The process of trading on financial markets from the trader’s perspective is already well described in all possible sources. The advantages and tricks of using various trading strategies, the selection of financial instruments, the application of technical and fundamental analysis methods, the psychology of the trader, market patterns, and features—probably there is no topic that has not been covered in books, articles, blogs, and specialized portals.
However, between the trader and the market, there is at least one more link — a professional intermediary or broker. And their activities, features, and capabilities usually remain off-camera. The topic of the forex broker is raised only when disputes, claims, and problems with profit withdrawal arise.
Debates about what locking represents — a trap for fools who eventually outwit themselves and lose the entire deposit, or an effective method of limiting losses and a worthy alternative to setting stop orders — have not subsided in the trader community for many years. Without delving into details and arguments from both sides, we can acknowledge that there is some truth in the positions of each.
Content
- Locking on Forex — a lifebuoy and a burden for the trader
- What are the principles of locking on Forex
- Locking as a source of income and loss for the broker
- Which Forex broker suffers from locking
- Conclusion
Locking on Forex — a lifebuoy and a burden for the trader
Indeed, in various market situations, a lock or a position lock can minimize the trader’s losses. In the case if the trend goes against the initially opened order, a negative lock will reduce the lossy position.
- Positive lock, set against a profitable position, will allow you to protect yourself from market reversals and pullbacks.
- Zero lock — that is, opening opposite-positioned positions of the same volume — will allow you to reach a break-even level in any case.
However, the use of locking techniques requires serious preparation and is not suitable for beginners: at a minimum, it is necessary to determine the sufficient volume of the second position, support and resistance levels. But the biggest problem is the correct exit from the lock with the maximum reduction of loss and the preservation of the profit on the order that ultimately turned out to be profitable.
Thus, there is no need to expect a clear answer on whether to use locking on the forex market, derivatives, and other exchanges and trading platforms. Each must come to their own opinion through trial and error.
What are the principles of locking on Forex
Evaluating the market, you open a sell deal
Unfortunately, your forecast was wrong, and the price again starts to rise along with your loss. To stop the increase of the minus, you buy from the previous maximum level.
Forming a ‘Head and Shoulders’, the price returns to the purchase level. Knowing that this is a signal for the continuation of the downward trend, you close your BUY position.
This time the forecast is correct, and you close the initial sale with a profit.
How this process looks on a real currency pair chart:
Locking as a source of income and loss for the broker
Why is locking beneficial or detrimental for the Forex broker? Why do some companies prohibit its use?
The ban on using the locking tactic may be included in any of the company’s internal documents, but it is most often included in the Trading Rules or the Trading Agreement / Brokerage Service Agreement. In addition, this position may not be commented on in the documents, on the website, and in the rhetoric of the support service managers, or it may be hidden behind abstract words about protecting the interests of clients and fighting fraud.
In fact, objective reasons for prohibiting locking can be conditionally divided into three points:
- Ban by regulator.
- Technical impossibility to place a locking order in the trading platform.
- Unwillingness to provide clients with an additional tool for limiting losses.
The National Futures Association (NFA) in the United States took a stand against the hedge through locking positions in 2009. The official explanation for this position: ensuring the security of client funds. According to the regulator, traders who use the locking tactic incorrectly assess the financial costs of such operations and engage in “economically unjustified activities”.
Naturally, this ban is objectively impossible to bypass, and clients of NFA-member brokers have to accept it. However, this rule applies to a limited U.S. territory segment of the market. A broker whose activities are not subject to the jurisdiction of the NFA and similar organizations can certainly prohibit locking based on the “trends” of the American brokerage business and recommendations from leading U.S. regulators, but in this case, the discussion will be about the unwillingness to allow locking positions for their clients, not about the objective impossibility of providing such a service to traders.
The possibility of locking can also be prohibited in a particular trading platform. One of the most popular and well-known terminals, in which opening opposite orders for the same instrument is technically impossible — is MetaTrader 5. The developer also presents this measure as care for the interests of traders, especially inexperienced ones, and increasing the financial stability of brokers.
The advantages and innovations of MT5, of course, largely compensate for the ban on locking, but at the same time, this very fact becomes a serious obstacle on the way to the widespread adoption of the terminal. Many companies prefer to use the previous version of the platform and improve it
FAQ
What is locking on Forex?
Locking on Forex involves opening opposite positions to limit losses or protect profits, often used as a hedging strategy.
Why do some brokers prohibit locking?
Brokers may prohibit locking due to regulatory restrictions, technical limitations, or to prevent traders from engaging in risky strategies that could harm their financial stability.
Is locking suitable for all traders?
No, locking requires careful planning and understanding of market conditions, making it more appropriate for experienced traders rather than beginners.
