If a trader made an erroneous entry into the market, he can reverse the position. During exchange trading, there are times when an open order suddenly goes negative. In this case, the market player has two options: fix the loss or change the current situation with the help of special techniques. Today’s article will introduce the market player to several tactics that can be applied in practical trading.
Position reversal – what is it?
As you know, quotes move unpredictably and it is impossible to know exactly where the market will go in the next moment. In this regard, traders often open unprofitable positions, regretting the mistakes made. If an exchange player is not ready to give up, then he can take certain measures and reverse the position in the market. In fact, this is the closing of one order and the simultaneous opening of the opposite one.
This method is often confused with locking, but there is a big difference between these approaches. When setting a lock, both positions remain open and block each other. They form a “lock”, allowing you to save part of the invested funds. The reversal of a position on the exchange provides for only one open order, which can bring good profits and cover existing losses.
At first glance, the technique looks quite simple. A trader only needs to close a losing order and open a new one using the same asset and in the opposite direction. In practice, it often happens that after a reversal of the current position, a trend change occurs. In this case, a new order also brings a loss, increasing the total loss. In order not to be in a difficult situation, a stock player must make a qualitative analysis, make a forecast of price movement for the selected financial asset.
Tactics for reversing positions
This strategy involves high risks. If a stock player makes a mistake when making a forecast, then his state of affairs will be deplorable. Do not confuse a reversal with a price correction that will end in a few minutes. A market trader must clearly understand what the price movement depends on and for what reasons it has changed to the opposite.
Understanding what a position reversal is, a trader can emerge victorious from the most difficult situation. At the same time, the choice of tactics should be based on the existing market situation. If this is a spontaneous decision caused by a storm of emotions, then it is worth delaying the opening of new orders. There is a possibility that the beginner misjudged the stock trend and made a gross mistake. Feelings are the main enemy of a trader who wants to achieve high results.
If a deep analysis of the market situation has confirmed the fears of a stock player, then a number of actions must be taken. The reversal of the position is carried out in several stages:
- Schedule monitoring. Let’s assume that a trader opened a short on the euro-dollar pair. He predicted a long bearish trend, but the situation has changed, and now the quote is heading up.
- If a stock player is in doubt, he can block the position by locking. Thus, he will get some respite, be able to think about the situation and draw up a competent plan of action.
- When the price confirmed the reversal and continued to move in the opposite direction, you can reverse the position. Trading involves closing the first order, and therefore only one trading order remains on the market.
If a stock player is completely sure of a price reversal, he can immediately close a losing position and place the opposite one. If the volume of the second order is twice as large as the first one, then the market trader will be able to restore the initial balance and get a good profit. Fully aware of what it means to flip a position, a trader will make an informed investment decision. Depending on his confidence in the forecast, he will apply one or another trading strategy.