If you’re trading with a prop firm and using MetaTrader 5 (MT5), you’ve probably heard the term hedging thrown around a few times. Maybe you’ve even dabbled in it without fully understanding the ins and outs. Don’t worry—hedging might sound complex but once you get the hang of it, it’s one of those trading techniques that can help you keep your account afloat when the market throws curveballs. Let’s take a closer look at what hedging is, why it’s important in prop trading, and how to utilize it on MT5 without any confusion.
What Exactly Is Hedging?
Let’s begin with the fundamentals. The key to hedging in forex trading is risk control. It’s a strategy to keep your position from going totally wrong when the market isn’t cooperating. Think of it as insurance where you’re preventing yourself from being fried on one trade but you’re not necessarily attempting to win both.
Hedging is essentially starting a new position in the opposite direction of your initial transaction. Thus, you can initiate a short position on the same pair if you’re long EUR/USD and things start to seem shady. You’re hedged now. One trade rises while the other falls. The objective? Reduce your losses while maintaining the possibility of making a profit.
Why Hedging Matters in a Prop Firm Setting
Prop firms function differently than your personal trading account. To begin with, you are dealing with someone else’s money which has rules, evaluations, and drawdown limits. Most prop firms allow a limited maximum daily and overall drawdown of 5% daily and 10% overall. If you are not careful, one bad trade could end your trading career. This is where hedging can be crucial because it allows you to buy yourself some time and reevaluate the market instead of closing a trade at a loss which instantly affects your stats. Additionally, some prop firm traders use hedging as a way to ride both sides of market indecision. Although it is not the best long-term strategy, it can be helpful in some circumstances, particularly when high-impact news is involved.
Now let’s talk about the platform you’re most likely using MT5.
The Difference Between MT4 and MT5 (and Why It Matters for Hedging)
Take a moment’s break because this is more important than you may realize.
Hedging is not supported by MT4 unless your broker has enabled it explicitly through custom settings. It simply nets the positions if you open a buy and then open a sell since it employs the FIFO (first in, first out) netting technique. There’s no real hedging there.
In contrast, the MT5 trading platform provides both hedging and netting account types. The good news is that. However, and this is crucial, you must confirm that your prop company account is configured to permit hedging. By default, some brokers or businesses only provide netting accounts, which eliminate conflicting positions rather than leaving them both open.
Therefore, confirm that your account type is hedging-enabled before attempting to hedge. The majority of prop firms support MT5.
Setting Up MT5 for Hedging
Assuming your account type allows it, here’s how to make sure you’re set up correctly.
- Login to Your Account
Fire up MT5 and log into your prop firm’s account using the credentials they gave you. - Check Your Account Type
Go to the Navigator panel, right-click your account and select Details. Look for Hedging: Enabled or something similar. If it says netting, you won’t be able to place true hedge trades. - Open a New Chart
Choose the pair you’re trading—say, EUR/USD and open a new chart window. - Place a Trade
Let’s say you buy 1 lot of EUR/USD. Then to hedge it, you sell 1 lot of the same pair in a separate order. You’re now hedging.
Just make sure each trade is opened individually. If you try to open the opposite trade from the same ticket window, it may just close the first one instead (if you’re on a netting account).
When to Use Hedging in a Prop Trading Account
Now that you know how to hedge on MT5, let’s talk about when it makes sense. Hedging isn’t something you want to overuse—it’s a tool, not a crutch.
Here are a few situations where it might come in handy:
News Events
Major news like NFP, interest rate decisions, or CPI data can make the markets go wild. If you’re already in a trade before the news drops, hedging can give you some breathing room if the market spikes the wrong way.
Breakout Traps
You think a pair is about to break out but you’re not 100% sure which direction. Some traders open both a buy and a sell at key breakout levels with tight stops on both. One will get stopped out the other (hopefully) flies.
Swing Trades Gone Sideways
Ever held a swing trade and watched it hover in a nasty range for days? Hedging can help lock in the range by opening an opposing trade near the top or bottom of that range, limiting your net exposure while you wait.
Market Confusion
There are moments when you simply don’t understand what’s happening. Your gut is turning, the chart is disorganized, and the signs are contradicting each other. A hedge can serve as a pause button during certain situations so you can zoom out and get your bearings.