Is there such a thing as a no-loss hedging strategy?
That's the question that I will answer in this article.
I'm going to take a realistic look at trading strategies that claim to win 100% of the time.
First I'll define no-loss, then I'll share the strategies, and I'll finally review them based on my backtesting.
Are There Really No-Loss Strategies?
Let's get one thing out of the way, there's no such thing as a trading strategy that has 100% wins.
That's simply not possible.
However, the following trading strategies claim that they can put on a series of trades that will be closed at a net profit, 100% of the time.
That's a big difference.
For example let's say that a hedging strategy puts on a series of trades that have the following results:
These trades net out at a profit of +$427, but there was a 50% win rate.
The overall result was profitable, although there were losing trades within this set of trades.
Even if a strategy doesn't win 100% of the time, it can be very useful if it's net profitable for a long period of time.
Now let's find out what these strategies are like, and I'll give you my opinion of their claims, based on my experience.
No-Loss Hedging Strategies
I've been researching hedging strategies for years and I've found that there are 2 strategies that claim to be “no-loss” and seem to have merit.
Remember, I'm not saying that these strategies actually work.
My intent is simply to see if they have any potential and if they could be tradable for the average person.
But if I'm going to examine these strategies properly, I have to define them first.
The Zone Recovery Method
Once of the most popular “no-loss” hedging methods on the internet is called the Zone Recovery Method.
There have been a ton of copycat YouTube videos made about this method.
As far as I can tell, the guy in this video has popularized this hedging strategy.
The idea behind this method is that price will eventually break out, so he adds positions within a range, until price does break out.
Yes, this could be dangerous if the market consolidates for a long period of time.
However, if the volatility is high enough, price should eventually break out.
At least that's the theory.
The Grid Method
Another hedging strategy that claims to be no-loss is the grid hedging method.
There are different flavors of grid hedging but this video claims a no-loss result.
The basic idea behind this strategy is that the market will turn around at some point in the near future, so you just have to keep placing trades until the market turns and takes you out at a profit or breakeven.
There are several people who teach this type of a method and have a similar formula.
With this concept in mind, the strategy sets up a grid at set intervals on a chart. For example, it might setup a grid that has levels that are 25 pips apart.
Whenever price hits a grid level, you would take a fully hedged trade.
At first glance, that doesn't make sense because you don't make any money with a 100% hedge.
But the key is to take profit on winning trades, then wait for price to retrace and exit all of the previous trades at a profit.
Watch the video above for details.
Review of the Hedging Strategies
Now that you know the trading strategies and what they claim they can do, I'm going to analyze the strategies and give you my opinion of them, based on my testing.
The Grid Method
I'm starting with the grid method because I believe that this strategy doesn't work.
It probably works over a short period of time, but my testing has shown that it won't work over the long run.
Maybe I'm missing something, but that has been my experience.
The success of this method relies on the fact that the market is likely to turn around at some point and cash out the open trades at a net profit.
However, there will be times when price trends and does not pull back enough. That is when the strategy will get caught with a big loss.
In fact, he even says at 14:14 in the video above, that there are going to be some losses.
If a trader is good at identifying trending/consolidating markets, and uses good risk management, then that could improve the results dramatically.
Now in all fairness, I have not tried out his EA. Even if the EA does not have a 100% win rate, it could still be net profitable.
But based on my own manual testing results, it's very unlikely that this method could be profitable over the long run, especially since strong trends are not predictable.
Another reason that I feel this strategy won't work is because of the dynamic nature of the markets.
Even if you optimize the method for a particular Forex pair, volatility in the market will change periodically and the grid sizes would have to be adjusted.
Once you adjust the grid, volatility could change again. It's like trying to hit a moving target.
On top of that, spreads change throughout the trading day and that would dramatically affect the performance of the strategy.
There just seems to be too much discretion involved, there are too many variables to account for, and it's not something you could run all the time.
You would probably have to know when to turn it on and off…if it works at all.
That's why it's important to learn how to backtest for yourself. You need to know how to test out ideas and find out if they are as good as they claim.
So in summary, this is not something that I'm going to pursue.
The Zone Recovery Method
This strategy does have potential.
I did manually backtest it, but it takes a lot of time because of all the logic involved in entering and exiting trades.
The presenter in the video also says that he uses automation to trade this strategy.
That makes sense.
It's probably the only way that it could be traded successfully.
Since I haven't been able to code up a EA yet, I'm going to provide some observations that I had in my limited manual testing.
I could see this working if the following conditions are met:
- Completely automated with an EA
- Only open trades during high volume times. The London and NY opens would probably be best.
- Wait for high volatility periods before turning the EA on
- The account has to be large enough to carry the necessary number of open trades
My biggest concern is the martingale-ish nature of the strategy.
It's not full-on martingale, but does increase position sizes as new trades are taken.
There would have to be enough money in the account and only a few trades could be taken at once.
That might not be a huge deal. But again, more automated testing would have to be done.
I did some research on this guy and tried to find his automated program so I could test it. Unfortunately, it seems that he has moved on from offering his automated platform publicly and is working on another project in politics.
As I was looking around for a substitute “Zone Recovery EA” to possibly test out this method, I wasn't able to find anything that follows this exact formula.
Well, at least at a price that I was willing to risk. There are some EAs that cost $1,000 or more.
But risking that much on a random MetaTrader Marketplace EA is just dumb.
I did purchase one EA for about $100, that claimed to be a Zone Recovery EA. But after I started using it, I found out that it wasn't following the rules of the original strategy.
Unfortunately, that's pretty common with a lot of EAs out there.
So this method would require more automated testing, but I'm also cautiously optimistic that it could have an edge, and might even live up to the no-loss claim.
So that's the reality of no-loss hedging strategies.
There are no free lunches in trading and any trading strategy that claims to be “no-loss” has to be evaluated closely because it has the odds stacked greatly against it.
In my opinion, it is FAR easier to hedge manually and not rely on an automated trading program.
If you want to learn the hedging method that works for me, check out my Zen8 Forex Hedging Program.
It's NOT a no-loss strategy, but it works for me and it might work for you too.