WHAT IS A ZONE RECOVERY STRATEGY?
The Zone Recovery strategy is a hedging strategy that excels in trending market conditions. The main idea behind Zone Recovery is to enter trades with the trend, and if it does not reach the takeprofit, a hedging trade will be opened in the other direction with a much bigger volume to cover the losses from the first trade. The strategy excels in volatile markets, which is why many EAs based on news events execute Zone Recovery strategies. The only forecasting needed is that the price will break out of a range and not bounce up and down in an interval. The hardest thing to predict in the market is the direction of a security, but with this strategy, the direction doesn’t matter at all. The only thing that matters is that it is going somewhere and it does not bounce up and down. Theoretically, if someone had an infinite amount of money, this strategy would have a 100% winning rate. A well-thought-out Zone Recovery strategy has a low possibility of losing, but the flip side of this coin needs to be mentioned as well: the risk. This strategy has a bad risk-reward ratio, making losses huge compared to the winners. Still, a trader with knowledge of this method can easily turn losing trades into winning ones with great risk management. Another key point of the strategy is that it can be easily automated. A well-developed trading tool can help save plenty of time and stress.
HOW DOES IT WORK? (EXAMPLE)
Let’s suppose the trader assumes that the price of a security, after reaching a support level, will go down in the future. The current price is 115, and a sell limit order with 0.01 lot is placed at the price of 90. The price goes down, reaches the sell limit, and the trade is opened. If the price fell further to 80, the trader would close the position with $10 profits. Instead of going down, the price shoots up in the other direction, reaching 140. The trader now decides not to close the sell trade, realizing the loss, but to enter a hedging buy trade with 0.07 lots. If the price fell back to $90, causing a drawdown of $350, the trader would close both trades, realizing the loss. The price now goes up to 150, the floating loss of the selling trade is $60, but the profit of the buy trade is $70, so the trader now can close the trades with a profit of $70 – $60 = $10. In this example, the trader used zone recovery to cover the losses from the first losing trade.
PARAMETERS
To better understand the strategy, let’s define the following parameters:
- Startprice: The price at which the strategy commenced. In the example provided, the start price was 115.
- BuyLevel: The price at which the strategy initiates a buy trade. If the preceding trade was a sell trade, this is where the hedging buy trade would occur.
- SellLevel: The price at which the strategy executes a sell trade. If the previous trade was a buy trade, this is where the hedging sell trade would be initiated.
- Volume Cap: The total volume allocated for the strategy. In the example, it is 0.01+0.07 = 0.08 if no further trades were opened.
- Range: The takeprofit levels for the buy and sell trades. In the example, the buy trade would close at 150, and the sell trade at 80, with the start price being 115. Thus, the range is 150-115 = 115-80 = 35.
- Gain: The desired profit from the strategy. In the example provided, this is $10.
- Risk: The acceptable loss if the strategy fails. In the example, this is $350.
These parameters collectively determine the number of trades the strategy can execute, known as the maximum order count. In the example provided, it was 2, as the strategy initiated the first short trade and subsequently opened a hedging trade at the buy level. If the trader chose to open another sell trade at the sell level with a higher volume (adjusting both risk and volume cap parameters), the maximum order count could have been 3.
CONCLUSION
This type of trading can offer significant advantages, especially when trading news events, as there’s a high probability that prices will move significantly. However, it’s essential to acknowledge the considerable risk associated with this approach compared to the potential gains. As such, this strategy may not be suitable for every trader. Personally, I’ve found success using this strategy to capitalize on substantial market movements.
I rely on an automated tool called the ManHedger EA, which allows me to swiftly create and implement these strategies, automating the entire process. I hope this blog has provided valuable insights into why and how Zone Recovery strategies are utilized in the market.
Wishing you profitable trading ahead!
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