Netting and hedging? What is the difference?

Netting and hedging? What is the difference?

The vast majority of traders, not only beginners but also more experienced ones, do not know the difference between these order execution systems.

Netting

Netting is a system of trade order management, which means that at the same time, on a trading account for the same instrument, only one position can be opened in any direction.

If there is already an open position for a symbol, the volume of that position will increase when a deal is executed in the same direction.

If there is already an open position for the instrument, and the second and further deals are executed in the opposite direction, a deal will be closed if the volume of a deal opened earlier is equal to the volume of a new deal or a deal will be opened in the opposite direction if the volume of a new deal is larger than the current position.

Let's look at an example, assuming that we already have an open buy in EUR/USD with 1 lot volume.

If you open another buy of 2 lots, then you will have one position with a total volume of 3 lots. In this case, the entry price will be averaged (1 lot of buy + 2 lots of buy = 3 lots of buy).

If you open a sell position with 1 lot, you will close the position (1 lot of buy - 1 lot of sell = 0).

If you open a sell position with 3 lots, your buy position will be closed, and a sell deal will open for the remaining volume of 2 lots (+1 lot of buy - 3 lots of sell = -2 lots of sell).

Hedging

Hedging is an accounting system of trade orders which allows you to open many positions for one and the same instrument in different directions. When you open two opposite positions with the same symbol, for example, buy EUR/USD 1 lot and sell EUR/USD 2 lots, they are both displayed in the terminal, and a locking position occurs. There can be any number of such oppositely directed positions, and the trader can close them in any order.

As you already know, to close a position in the netting system, it is sufficient to open an opposite order with the same volume. To close a position in the hedging system, you must select the "close position" function in the position's context menu. All trading terminals with a hedging system always have a similar button. In the hedging system, it is impossible to reverse a position, and you will simply have a "lock."

In conclusion, the netting system is used everywhere in the stock, futures, and cryptocurrency markets. The hedging system is most often found in the Forex market, in particular on the most popular forex platform, MT4. The MT5 was originally built on a netting system, but to the numerous requests of many forex traders, the new versions of MT5 introduced a hedging system.

Moreover, a new type of trading operation, "Close By," was also introduced in the MT terminal. This operation allows the closing of two oppositely directed positions on the same financial instrument simultaneously. And if opposite positions have a different number of lots, only one of them will remain open, and its volume will be equal to the difference between the volume of two closed positions and the direction of the position and the opening price - to the larger (by volume) of the closed positions.

Have a good trade.

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by JustMarkets, 2022.11.02

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