Chapter 2 Open Position & Close Position, Hedge, Slippage
1. Open Position & Close Position
When you trade in the Forex market, you are opening and closing positions. An open position is any established or entered trade that has yet to close with an opposing trade. An open position can exist following a buy, a long position, a sell, or a short position. An open position represents market exposure for the investor, and the risk remains until the position is closed.
Closing position is the exact opposite of open position, referring to nullifying the position opened in the first place and eliminating the initial exposure. Closing a long position in trading implies selling your assets back to the market, while closing a short position involves buying assets back. The alteration between the prices when a trade was opened and initiated and the price when it was closed shows the gross profit or loss for that Forex position.
2. Hedge
Hedging with Forex is a strategy used to protect your position in a currency pair from an adverse move. For example, if you are going long on a foreign currency pair, a proper Forex hedge can protect you from downside risk. Alternatively, if you are going short on a foreign currency pair, it can protect you against upside risk.
Besides, it is typically a form of short-term protection when you are concerned about news or an event triggering volatility in currency markets.
But, it is important to remember that a Forex hedge is not a money making strategy. It is meant to protect from losses, not to make a profit. Moreover, most hedges are intended to remove a portion of the exposure risk rather than all of it, as there are costs to hedging that can outweigh the benefits after a certain point.
3. Slippage
Slippage refers to the difference between the expected price of a trade and the price at which the trade is executed. Slippage can occur at any time but is most prevalent during periods of higher volatility when market orders are used. It can also occur when a large order is executed but there isn't enough volume at the chosen price to maintain the current bid/ask spread.
Slippage does not denote a negative or positive movement. When an order is executed, the currency pair is purchased or sold at the most favorable price offered by a broker. This can produce results that are more favorable, equal to or less favorable than the intended execution price.
For example, If you attempt to buy the EUR/USD at the current market rate of 1.3650. When the order is filled, there are three potential outcomes: no slippage, positive slippage or negative slippage.
1. No Slippage
The order is submitted, and the best available buy price being offered is 1.3650 (exactly what we requested), the order is then filled at 1.3650.
2. Positive Slippage
The order is submitted, and the best available buy price being offered suddenly changes to 1.3640 (10 pips below our requested price), the order is then filled at this better price of 1.3640.
3. Negative Slippage
The order is submitted, and the best available buy price being offered suddenly changes to 1.3660 (10 pips above our requested price), the order is then filled at this price of 1.3660.
