Only the lazy missed the topic of our today’s review, and there are a lot of opinions about the benefits and dangers of using this trade method among Forex traders.
The topic is as follows: what is a lock and what do we do with it. Is it even useful?
Technically, the lock allows you to avoid losing trades.
As it follows from the definition itself, these are two positions of equal volume for the same instrument opened in a different directions (buy and sell). Absurd as it may seem at first glance, it actually is not.
Use. Pros and cons
So, what do we need it for (if we do at all)?
There is the concept of risk management. And risk management tools include margin deposit volume, stop order for limiting losses (closing the transaction in case the expected scenario is cancelled) and the above-mentioned subject of the discussion. What are its advantages and disadvantages when compared to a stop loss?
The advantage is clear - in case of opening a position in the opposite direction with respect to the one opened earlier, but at a less favorable price, the account balance will not decrease. The trader has time to analyze their mistake made when opening the position and is forced to lock the positions with a possibility of still bringing it into profit zone.
The downside is the fact that equity (available trading amount) is reduced. And, naturally, you will have to exit the lock.
Summary: The solution is more complicated than using a stop order, but the possibility of getting a loss immediately after reaching a critical level is at least delayed, and maybe even can be be avoided.
Lock as an alternative to stop loss – graphic illustration
When the price approaches the resistance level (horizontal red line), we open a sell order along with the market (1.08239 - red mark) and set a buy order with a condition that the resistance level must be broken (1.8429 - green mark).
We make sure that the trend is ascending (the subsequent low is higher than the previous one, as is the high, respectively), and when the price passes the former resistance level again, we close the sell order.
There is another trading application for the lock, namely - with the support of a profitable position. As you know, the price does not go straight, alas. According to numerous studies, the mechanism of its movement is of a wave nature, and the trends interchange with corrections. In this case, in order to save profits, if you don’t want to open additional positions at the current price in the direction of the trend, and at the same time, you have no desire to close the current profitable positions, you can lock the current profit as a temporary measure for fixing it.
Advantages: the current profit will not go anywhere, and in the case of correction, you can earn extra money by closing the position of the locking trade in the profit zone, or put it in breakeven, let the price close it in case of continuation of the trend and get additional profit in the main position opened earlier along with the trend.
Disadvantages: the possibility of getting less profit from incorrect closing in case of correction, if the trader made a mistake in the analysis of the movement structure (what they took for correction turned out to be a trend in the direction of locking).
Lock as an additional profit option when trading in a correction - graphic illustration
When the resistance level (horizontal red line) is reverse tested, we sell (1.082217 - red mark) a volume equal to the purchase from the level 1.05621 (green mark).
When the resistance level is broken again, we close the sell position and leave a profitable position in the direction of the main trend.
As it turned out in the end, a trade solution that seemed illogical at first glance is often used in the implementation of various trading strategies.
So, the general summary of the above described two options for using locking positions is as follows:
- retains the balance of the account and saves you some nerves in case of the wrong analysis of market trends, which results in the triggering of stop orders to limit losses;
- provides an opportunity for additional profit when trading in corrections, provided that the main position is open in the direction of the trend;
- technique-wise, the strategy is complex and requires experience and knowledge in analyzing the structure of the price movement for its successful application.
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The content of this article reflects the author’s opinion and does not necessarily reflect the official position of LiteForex. The material published on this page is provided for informational purposes only and should not be considered as the provision of investment advice for the purposes of Directive 2004/39/EC.