Forex locking and unlocking - Lock Forex strategy | Litefinance (2024)

We shall discuss the famous concept of locks in trading; how to enter and exit it, and, also, how traders deceive themselves.

Let's figure outwhy do traders use locks? What should you do if you got in a lock? How to get out of a lock in forex?

What is a locked position in Forex and how do you get out of it

There is a belief that an advanced trader knows about the price movement more than an average person. Well, of course - everyone saw beautiful advertising pictures with a boy in a jacket, sitting in front of computer screens with some sort of indicators and looking at them. And the less clear the purpose of these indicators, the better - so that ordinary people can realize their ignorance. It makes a strong impression, I agree. Well, for the sake of an example.

I wonder what so useful they see there and what the grey-haired man is showing on the screen.

It looks like it is an ideal trader. And you are going to become like this in future. You will also be looking at some sorts of things and THEY will a kind of indicate where the price will go next...Nothing like that!

What is a locked position in Forex?

Locking (a locked position) is a type of hedging in Forex. To "lock" a position, you have to open two trades on one instrument but in opposite directions. The locking strategy is used both as a trading strategy and a way to turn an unfavourable position into a profitable one. This second way may harm a beginner trader.

Let's see the reasons why traders get themselves "locked" and the ways to get out of the locked position.

So, let’s speak more to the point.

Why we take much to the things like forex locks

In this part, I’ll describe what makes people use different kinds of locks, averaging and something like this. If you are interested in the concept of the lock itself and how to operate with it in practice, you’d better skip this part. But if you often use locks and you get sick of it, read this part attentively. I hope, all that is written below will clarify something.

To cut it short, a person doesn’t like making errors. But if you don’t know the future, sooner or later, you’ll make that “error”, for example:

• you’ll enter a trade in the wrong direction;

• the price will trigger your stop loss and instantly go back;

• the price will almost touch your take profit and reverse.

It is painful to make mistakes because you feel foolish. And, as you want to avoid this feeling, at first, you long for discovering such a tool that will help you be right as often as possible (in fact, we all hope to be always right). We don’t even understand what this tool should be like. Therefore, the situation described above, when the guys are looking at something completely unclear, is so attractive. It seems that they have that magic tool and that is how they make money on trading.

At first, traders are extremely upset with themselves, because they are often (as they think) wrong. And, until the instrument, that will improve their performance, hasn’t yet been discovered, forex traders may start locking positions, or using locks. The lock allows you to deny a loss and give yourself a chance to avoid the loss in future. In fact, in their heart, traders feel that this approach is wrong and it won’t provide a steady income, but they can’t give it up because they are not 100% sure that it is so (yes, the matter is not in the lack of willpower).

A trader suffers from the pain, caused by the feeling that the loss has resulted from the wrong market analysis. It is like, if the trade is winning, you have understood everything correctly. If the trade is losing, you have understood something wrong. Locking gives a hope that, “I haven’t considered something now”, but next time, I’ll “consider everything” and manage to avoid the loss. But this point is based on the misunderstanding of the situation about the principles of the price movements; a beginner trader’s mind is not yet ready to accept it (yes, the matter is not in stupidity).

The right understanding starts with the inner feeling that a losing trade doesn’t define a trader in any way – neither as a fool nor as a clever man, it tells nothing about a trader. A losing trade neither defines the quality of the chart analysis – whether it is analyzed well or not.

The right point of view is when you yourself see/realize/feel that a losing trade is just a piece of impersonal evidence (like, for example, rain or wind) that the price didn’t go where you have expected. That is, you understand that you just can’t learn in advance where the price will go. You will never able to know it.

A profitable trade is the same impersonal evidence that the price went in the expected direction. And again, you couldn’t by any signs learn in advance where it will move. Not by means of trendlines, not by “strong price level”, not by any other indicators. That is when a trader gets calm and makes the first small step to conscious trading.

If you can’t forecast the future, and you need to somehow generate income, the inevitable conclusion is that trading is just profitable trades without losing ones. It means losing trades are acceptable as a natural part of the process, rather than a kind of failure. Therefore, you need to find out such entry parameters that will allow you to make profits not from each trade, but after you’ve made a few of them. So, you need to work out a sort of “perfect trade pattern”. What do I mean? Let’s see a comparison.

For example, you are an owner of a business and want to hire an employee. I’m sure, you’ll prefer good-looking people and positive career changes at their previous jobs, that is they have been promoted and/or they have been working at the previous work more than a couple of months. So, there is a kind of a pattern of what your future employee should be like. You will direct those who match to this pattern to the next round of the interview. You will reject right away those who don’t match. This way, you’ll select a few candidates who are likely to suit you.

Note that this pattern can tell nothing about the candidates’ skills. It just allows to filter off those who are initially not interesting for the company. However, among those who "passed", there will certainly be less competent (unprofitable for the company) and more competent (profitable for the company) workers.

Is it possible to find such parameters of the pattern that will 100% identify an employee, profitable for the company? I don’t think so.

That is, the pattern is a kind of a rough selection, based on common sense. Then, what is the “common sense” in trading?

Common sense in trading is performance. Simply put, the financial outcome of trading decisions.

First, you need to find some repeated situation, attach the rules of entry/stop-loss/ take profit and test. That will be your pattern or pattern. If, following 100 trades, your deposit decreases, the pattern is bad. You need to look for another price situation or change the rules of entry/stop-loss/ take profit. If your deposit increases, you keep the pattern.

That’s it. Now, you see what situation is good to enter a trade. Ifa result of your pattern use is positive, it makes no sense to guess where the price should go at a particular moment. There is another matter if there is a suitable pattern in the chart or not.

Besides, with each particular trade, you’ll understand that it may be losing. But you won’t worry because what matters is the result of a SERIES of trades, rather than of a single one. Will get upset because of one losing trade if you know that your trading strategy yields you steady profits as the total outcome?

P.S. Of course, it is not that simple and you’ll need to update and improve your pattern many times so that it will become “the right one”. How will you understand that it is already “the right one”? But how did you understand that you’ve learnt to walk? :)

And now, to the point.

What is lock in trading

A lock (or a locked position) is when a trader doesn’t exit a losing trade but opens the position of the same size in the opposite direction. For example, you open a buy position at the price of 1.16243. The price goes down, i.e. against you. And you open a sell position at 1.16224, WITHOUT CLOSING the buy position.

As a result, thecurrent loss is fixed but the losing trade is not exited:

• if the price goes up, the situation of the buy trade will be improving, and the case with the sell trade will be getting worse;
• if the price goes down lower, the growing loss from the buy position will be covered by the profit from the sell one.

In fact, this lock (or locking in) is just a stop loss but postponed. Using locks, a trader doesn’t “accept” the loss and is going to wait out an “uncertain situation”.

You are likely to read on the Internet that locks are allegedly a feature of advanced traders, and they are said to use them. However, locking in is ALREADY suggests that a trader expects a “certain” situation in future when the price next move will be “clear”. Alas. But this approach means a lack of experience and professional skills. It means that a person doesn’t understand the principle of making profits from trading.

The logic is like this: “I will cover a losing position now because it is not clear where the trend is going. And when it is clear I’ll exit the lock and take the profit”. Well, here is an example when it is first “unclear where the trend will go”, and then “it is clear”:

The approach suggests the same “forecasting”, I mentioned in the beginning: a trader expects that the chart will provide some certainty regarding the future, i.e. when it is clear what will happen next. What professionalism is it about? :) In fact, such trader considers not the current situation (the trend is upward, so may continue) but his/her own expectations (the trend is upward/the price rebound from the level/ indicators meet, and so, the price will go up and I will buy). Yes, this trader may guess the further price direction. But what distance will it move at? Will it be sufficient to cover the loss? Nobody knows. What do you yourself think, whether a person with such an approach (when he/she doesn’t know for sure the exit point) can generate a steady income?

How do you get in a lock while trading?

It is very easy. It is enough to be excitable and vulnerable to your feelings.

The reasons of using locks are ALWAYS psychological:

• Unwillingness to admit that your forecast is wrong (the price may go up not now but later);
• Willingness to “outsmart” the market that seems to be trying to trick you (it may trigger stop loss and then go in the needed direction);
• Irrational greed (when you lock a losing purchase by a sell, hoping to close at least one of these trades with a profit because you are sick and tired of this Forex);

All these reasons are united by the feeling that a trader “doesn’t know enough to forecast the market correctly”. Until this feeling is replaced by the feeling that it is impossible to forecast the market at all, each loss will be seen as the evidence of the trader’s stupidity. It can be cured only by a huge amount of practice and nothing else.

How to avoid the influence of these psychological reasons on your trading? You can’t do it by means of theory:) I can provide you with hundreds of thousands of reasonable arguments why it is harmful not to admit that you’ve been wrong in trading. And why there is no point in trying to outsmart the market. As well as why you can’t anticipate the price further movements. But even having read all of this and having agreed with it, traders will still try to do these absurd (even in their opinion) things. Why? Because they aren'tsure. Because “what if I can in spite of everything”. I don’t criticize anyone, it a natural part of becoming a trader.

Well. To stop doing absurd things, resulting in the use of locks and further sad questions like “how to get out of a lock, help”, traders need to use as many times, so that they see themselves that it doesn’t work. Again, why is it so? It is because we all trust only ourselves and other people can draw wrong conclusions. How can you know in advance who is right and who is wrong? You can’t do it. You can know only trying by yourself. Alas, it is not so again. :)

The most frequent casesof getting into a lock

Now, let’s see in what situations a trader may want to lock a position. The practical value of this article is that you’ll know yourself and feel psychologically comfortable (it very important) because “I’m not the only one of this kind”.

Example of locked position number 1: “in pursuit of price”

So, imagine that I’m trading according to horizontal levels. I discovered an excellent entry point in the chart, with a clear stop loss and take profit.

But, as I like looking at short timeframes, then, in M1 I see that the price “isn’t somehow going to the level, and is rebounding earlier”.

And a silent voice in my head is whispering “you should buy, or you’ll miss...” And I buy. And here is the price! Going down to the level, I originally wanted to enter.

Current result: the price went in the needed direction, and I am already at a loos. And here, I may want to cover my purchase by a sell position. The logic is like this: I expected the rebound from that level. If the price goes to my stop loss, I will close at least the sell position with a profit, so that the final loss will be less. If it rebounds and goes in the needed direction, I will close the sell position, expect the profit from the purchase and go to breakeven.

It is cool, isn’t it?

Certainly :)But the matter is that such an approach won’t yield a steady income: nobody guarantees, that the rebound will finally allow you to break even or will reach the take profit.

Variations of these moments for locking may also be when the price “almost reaches” the trend line, when indicators “almost sent” a signal during a candlestick constructing, and not after it is complete, and many other things. They are all united by the concept “entered too early”.

Case of locking №2: “how long do I need to wait? I’m sick and tired”

There are 2 scenarios.

The first one is when a trader doesn’t use stop losses. He/she enters a trade and the price goes on and on and on...And? Goes on moving against you :) And the trader is waiting and waiting and waiting for a reversal, and finally growth angry and locks the position, like “you can’t increase my loss any more”. I agree, it is nonsense, but this also happens. In this case, traders don’t usually plan the future, how they will get out of the lock. They just enter a lock and then whatever happens.

The second scenario is when you trade without stop losses and but you are a kind of “fighting” with the market for the profit. For example, you buy and the market continues going down. The market downtrend is in this case seen as an “evil act” of the market. “Stupid trader, why are you holding on your buy position when I am going down?” And then you give in and enter a sell trade. Like “if you are going down, I’ll follow you”. It is your brain’s attempt to anticipate the future, based on the current trend, and so you enter a trade for nobody knows what reason. It most often happens when you have made a few losing trades and you are already tired of “this evil market”; you can’t figure out where it will move next and you are already sick and tired :)

In these two cases, in my opinion, the chances to get out of the lock with fewer losses are extremely low. A trader expects “a clearer situation”, but it is like the situation when you expect it to become clearer of how many people you will meet today.

“Wait, wait... Doesn’t it mean that I still can successfully exit a lock?”, some readers may think. Both yes and no:) Let’s find out together.

How you can exit a lock

Let’s mark an important moment from the beginning. There is no way that will 100% allow you to get out of a lock without a loss. I know that because of this wording, I may look like a trader, trying to convince everyone of the impossibility just because he could not do it himself. So, we shall do like this: I’ll explain why it is impossible, and if you don’t believe, try to perform it yourself and write about the results in the comment section below.

Why it is impossible (proof by contradiction): if it were possible, so it would be 100% clear (i.e. without any risk to be mistaken) at some point where the price will go. And it is impossible for the reasons described in the beginning. That’s it.

A little more detailed explanation: To exit a lock “without a loss”, you basically need that the price covers the rest of the loss after you close on of the positions. That is, the price should go in the needed direction for the right number of points.

It can’t be so in any case and in any lock. If there is not 100% guarantee, so the price may go both in the needed direction and in the opposite one. And so, it may not cover the right needed distance; it can move for fewer points (if you are not lucky) and more points (if you are lucky). So, there is no guarantee that such an event will occur, if you don’t know the future.

Just in case: I am not saying that it is impossible to exit a lock without a loss. I am saying that this operation is of probability matter – you may succeed and you may fail as well.

So, now you see it; let’s try to figure out how you can increase the probability to exit the lock successfully.

To start, we need:

1) To understand what a timeframe is;

2) Trading strategy. Any. It may apply indicators, or it may not.

3) To understand the process of demand/offer interaction. In particular, the type of price movement.

Let’s see the most incredible case – when a trader was trading without any system, the position started yielding negative return and he/she locked it in and now wonders what do :)

First, we need to find out what loss should be covered. For example, it is 100 points. Next, we’ll need to know what a “timeframe” is. You may apply an indicator like ZigZag to see it clearer. Standard parameters of the indicator will quite suit.

So, we need to understand in what timeframe we will look for an entry point that hypothetically may be profitable and so it may help us cover the loss, yielded by the lock.

So, we attach ZigZag to the chart and see what is the average momentum length. That is how the indicator looks like in the M5 timeframe.

You see, that the average momentum length in the timeframe is about 30 points (there is EUR/USD pair in the example, but, in general, you should see the instrument, which is in locked position). And we need to cover 100 points. Therefore, we switch to a longer timeframe and see there. Finally, we find out that the average momentum of 100 points occurs in the H1 timeframe.

In this timeframe, we shall look for an entry point according to the chosen strategy. I’ll explain the indicator strategy, just for a change of an empty chart.

I’ve found on the Internet the strategy with the following parameters:

Moving average SМА with a period of 5,

Moving average EМА with a period of 20,

Moving average EМА with a period of 30.

A buy position is opened when two conditions a met at the same time:

1. The green line is above the blue one

2. The red line is above the green one

A sell position is opened, is two conditions are met simultaneously:

1. The green line is below the blue one

2. The red line is below the green one

We attach all of this to the chart and expect an entry signal. I suggest expecting the signal in the direction, in which a losing position is opened.

For example, if the purchase in the lock is yielding a loss, and the sell position – a profit, then we expect a buy signal.

After that we’ll also need to understand how the demand correlates with the offer and how it looks in the chart.

To cut it short, that is how a deficit looks like and the lack of strong willingness to sell at the price that has just increased.

What is going on: at some price, there are suddenly appeared many buyers with the deficit and the price has sharply risen. But if the higher price were appealing for sellers, they would fast start selling to enter a profitable trade ON TIME.

However, we see that the price is going down very slowly, i.e. sellers are either passive and are not in a hurry, or buyers buy out all sell orders, seeing the price be still too low. Based on these two situations, I can conclude that the price, according to the market at the GIVEN MOMENT is not high enough and is LIKELY to be rising higher. That is what the price chart should be like to suggest an entry signal.

And that is how more or less mutual interest between buyers and sellers looks like.

In the given example, we, on the contrary, see that there demand is rather high at a “low” price, and there is a considerable offer from sellers at a “high” price. The situation doesn’t imply a change in the probability, so, even if we receive an entry signal with this price chart, we shouldn’t open the lock and should wait for some more time.

I will again repeat myself again, just try to remind yourself during your operation of exiting the lock: above there is described the way to look for such a situation in the market when there are more favorable conditions than unfavorable ones. But you shouldn’t expect that “Yeah, if there is demand and there is no offer, then the price will surely go in the needed direction” praising that you have at last found a good signal. Yes, the probability is higher, there is still no certainty.

So, if the result is successful, you’ll exit the lock without a loss, or maybe even with a profit. If the result is negative, your stop loss will be triggered. I understand that it is fearful, because in the negative case, the loss will be even more than it was yielded by the lock previously. But try to look at this in the following way: you pay 20 dollars for a lottery ticket that is 50% likely to win 80 dollars. Yes, you may lose all you 20 dollars, but you may earn 60. In case with a lock, you pay with probability of a slight increase in the loss for the probability to totally cover it.

Next, I’ll describe some basics about the probability. I use rough calculations, just to explain the essence more or less clearly.

Imagine that the likelihood of the price movement up and down at our entry point is 50%. Therefore, if a stop loss is equal to take profit, then each of them is 50% likely to work out. It means that conventionally 2 out of 4 trades would bringa profit and 2 wouldclose ata loss. The final result would be 0.

Therefore, if with this equal probability (that the price may go up and down for the same distance) we increase take profit and leave stop loss the same, then we REDUCE the chance of reaching take profit and INCREASE the likelihood of the stop loss to work out.

For example, if a take profit is at the distance that is three times longer than the stop loss, 3 out of 4 trades will be losing (with a small loss each) and one trade will be profitable (with a big profit) that will cover three previous losses.

In the same way, if we increase the stop loss and leave the take profit the same, we INCREASE the chance of reaching take profit and REDUCE the likelihood that the stop loss will be triggered.

In this case, one big losing trade will be covered by three small profitable ones.

Taking this into consideration, traders need to figure out, which way is more comfortable to exit the lock.

If the way “all at once by one step” is more convenient for you, look for strategies where take profit is more than stop loss. Take profit in this case will be the size of the loss, caused by the lock.

If it is more convenient for you to go “slowly but steady”, but with a higher chance for success, accordingly, look for a strategy where take profit is less or equal to stop loss.

There may be situations when something goes wrong. For example, when in the first case a stop loss works out. Or when in the second case 2 take profits work out and then a stop loss is triggered… You shouldn’t panic in any case, that is market, it cannot be predicted :) I offer you to develop you trader smartness, and suggest the ways to act in these cases. If there still problems, write in the comment sections, I’ll help you.

So, when you found a strategy, the algorithm of your further actions is like this:

1. Expect the entry signal, sent by the system, to be in the right type of the price movement ( a momentum);

2. Take a deep inhale and exhale;

3. Close the locked position that is currently profitable (in the figure with opened positions, it is a purchase). The losing position is left opened (in the figure, it is a sell).

4. You still put a stop loss for the currently losing position, according to the strategy rules.

5. Expect.

That’s it, nothing depends on you next. You’ve done everything you could – you’ve maximized the likelihood of a positive outcome. If you were doing everything according to the algorithm, you can be proud of yourself: at these moments of analysis, expecting the right conditions and actions according to the system, you’ve made on of the most expert steps in your trader career.

You should take into account that exiting a lock is a try to catch a lucky chance. Basically, any try to exit a lock is a common trade. Only, you take your chance not by making a profit, but by covering the current loss; and you miss a chance when you loss is increased by the stop loss size. Before you exit a lock, you need to understand that this chance is paid. You pay for a chance to fully cover your loss by the risk to increase it a little more.

Otherwise (if you don’t want to “pay”), you’ll be looking eternally looking for a magic signal that the price will 100% surely go in the needed direction.

If you have, so to say, accepted by your heart that you need to pay for this chance, it is going to be much easier next.

Summary

So, if you risk something in any case, the conclusion is the following: the only thing you can do is to try by any effort to increase the PROBABILITY of a positive outcome. And now, let’s summarize what I have written above:

• We have found out the lock size, we need to cover. Here we try to make as few efforts as possible and cover the loss with the least number of trades. Just for the sake of common sense, like it is always better to take off a plaster by one motion, than a few ones.
• We have found a trading strategy. A clear entry point provides a system point of view and reduces mental pressure. We are focused. We know for sure what conditions are needed to enter a trade and to exit it. All of these increases the chances that we wait through until the needed distance is covered by the price and not to exit too early.
• We have understood the types of price movement. Expecting the needed type together with the entry signal, we increase the likelihood that the take profit will be reached. And so, then we are more likely to exit the lock successfully.

Note that it is a complex approach. All points are important. Itwill be a mistake to follow just a single step, point number 3, alone, for example. It is because you won’t be sure that there is a global potential for the needed distance of the price movement. If you follow only point 2, the likelihood of making profit declines. If you apply only point 1, you risk to get stuck in constant emotional entering and exiting the trade, not having waited until you completely exit the lock.

Only this cumulative approach can provide increased probability of success in this difficult operation.

That’s basically all! I hope that the information form this article will help you avoid mistakes, which I understood from my personal sad experience. Other ways to exit the lock are the variations of the basis, described above. However, if you don’t agree and you have a better way, I’ll be glad to learn about it from your comments.

P.S. Did you like my article? Share it in social networks: it will be the best "thank you" :)

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