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Hedge Stop Out

Posted on: 27 May 2013 , by: Pepperstone Support , category: About Trading

The diagram below shows what occurs for a Hedge Stop Out. Below is a diagram of the XAUUSD (Gold) before the market closes, during this time the spread widens, that is the bid price decreases and the ask price increases, this is the inverse of the relationship between bid – ask during normal market conditions. In a hedged position, your sell trades are closed by the ask line, and the buy trades are closed by the bid line. Normally, the loss of one position will be offset by the gain of another however when the spread widens like this, both positions create losses and can cause a stop out as margin will fall in the account. In a lot of cases, the stop out will occur on one position first but once the position has been closed, it has unbalanced the hedge and can cause all positions to be stopped out in a Hedge Stop Out.

Hedge Stop out

Spread widening on XAUUSD just before the rollover period

You will also note that in section 16.11 of our PDS, a description of how hedge positions can suffer losses is also provided.

"The ability to hedge allows you to hold both buy and sell positions in the same Contract simultaneously. You have the ability to enter the market without choosing a particular direction. While the ability to hedge is an appealing feature, you should be aware of the factors that may affect hedged Contracts. It is important to note that even a fully hedged Account may suffer losses due to rollover costs, exchange rate fluctuations or widening spreads. Such losses may also trigger a Margin Call."