This approach is called 'hedging' and implies buying and selling an asset at the same price at one moment. The trader gets two open trades, but at the same time must be twice as careful.
0. A clear strategy for an unclear strategy.
If you do not understand the market, use a hedging strategy, however, to trade a hedging strategy, you need to clearly understand the market. An oxymoron. This is the main problem of the method. In the chart, I consider setups (1) and (2) as an example. These are erroneous positions containing typical mistakes. But with hedging, mistakes and lack of experience are multiplied by two.
1. Costs of spread and commissions
When opening two opposite trades, you pay twice for both the opening commission and the spread (the difference between the buying and selling price), and funding for holding positions.
2. No net position
You find yourself in a situation where the total financial result at the moment is zero (or rather, even negative considering point 1). This makes the strategy meaningless if you do not have a clear understanding and plan to exit both positions with profit. And the plan itself resembles chasing two hares, resulting in neither hare being harmed, and the hunter remaining hungry.
3. Complex position management
Simultaneously holding opposite positions creates confusion. At what moment should each trade be closed? What to do when the market goes in the direction of one of them, while the other begins to incur significant losses?
It is necessary to close, for example, the short, leaving the long. At this point, as soon as only one position remains, the price may reverse instead of continuing to rise. This will start to reduce the profit from the long, but there will already be nothing to compensate for it since the short is closed. The final financial benefit of this begins to be negative.
Even in cases where the long justifies itself, it is difficult for you to fix the initial conditions, as the opening occurred in both directions, from uncertainty, from a not fully formed strategy. Otherwise, it is hard to explain such expenses on the second position, as a stop-loss is a much more effective tool for reducing risks from incorrect decisions.
4. Psychological stress
If you do not understand which direction to open a trade, and therefore open in both, you will continue to experience similar problems, but already with two trades eating away at your deposit. The best advice for such a situation: stay out of the market, 'sit on the fence,' and wait for confirmations to open either a buy or a sell. Moreover, it is not necessary to try to play in both directions. A beginner is better off playing from buys in a bull market, avoiding shorts like the plague, and from sells in a bear market, ignoring buys. Naturally, until the global trend changes (read more about this in my profile in other articles marked with #Newbie).
5. Risk of increasing losses
If both trades are managed without a clear strategy, there is a chance of closing both positions at a loss. In a volatile market, you can make a 'strike' of a series of doubly losing trades. Due to point 2, you cannot properly calculate the risk/reward ratio. You cannot rely on the formula '1 unit of loss brings at least 3 units of profit,' accordingly, you cannot come out ahead in the long term.
Furthermore, hedging can occur without setting stop-losses, under manual control of the situation. This will exacerbate losses if and when a strong sharp movement occurs. You can drive a car without brakes for some time and avoid accidents, but any slight mistake and it will all be over.
6. Freezing of deposit
When opening two trades in opposite directions, you block part of the deposit to maintain margin requirements for both positions. Practice shows that beginners can 'get careless,' i.e., not follow money management, incorrectly calculate the size of the entry into a trade. All this will lead to having two losing positions where almost the entire deposit is involved. Then margin call, tilt, and depression happen, which can be further exacerbated by market reversals after liquidations (see point 3).
7. Algorithms and robots
Here I will stop to elaborate. Why does the market reverse right after your stop is taken, or your deposit is liquidated? Sometimes this can seriously turn into mockery when a whole series of trades happens according to one scenario: minus your stop, then a reversal. This occurs for one banal reason: most think alike.
Let's imagine two different traders decide to open a position, for this they choose a place for the stop-loss. A trade with a risk to reward ratio of 1 to 1 makes no sense, even 1 to 2 is wasteful. Therefore, both traders will start planning a trade with a ratio of 1 to 3, 1 to 5, and more. And in most cases, these levels will approximately coincide. Thus, zones of concentration of limit orders for buying and selling will emerge -- liquidity zones. Orders are either money or goods ready to enter the market upon reaching certain levels.
Now it remains only to set up the robot in such a way that it buys below the possible stop-losses of buyers and sells above the possible stop-losses of sellers. If the robot is given a large deposit that allows it to 'move' the price in the desired direction, we will get manipulative fluctuations. The 'thinner' the market, the easier it is to manage. I think I will write a separate material about this, but simplified, the essence is clear.
Look again at the chart related to this article, now you will understand it better. And in general, there are quite a few places where both positions can go into the red:
Finally, one can briefly think about when hedging can actually be used. In my opinion -- never, but perhaps I just do not know how to prepare it. There is a similar tool called 'hedging' and this option deserves attention.
Hedging allows you to protect already received profit or part of it. For example, you have a long position in Bitcoin, say, from 75000. The current price is 105000 and you decided that the market has overheated, it is time for a correction. At the same time, you know that nothing falls all at once, especially on a strongly positive fundamental basis, accordingly, closing the long or reducing it is not considered. You open a short hoping to catch a brief wave of a pullback or even several. In case of brief corrections, you will be able to earn. However, if the correction is deep, the long will close, while the short continues to bring profit. In case of a continuous rise without a pullback, the short closes, taking a small fee for insurance.
The main difference from hedging is that you already have profit from the correct trend position, and hedging protects against the main risk -- against a trend break and reversal. Managing hedging and the size of the hedging position also requires understanding, however, it is much easier to work with this since the starting financial result is not negative, as in the case of hedging.
