Currently, there are many proven, as well as quite controversial ways to conduct efficient trading. Position locking can be safely attributed to the second - controversial category. Trading systems using this method often receive contradictory reviews and are strongly criticized by representatives of both technical and fundamental analysis. Nevertheless, this trading methodology has been existing for many years and some traders managed to build profitable trading strategies on its basis. Let us have a closer look at position locking, and its peculiarities, advantages, and disadvantages.
What Is Locking In Forex Trading?
Locking is a way of trading by placing positions in different directions on a single instrument from one trading account. Locking in this case is basically holding two opposite orders. Let's assume that a trader opened a long position (Buy) of 0.1 lot on the EUR/USD currency pair. When a short position (Sell) of 0.1 lot on the EUR/USD currency pair is opened, a "lock" is formed. The name of the structure is not without reason. The two positions are locked. Now, no matter what the price movement is, the loss on one order will be blocked by a proportional profit of the other order. Theoretically, this will be the case until the trader exits the lock - actions aimed at closing one of the opposite orders, or both at once.
In most cases, the locking performs the same functions as the Stop Loss. However, triggering a Stop Loss order changes the equity and balance of a trading account (a losing position reduces them). However, the opening of an opposite order does not affect the balance, only the second parameter decreases.
Thus, a trader tries to avoid losses by creating a lock instead of setting a Stop Loss. In simple words, locking can be defined as - opening an opposite order against an existing position to limit losses on the trading account. On the one hand, it can play a cruel joke on the trader. After all, if the price direction is wrongly interpreted a second time, the trader will have to open a third position followed by a fourth one, and so on. The deposit will become "inflated". Orders will become difficult to control, and the brokerage company will take a substantial commission for the position roll-over. In this state of affairs, the loss of all funds (Margin call) is almost inevitable.
A significant positive moment, in this case, is the psychological condition of the trader. On the one hand, there is a deceptive substitution of a stop order for a lock, on the other hand, the trader in this situation is more calm and focused. The deposit is still intact and there is a chance to correct the situation. Today locking technique has several varieties. Depending on the volume and the number of opened positions, they are divided into the following ones:
- Full locking – this locking position is equal to the volume of the locked position;
- Partial locking – the volume of the locking position is less than the locked position;
- Triple locking – the locking order exceeds the locked position volume, or the number of locking orders is more than one.
Based on the moment of opening of the opposite position, there are the following types of locking:
- Negative – a locking order is opened when there is a loss in the locked position;
- Positive – this locking order is opened at the appearance of profit on the locked position;
- Zero – the locking order is placed when the locked order has come to break even.
Depending on the chosen trading strategy and trading system, different locking methods can be used both individually and together.
How To Apply Locking Strategy In Forex Trading
There are many locking-based trading strategies. Nevertheless, every trader has to create their trading system, depending on their psychological characteristics and trading preferences. Let us consider the simplest trading strategy of positive locking in forex trading. The trader chooses any trading pair and opens a position following the trend with market execution. After opening the "main" position, it is necessary to place a reverse order with pending execution on the same trading instrument, at the closest possible distance from the price (and therefore from the "main" order).
In case the main order is profitable, the locking order is used as a Trailing Stop before the position is brought to the necessary level of profitability. If the main order shows a loss, the pending locking order triggers, a lock is formed, and the losses of the main order are limited. The trader proceeds to work with the locking order.
Ideally, when a profit appears in the locking trade, it is closed using the Trailing Stop. The price movement returns to the trend and a new "reverse" pending order is placed, which accompanies the original (main) trade. As the breakeven level on the deposit is reached, it is recommended to gradually increase the distance between the main (active) order and the newly placed pending order. When the profit reaches the specified level, the orders are closed. It should be noted that the situation described above is an idealized variant of events. In practice, there are much more gloomy alternatives for the situation development after you place a locking position.
How To Exit A Locking Position
There are various ways to exit locking. The key in this case is not just exiting trades, but the ability to close them with profit. Let us have a look at the most popular ones:
- If the price is between locked orders, there is an opportunity to take advantage of fundamental factors. When significant news is released, an additional position in the direction of the expected price movement is opened on the border of the lock. A strong price movement can override the loss and form a profit;
- When the price reaches the reversal point, close the profitable trade and try to wait for the second order to break even. Close the second order with a minimal profit or set Stop Loss and make its movement proportional to the growth of profitability of the trade;
- When the pending locking order triggers, wait for its price to pull back to the opening point and close the position. Let the main position become profitable;
- If a steady price movement in the direction of the locking position is established, increase this position or the number of such orders. You should wait for the trade to break even and close the orders. It is possible to close the main position and wait for the profitability of locking positions;
- When the price returns to the values of the opening locus and the price movement consolidate near this level, the profitable position should be closed. If the price movement is again in the unprofitable direction, open a new locking position, but with a much smaller volume. Otherwise, wait for the main order to break even;
- If the price movement has returned to the direction originally intended, and quotes have moved significantly away from the locking order, increasing its unprofitability, then it is necessary to close the position using price pullbacks to minimize losses.
Should You Lock Your Losing Trades?
Several completely different categories of traders use locking in their trading. The largest group is traders who are new to trading. Their usage of locking can be explained by an unconscious desire to avoid worries related to the reduction of trading deposit, hope to wait out unfavorable market situations and, of course, to exit the lock with profit. In most cases, achievement of psychological comfort in a such way does not help the trader to get profit. Every time the trader new to the market gets out of the lock, they open a new locking order at a farther distance from the locked position. As a result, sooner or later, the equity of the account becomes so low that the broker's system does not allow locking the position. Further price movement toward the locked position leaves the trader without a deposit. The use of locking in this case is obviously useless. Another category of traders locking positions is professional traders. It is a relatively small group.
As a rule, locking is used by them in combination with other trading methods within a well-developed trading system. Such trading systems often have several reserve variants of exiting the lock, fundamental analysis for a trading instrument is carried out and expert advisers for locking are used. The use of locks, in this case, is justified, as it gives more flexibility and stability to the trading system.
Advantages And Disadvantages Of Locking In Forex Trading
Locking, like any trader's tool, has its positive and negative sides.
The advantages of the method include:
- State of psychological comfort (the main advantage). When a position is closed with a stop order, the size of the deposit is reduced. At a series of unsuccessful trades, the deposit melts before your eyes. In this situation, the trader experiences the strongest shock and anxiety. Locking gives the trader a second chance. In spite of the natural equity decrease, the trading account state remains unchanged until the lock is exited. The presence of exceptionally profitable trades in the Metatrader 4 report is undoubtedly encouraging for the investor;
- Reducing the number of losing positions. It's no secret that in financial markets there are situations when price movements defy any logical reasoning. In case of market noise, there is a high probability of Stop Loss triggering and a lot of losing positions appear. Locking is one of the ways to avoid increasing losses in trading;
- Gaining temporary advantage in decision making. Since placing a locking position leads, on the one hand, to the limitation of further losses, and on the other hand, the position remains open, the investor has a chance to think over further actions.
Still, there are some disadvantages:
- The complexity of getting out of the lock. Easily opened positions at the beginning of trade are bound to lead to difficulties in exiting them. As a rule, only a trader who can analyze the market can exit the lock with profit. Such traders open positions on the analysis as well, which creates further conditions for the successful closing of the position. It will be extremely difficult for a trader-beginner to exit the lock;
- Blocking of part of the deposit. This point is especially important for traders who do not have much money in their deposits. Even though the deposit amount does not decrease during locking, while losses are blocked, the equity amount becomes lower and the broker will not let the trader open new positions, including locking ones, at a certain moment.
- The risk of an increase in the locking volume. This locking feature is similar to Martingale. Hoping to cover losses, the trader can open the locking position more than the main one. As a result, the volume of orders in the lock will grow and eventually the trader's deposit will be lost.
- Increase in the cost of order servicing by the broker. At the opening of each order, the trader pays a spread to the broker, if the orders are often opened and closed without profit, the size of such expenses can become essential. Also holding the positions in the lock can last not one day but sometimes even weeks. For the transfer of an open position to the next trading period there will also be a fee, i.e. a swap. If the position is held for a long period, the swap can reach a considerable size.
- High mental stress. One of the advantages of locking is the feeling of psychological comfort. However, there is another side to this. By locking the position, the trader gets away from the problem for a while. However, the inability to get out of the lock and the increase of local volumes sooner or later will make themselves felt. The trader gets tired and understands that the problem that seemed to be avoided by opening a counter order has appeared again and in multiples of it. Such a situation can plunge even an experienced investor into despair.
Conclusion
Despite the controversy of locking, this method can be effective in limiting losses. It becomes possible when using it by an experienced trader within a well-tuned trading system. Partial or triple locking can increase the flexibility of the trading system, which is not always possible when using stop orders. For some emotional traders, locking can be a good option to limit losses, provided they understand the nature of this method.
At the same time, the use of this trading tool by a novice trader can increase the risk of losing the deposit many times over.
