Hedged orders, also known as offsetting orders, are orders made for the same instrument in opposite directions. For example, 1 lot Buy EURUSD and 1 lot Sell EURUSD. In this article, we’ve compiled all you need to know about hedged orders.
- Fully hedged vs. Partially hedged
- Margin on hedged orders
- Stop out on hedged orders
- Closing a hedged order
Fully hedged vs. Partially hedged
To understand the difference, let’s take a look at this example:
If you buy 5 lots EURUSD and sell 5 lots EURUSD, these orders are considered fully hedged since the volume is matching in full.
If you buy 5 lots EURUSD and sell 3 lots EURUSD, these orders are considered partially hedged.
There is no margin held for the 3 lots that are matching in volume, while for the remaining 2 lots of the buy order, the margin will still be kept on hold.
Margin on hedged orders
There is no margin held for hedged orders in these account types:
- Standard Cent
- Raw Spread
Note: You must open a buy and sell order simultaneously for the same instrument with the same account type for the order to be considered fully hedged.
What if the margin is being held on my hedged order?
If the margin is being held for hedged orders, it could be due to one of these reasons:
- You are trading in suffixes.
Hedged orders must be the same instrument from the same account type.
While different account types offer unique contract specifications for the same trading instrument. Orders are not considered hedged for the same instruments if different account suffixes are used for the buy and sell orders, as each account type has its own market conditions.
For example, if you have a buy order in EURUSD and a sell order in EURUSDm, full margin will be held for both orders.
- You have closed a part of the hedged order.
When two orders are hedged and you close one of them, the other order gets automatically unhedged. Thus, a full margin is held for it.
Note: If closing a part of a hedged order during a high market volatility period (like before market closure), the margin requirement for the unhedged order may be higher. Learn more about why you can’t close a hedged order.
Stop out on hedged orders
It is possible for a hedged order to stop out when using MT5, if the order results in negative equity (equity < 0). In this case, the trading account will stop out and the order will be closed to prevent a negative balance.
Closing a hedged order
When choosing to close an order that is hedged, its counterpart gets unhedged automatically, resulting in margin being charged for the remaining order.
Here’s an example:
You have two orders of 3 lots of Buy EURUSD and 3 lots of Sell EURUSD, completely hedged with no margin held.
If you choose to close the 3 lots of Buy EURUSD, the remaining 3 lots of Sell EURUSD become unhedged, and full margin will be held for those 3 lots.
Note: If you are closing orders using a close-by hedge or partially close in Bitcoin Cash, Ethereum, Litecoin, or Ripple, the volume of the closed position cannot be less than 0.1 lot (10 lots in the case of Ripple).
Why can’t I close a hedged order?
This may happen because you are attempting to close an order during a period of higher margin requirements, usually present during times of high market volatility.
It is our policy during high market volatility that all leverage above 1:200 is calculated at 1:200, to minimize risk for the trader and broker.
No margin is held on hedged orders for all instruments except cryptocurrencies. However, during a period of higher margin requirements, closing an open hedged position can fail if there is insufficient free margin to cover the higher margin requirements, specifically the higher margin requirements on the latter half of a hedged order at the time of closing.
Tip: Always ensure that you have sufficient free margin in your account in order to be able to cover the higher margin requirements during high market volatility.
To understand this further, here’s an example:
You deposit 100 USD and open a Buy position for 1 lot EURUSD and a Sell position of 1 lot EURUSD with a leverage of 1:2000 at the price of 1.1000. The free margin at the moment of opening hedged positions is USD 86.
At the time of higher margin requirements when the leverage changes to 1:200, you decide to close the Sell position.
The expected margin for the remaining order is calculated as follows:
= Lot x Contract Size / Leverage x Current Market Price EURUSD
= 1 x 100000 / 200 x 1.100
= USD 550
The free margin in this case will be negative:
86 - 550 = USD -464
Therefore, you won’t be able to close the hedged position as there is an insufficient amount of free margin (USD -464) to support the margin requirements.