How to Hedge on Mt5
Public testing of the new MT5 platform began on October 12th, 2009.
MetaTrader5 (MT5) is the long awaited next generation of the hugely successful MetaTrader4 trading platform (MT4). MT5 is not just an upgrade to MT4. It has been completely rebuilt from scratch.
Here are the claimed features of Metatrader 5.
• 3 chart-types, 21 timeframes and over 70 analytical tools
• 5 order types and 4 execution modes available for trading
• Implements practically any trading strategies
• Advanced built-in reports on all trading activities;
• Built-in indicators and graphical objects
• Allows quicker analysis of quotes and trade decision making
• High performance and outstanding speed
• MQL5 development environment with new IntellySence system and more advanced strategy tester.
As most of you will know, Metatrader 4 (MT4) is the most widely used “off the shelf” platform in the Forex and CFD markets. It is expected therefore that when MT5 is out of beta, it too will be widely used.
Today MT4 is the trading platform of choice for virtually all Forex robots as well as custom indicators and scripts.
Unfortunately, the Metatrader4 language (MQL4) will not be compatible with MetaTrader 5 (MQL5). In order to meet the incorporate the requested features and execution speed, a new object oriented programming language was developed. As a result, existing MT4 custom indicators and EAs (.mq4 and .ex4 files) won’t work with MT5 platform.
You may be thinking that any new investment in MT4 custom indicators, scripts and robots is wasted. That is certainly not the case. MT5 is likely to be in beta for at least 6 more months. The current Mt5 beta doesn’t even include a strategy testing function. So it could be as long a year before any significant MT5 robots become available.
Even when MT5 has matured into a stable trading platform, the amazingly popular MT4, is still going to be supported by brokers for many years to come. If traders demand it, brokers will support it. You can expect many brokers will be supporting both platforms and there is nothing to stop you running both MT4 and MT5 clients at the same time.
It is only a matter of time before a MT4/MT5 compatibility is developed. Most likely this will be in the form of a compatibility module or MT4 virtualization plugin for MT5. Rather than recoding every MT4 indicator and EA for MT5, it is almost certain that some clever programmers will code a virtual MT4 plugin platform for MT5. Much like the way you can now run Windows in a virtual machine on a Linux box or Linux inside of OS X.
Once a tool is developed to convert existing Expert Advisors and indictors from MT4 to MT5, then the uptake of the MT5 platform will occur more quickly.
Here is the official announcement about MQ4 and MQ5 compatibility:
“From the beginning of Metatrader 5 development we thought that we will be able to save the compatibility. And we said about it many times. But the numerous traders/developers requests made us change our mind. We’ve understood that just can’t make a new language compatible. At the same time we have made MQL5 more powerful and in this way we gave you, traders and developers, more abilities – that was our main goal in developing of MQL5 IDE. From one side, new language with the new abilities, and from the other side – MQL4 and MQL5 compatibility. Unfortunately, these two aims can’t be reached at the same time.” Interview with Metrader5 lead developer
The complaint often heard about MT4 is that it was built by programmers not traders. Certainly it was built with a focus on the front end and “client side” rather than the brokers back office side. The platform itself evolved from a price and data delivery terminal that became very popular with traders. Users then started to ask whether trading functions could be built into it. Metaquotes used the same architecture and added trading functionality to it, leading some to call MT4 a Frankenstein creation.
No Hedging and Compliance With the New NFA Rules.
Some may feel that the NFA regulated Forex brokers are driving the MT5 development. Others are saying the MT5 position/order management is to the benefit of the brokers not the traders. Afterall, it is the brokers who pay for the Metatrader platform.
To meet Forex industry standards, MT5 changes the entire core of position handling. From now on MT5 traders will be able to keep only one position of any single trading instrument/currency pair. This reflection of orders aligns with the new FIFO (first-in, first-out) rule implemented by NFA as an industry standard in summer 2009.
Hedging at this point is eliminated and so is the separate management of two different in time orders on the same currency pair. Buying and Selling the same pair (hedging strategy) will result in zero positions being open.
For example: 9:00am Long GBP/USD 1 lot @ 1.3000, and later added 12:00pm Long GBP/USD 2 lots @1.3500, will be seen on Metatrader 5 account as one position “Long GBP/USD 3 lots”.
The first order to close is always the order that was initiated first, so it’ll always be the 8:00am Long position to close in our example above.
Is the FIFO and No Hedging a Show Stopper?
No individual orders listed, NO Hedging, and INCOMPATIBLE with anything MT4. Is this a step BACKWARDS?
If you like the way MT4 works for you now and or have made the move to a non NFA regulated broker then MT5 doesn’t look a very attractive prospect.
However there will be other instruments and charts accessible beyond forex. Such as futures (cfd-versions) along with lots of option classes. Lots of opportunities for real-world hedging, (i.e. where the two instruments are NOT identical) and for trading styles that are currently impossible. Such as buying options on signals, instead of just going long or short the currency pair. Or constructing forex grids with options.
Some traders have said that FIFO (first order in first order out) prevents counter trend trading or engaging in a quick scalp in the opposite direction when you already have an open position. It doesn’t affect your net position but it does affect the way you must manage your trades.
Correlation strategies are also an obvious alternative way to hedge. Hedging a position can be achieved by taking position in more than one correlated currency pair. And in MT5 this could be expanded to forex options and their underlying currencies or forex futures and their own options. In fact if you are trading on more than one currency pair then currency correlations and their impact leverage and risk is something that needs to be well understood.
For more on currency correlation and how to apply it to your trading system, see Correlation Trading system
Here are a few Forex brokers offering the MT5 platform download and testing