A freeze, not a solution
Open an opposing position of equal size and the floating loss stops moving — that is all that happens. The loss was not removed but frozen where it stood, and you now hold two positions consuming double the margin and paying swap on both.
So hedging deserves a direct question: what does it give you that simply closing does not? For most retail trading the answer is deferring the admission of a loss — a psychological price paid in money. For a company protecting foreign-currency cash flow the answer is entirely different, and real.
The same dollar through each control
The reference account for this family: $1,000, risking 1% — $10 a trade — on 0.01 lots of gold, where $1 of price is $1 of money. A $10 stop distance is therefore exactly 1% of the account.
Every page here follows that same dollar through a different control: how much I risk, when I remove the risk, and how many losses the account can absorb before it is finished.
A worked example
Buy 0.10 lots of gold at 2,400; price falls to 2,350 for a $500 floating loss. You open a 0.10 lot sell, and the loss freezes at $500 whatever price does next.
But the held margin has doubled, swap is charged on both positions, and the $500 has not moved. Simply closing would have realised exactly the same $500 — with no extra margin, no swap, and no deferred decision. The only difference is that closing makes the number final on screen, and that comfort carries a cost that repeats every night.
Common mistakes with this term
- Using it to defer admitting a loss, so the costs continue while the decision stays unmade.
- Assuming the two positions cancel margin, when many brokers hold margin on both.
- Overlooking that hedging with a correlated instrument is not a complete hedge; correlation shifts and can break.