Netting vs Hedging: What Is the Difference?
Netting vs hedging decides what happens when you open a second trade on the same instrument. On a netting account, it merges with the first one: an opposite trade reduces, closes or reverses the position. On a hedging account, every trade stays separate with its own stop loss and take profit, so a buy and a sell can run at once.
Netting vs hedging decides what happens when you open a second trade on the same instrument. On a netting account, it merges with the first one: an opposite trade reduces, closes or reverses the position. On a hedging account, every trade stays separate with its own stop loss and take profit, so a buy and a sell can run at once.
TL;DR
- Netting: one position per instrument, for stock and futures trading.
- Hedging: separate positions, for most forex traders and Expert Advisors in MetaTrader.
- To hold a buy and a sell on one pair at the same time, you need a hedging account.
This guide explains both account systems with examples, compares them side by side and shows which one suits your trading.
Many traders who use Forex terminals have come across a situation when they fail to place a lock and their open order is closed.
Another type of such a situation: when a second position on an instrument is open, the first position increased its volume for no obvious reasons. The explanation may be simple: the account could have been open by the Netting system.
The Netting system allows only one position open in any direction for one instrument. The system is used all over the stock market. To put it simpler, the trader cannot open selling and buying position on one instrument simultaneously: opposite positions close each other, and orders in the same direction add up.
The Hedging system allows as many open positions in different directions as you wish.
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Why Are There Two Types of Accounts?
The answer is simple. The Netting system was initially used for trading on stock markets. After the Forex market appeared, there was an attempt to make trading and controlling open positions simpler. This allowed traders to use different strategies on one account.
Let us discuss the two systems in detail, looking at a couple of examples.
The Hedging Account System
Let us imagine a trader opened a position for buying EUR/USD (the opening price is now irrelevant). The volume is 1 lot. Sometime later, the trader decided to open a selling position on this instrument, also sized 1 lot. With the Hedging system, the positions will be opened and the traders locked: 1 lot EUR/USD buy and 1 lot sell. If we open a new position in the same direction as the first one in the Trade section there will appear a new order at a new price and volume. In theory, there can be as many such positions as you wish. They can be closed at any time in any order.
The Netting Account System
With the Netting system, a position in the opposite direction will close the first one if they are the same volume: 1 lot buy will be closed by 1 lot sale. In the case the trader is using different order volumes, the following happens: if the buy is 1 lot and the sell is 2 lots, the buy closes and 1 lot sell remains.
The same thing happens if there is 1 lot sell and 2 lots buy: part of the buy is closed and a part remains.
Another example:
A trader using the Netting system decides to open a buy sized 1 lot, then decides to open another buy trade. In this case, the orders are summed up and their volume averaged. Pending orders work the same way.
Netting vs Hedging: Side by Side
The table puts the two account systems next to each other on the seven points that decide how your trades behave.
| Parameter | Netting account | Hedging account |
|---|---|---|
| Positions per instrument | One net position | Any number, in both directions |
| An opposite trade | Reduces, closes or reverses the open position | Opens a separate position, and both stay open |
| A second trade in the same direction | Adds to the volume, the entry price becomes the average | Opens a new position with its own price |
| Where it is used | Exchange markets: stocks and futures | Forex and CFD trading in MetaTrader |
| Margin on opposite positions | Not applicable, they offset into one position | Charged on both, usually at a reduced hedged-margin rate |
| Platform | MetaTrader 5 netting accounts, exchange terminals | MetaTrader 4, MetaTrader 5 hedging accounts |
| Example: buy 1 lot, then sell 2 lots | The buy closes, 1 lot sell remains | Two positions: 1 lot buy and 2 lots sell |
Which System to Choose
Choose hedging if you trade forex in MetaTrader, run more than one strategy or Expert Advisor on the same pair, or want to hold a buy and a sell on one instrument at the same time. Choose netting if you trade stocks or futures, or want the platform to keep one clear position per instrument.
Hedging is the default for most forex traders because each trade keeps its own entry price, stop loss and take profit. Two robots on EUR/USD can each manage their own positions without touching the other's. Under netting, the same two robots would merge into one averaged position, and one robot's exit would change the other's trade.
Netting keeps the account simple. You always see one position and one average price per instrument, you cannot open an opposite position by accident, and the account matches the way exchanges report positions. Keep in mind that a lock on a hedging account freezes the result without closing it: both positions pay the spread and the overnight swap, and you still have to decide which side to close first.
Summary
Each system suits a different way of trading.
For those who use locks a lot, Netting may be uncomfortable, as well as averaging. On the other hand, there are advantages to it. The trader will not find themselves in a lock randomly or by a mistake. An open position in a slump may be corrected by averaging: the price of the first open order changes, the slump in points reduces and the chance to close all positions with a profit enhances. If you trade on the stock market only, these are all the details you need to know.
Hedging will suit those traders who use locking and trade several orders on one instrument at a time.
In the R StocksTrader terminal, the trader can choose any of the two systems for managing their account, which is, in its term, a serious advantage that allows using different strategies for all instruments. In this terminal, almost all instruments are available: currency pairs, metals, as well as stock market instruments: US, German or Swiss stocks and indices.
FAQ
What is the difference between netting and hedging?
A netting account keeps one position per instrument: every new trade adds to it, reduces it or closes it. A hedging account keeps every trade as a separate position, so you can hold several buys and sells on the same instrument at once.
Can I switch my MT5 account from netting to hedging?
No. MetaTrader 5 fixes the accounting system when the account is opened. To trade under the other system, open a new account with it. You can keep both and move between them in the Navigator window.
Is MetaTrader 4 netting or hedging?
MetaTrader 4 works like a hedging account. Every trade is a separate position, so a sell on a pair where you already hold a buy opens a second position instead of closing the first.
What is a hedging account in forex?
A hedging account lets you open opposite positions on the same currency pair and manage each one separately. Traders use it to run several strategies on one pair, to let Expert Advisors trade independently and to hold a temporary lock while they decide how to exit.
Which system is better for Expert Advisors?
Hedging, in most cases. Most Expert Advisors written for MetaTrader open and close their own positions and expect them to stay separate. On a netting account, two robots trading the same instrument share one position and interfere with each other.
Any information provided in articles on this website is based solely on the personal opinions of the authors. These articles should not be construed as trading recommendations or a call to action. The authors and RoboForex accept no responsibility for the results of any trades made on the basis of these recommendations and reviews. Past performance is not indicative of future results. Trading stocks and CFDs involves a high risk of capital loss.
