Some brokers will let you place orders on the same currency in the opposite direction. You can have a buy and a sell order at the same time (obviously at different prices).
Others I know have two brokerage accounts. From there they will execute buys and sells on the same currency. Usually it is used instead of a stop loss. If the price drops too far, a hedge is executed.
There is a problem with this. Instead of closing out the bad trade, you've now paid the spread twice for the same trade. That's a good way to go to the poor house!
The spread is an edge against the trader. It must be overcome and minimized at all opportunities. Hedging does exactly the opposite.
Traders, who use it, use it because of its psychological comfort. They don't have to admit that they were wrong and close a loss. They just hedge and lock in the loss, however, unrealized. Once hedged the market could rise 1000 pips or drop that many and the loss (whatever its size) is permanently fixed.
Those who use it say it's better because if the price turns and goes back in their direction, they can un-hedge and reap the profits. This line of thinking is presumptuous.
There is no guarantee that if the price starts to move in your direction that it will keep going long enough for you to get out with a profit (let alone break-even). How do you know when to un-hedge?
Far better to do the hard thing, admit you were wrong (close out the trade), and look for better trades.
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Nathan Pennington is a forex trader and the author of Winning Forex Trading -THE Definitive Guide
Source: www.articlecity.com
