“Cover on approach” is a trading strategy employed by traders who have a short position in a security or a currency pair.
The phrase refers to the practice of closing, or covering, a short position as the price of the security approaches a pre-determined level or target.
Typically, a trader enters a short position with an expectation or hypothesis that the price of the security will decline.
They set a target price where they believe the security is likely to reach based on their analysis.
When the price of the security “approaches” this target — that is, gets close to it — the trader will “cover” their short position, meaning they will buy back the security they initially sold.
By covering on approach, they aim to lock in their profits before the price potentially bounces back or reverses direction, which would erode their gains.
However, like all trading strategies, the “cover on approach” carries risk. If the price doesn’t reach the target and instead rises, the trader could incur a loss.
Therefore, it’s important to use risk management techniques such as stop-loss orders to limit potential losses when employing this strategy.