Netting vs. Hedging: What Is The Difference?

Netting vs. Hedging: What is the Difference?



Many traders who use Forex terminals have come across a situation when they fail to place a lock and their open order is closed.

Another type of such a situation: when a second position on an instrument is open, the first position increased its volume for no obvious reasons. The explanation may be simple: the account could have been open by the *Netting *system.

The Netting system allows only one position open in any direction for one instrument. The system is used all over the stock market. To put it simpler, the trader cannot open selling and buying position on one instrument simultaneously - the positions mutually close, the orders open in one direction summing up.

The Hedging system allows as many open positions in different directions as you wish.

Why are there two types of accounts?

Why are there two types of accounts?

The answer is simple. The Netting system was initially used for trading on stock markets. After the Forex market appeared, there was an attempt to make trading and controlling open positions simpler. This allowed traders to use different strategies on one account.

Let us discuss the two systems in detail, looking at a couple of examples.

The Hedging system

Let us imagine a trader opened a position for buying EUR/USD (the opening price is now irrelevant). The volume is 1 lot. Sometime later, the trader decided to open a selling position on this instrument, also sized 1 lot. With the Hedging system, the positions will be opened and the traders locked: 1 lot EUR/USD buy and 1 lot sell. If we open a new position in the same direction as the first one in the Trade section there will appear a new order at a new price and volume. In theory, there can be as many such positions as you wish. They can be closed at any time in any order.

The Netting account system

The Netting account system

With the Netting system, a position in the opposite direction will close the first one if they are the same volume: 1 lot buy will be closed by 1 lot sale. In the case the trader is using different order volumes, the following happens: if the buy is 1 lot and the sell is 2 lots, the buy closes and 1 lot sell remains.

The same thing happens if there is 1 lot sell and 2 lots buy: part of the buy is closed and a part remains.

Another example:

A trader using the Netting system decides to open a buy sized 1 lot, then decides to open another buy trade. In this case, the orders are summed up and their volume averaged. Pending orders work the same way.

Summary

No doubt, both systems have their fans and haters.

For those who use locks a lot, Netting may be uncomfortable, as well as averaging. On the other hand, there are advantages to it. The trader will not find themselves in a lock randomly or by a mistake. An open position in a slump may be corrected by averaging: the price of the first open order changes, the slump in points reduces and the chance to close all positions with a profit enhances. If you trade on the stock market only, these are all the details you need to know.

Hedging will suit those traders who use locking and trade several orders on one instrument at a time.

In the R Trader terminal, the trader can choose any of the two systems for managing their account, which is, in its term, a serious advantage that allows using different strategies for all instruments. In this terminal, almost all instruments are available: currency pairs, metals, cryptocurrencies, as well as stock market instruments: US, German or Swiss stocks and indices.



Left unedited for writing style, spelling or punctuation.


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