It never ceases to amaze me how many articles in the Forex industry are called hedging and scalping, or scalping and hedging, especially considering that the only two things these strategies have in common is that they’re both widely used. Otherwise, there is no relation (except for those who use scalp using hedging techniques or hedge using scalping techniques; but then, there may as well be articles on coffee and scalping, since many of us drink coffee while we’re scalping).
OK, now first off, I’d like to make it clear that some brokers do not allow you to scalp, and by that I mean they won’t let you engage in the kind of scalping that is illegal, i.e. the fraudulent type that means you enter a position, find some way to force the asset up or down, then close the position at the resulting profit, otherwise known as front-running; and chances are you’re not doing that since you’ve got to be a broker with clients moving enough volume to fraudulently influence the market (and in Forex, at least, that involves really, really huge volumes). Moreover, MT4 actually enables access to expert advisers whose task is to scalp.
Let’s look at some definitions first:
Hedging is where we open a position whose task it is to minimize our losses should a second open position begin to fail. We can do this by opening two positions in assets that are diametrically opposed to one another, like gold and US dollars. Because gold is priced in US dollars, and because its objective value (its total amount in the world and its demand are more or less fixed, and it has no extrinsic value) is relatively stable, what is left that can influence it is the value of the US dollar. As a result, gold and the US dollar usually move in opposing directions. Another example is opening opposing positions in commodities and the countries whose economies are based upon these assets, like copper and the Australian dollar: the Australian economy is firmly entrenched in its commodities production sector, and when the price for copper goes up, so does (with a slight lag) the value of the Australian dollar.
In other words, hedging is a form of safeguarding our portfolio (once we are invested in more than one asset, we have a portfolio of investments).
Now scalping, on the other hand, is a form of trading. Roughly, it entails investing large sums in very short-lived positions and profiting by a few pips each time (beyond the spread). Expect to make at least 5 and up to several hundred trades a day, and to be watching minute-sized charts. Obviously, if your broker charges a large spread, scalping is not a good idea, since you must find an asset to invest in whose short-term volatility is represented by an amplitude that is wider than the spread. Find a trending asset, then wait for it to retrace in order to enter. You’ll be wanting to take profit before the next retracement, or as soon as you have cleared the spread level (somewhere in between the two). Make sure you have a stop-loss in place just in case you have misidentified the retracement and your trend has actually reversed.
Scalping and hedging are just two techniques that dedicated traders use on a relatively frequent basis. You can discover more by joining Alvexo and accessing our Trading Academy.