrational foreign exchange lock-up decision may cause thousands or tens of thousands of losses. And when the position is locked, there is no energy to pay attention to other products, so that the opportunity that could have been profitable is also missed.