How to rescue a losing position?

We agree on something LOL; namely, that it's very simple. Referring to your chart example:

Whenever you open a buy position, I likewise open a buy position.
Whenever you close a buy position, I likewise close a buy position.
Whenever you open a counter-sell, I close a buy position.
Whenever you close a counter-sell, I open a buy position.

At all points along the way, my net overall position is exactly the same as yours. Hence I capture exactly the same pips that you do, and make exactly the same P/L, but with no "hedging", and less transaction costs. QED.

If I make exactly the same pips as you do, but with less costs, then I'll outperform you, every time. I've already explained why everything else that you've stated (facing new challenges, keeping old positions alive, positions being more or less risky etc) is an illusion. Copied from my prior post:

The reason you're profitable is because of the way you use analysis and skill in timing the changes to your overall position, relative to the subsequent price movement. The "hedging" (or locking, or whatever you choose to call it) adds no mathematical benefit. If I'm capable of applying the same analysis and skill as you are, then I can adjust my own position at exactly the same points along the way, and attain the same P/L as you, while paying less fees to my br0ker.

"Hedging" appears to offer an advantage, because it tricks you into thinking that the more positions you have open, the more choices you have; and, rather than accepting losses, you have the possibility of eventually closing every order that's currently open in profit. That's the illusion. The reality is that, no matter how you "hedge", (1) the market will subsequently behave however it pleases, and every position's P/L has the same 50/50 probability of improving or worsening; (2) while the "hedge" is rescuing one position, the opposite position is always worsening at the same rate; and (3) most importantly, it's always possible to replicate any "hedging" scenario with a single position, at every point along the way.

Anyway, I am done trying to explain this to you. I have explained the underlying math as best as I can, and have responded to the examples that you provided. All I'm doing now is repeating what I've said in earlier posts. I can't explain it any more simply that what I already have.

You're apparently stuck in a mindset that's telling you that the orders you have open are more important than the pips, and therefore the P/L, that you make. But your eventual P/L will always be the sum of the P/L of every component order, no matter which way you choose to arbitrarily view (or group) the orders that you use. That is the basis of the whole "rescuing" illusion that is the topic of this thread.

LOL... It's really Okay my friend.. no hard feeling at all, always appreciate nice discussion in every matter..

At first, I just want to answered TS question in my way. because just tell people to 'cut your loss asap and find another good opportunity to make new entry' sound not fair enough.. I think all people here always try to search 'that' good opportunity to entry the market before their positions become 'bad positions', then again and again 'history repeat itself' another 'cut your loss asap'. Yes of course 'that' buy low sell high 'wise advise'.. but did everybody knows how high is high or how low is low ?

I think a lot of friends here, somewhere sometime in the past experienced how 'psychologically regretful' after they 'close' their losing positions or even in profit positions that market immediately turning back into their 'already closed' position side.. lol.

It just sound 'bad' when someone ask you 'my leg is sick' then you answered 'oh ok, cut your leg' and try to find another new leg... lol.

here is what Hanover is trying to say in simple words

Hedging as you and other retail traders do it, is an Illusion...........
He is NOT SAYING you can't make money that way.........he is merely saying IT IS NOT THE MOST EFFICIENT WAY to trade.


here is my views on it.

we are all so damn conditioned with political correctness that we believe that we must respect other peoples opinions and even worse that all opinions are equally valid....this is not true.

Hanover gave you evidence of his position...it is not an opinion.......trading that way incurs less costs, therefore it is more efficient therefore IT IS BETTER THAN THE WAY YOU TRADE.

THERE IS NO OPINION ABOUT THAT.

OK then, finally.......... here is a point-by-point analysis of your last chart image:

“A”: we both buy 1 lot, and make the same pips from A to B.
“B”: you sell 1 lot, while I close my buy. Your position is 1 buy minus 1 sell = 0, while I’m simply out of the market. Hence we both make no pips between B and C (the positive pips you make on one position are canceled by the negative pips on the other position).
“C”: we both buy 1 lot. Your position is 2 buy minus 1 sell = 1 buy; mine is simply 1 buy. Hence we both make the same profit from C to D.
“D”: you close your sell. I open 1 buy. Now we both have 2 buy positions open. Hence we both make the same profit from D to E.
“E”: you sell 1 lot, while I close 1 buy. Your position is 2 buy minus 1 sell = 1 buy; mine is simply 1 buy. Hence we both make the same P/L from E to F.
“F”: we both buy 1 lot. Your position is now 3 buy minus 1 sell = 2 buy, while mine is simply 2 buy. Hence we both make the same P/L from F to G.
“G”: you close 1 sell, so I open 1 buy. Both of our positions are now 3 buys. Hence we both make the same P/L from G to H.
“H”: you sell 1 lot, while I close 1 buy. Your position is 3 buy minus 1 sell = 2 buy; mine is simply 2 buy. Hence we both make the same P/L from H to I.
“I”: we both close 1 buy. Your position is now 2 buy minus 1 sell = 1 buy; mine is simply 1 buy. Hence we both make the same P/L from I to J.
“J”: we both open an additional buy order. Your position is 3 buy minus 1 sell = 2 buy; mine is simply 2 buy. Hence we both make the same P/L from J to K.
“K”: you close 1 sell, while I open 1 buy. Both of our positions are now 3 buy. Hence we both make the same P/L from K to L.
“L”: we both open an additional buy order. Both of us now have 4 buy positions. Hence we both make the same P/L from L to M.
“M”: we both open an additional buy order. Both of us now have 5 buy positions. Hence we both make the same P/L from M to N.
“N”: you sell 1 lot, while I close 1 buy. Your position is 5 buy minus 1 sell = 4 buy; mine is simply 4 buy. Hence we both make the same P/L from N to O.
“O”: you close 1 sell, while I open 1 buy. Both of our positions are now 5 buy. Hence we both make the same P/L from O to P.
“P”: you sell 1 lot, while I close 1 buy. Your position is 5 buy minus 1 sell = 4 buy; mine is simply 4 buy. Hence we both make the same P/L from P onwards, no matter what price does henceforth.

As you can see, I simply copied your net position at every given point, hence I’m guaranteed to make exactly the same pips, and the same P/L.

Now, at the end (after "P") you have both buy and sell positions open, hence you think that you have more choices than I do; but that's already happened at several points along the way, and I'll continue to copy your net position, just as I did at those earlier points. That's part of the illusion.

You’ve opened 6 buy and 5 sell positions, so you’ve paid 11 spreads. I’ve opened 10 buy orders along the way (at A,C,D,F,G,J,K,L,M,O), so I’ve paid 10 spreads. I was never “hedged”, so I pay no swap interest.

Why does this work? Because closing a sell position is effectively the same as opening a buy position. And vice versa.

I hope that you can see it now.

Absolutely no hard feelings. I apologize for my frustration.
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[EDIT]
You are viewing the situation in terms of how to get the best possible result from each trade, while I am viewing it simply in terms of total pips won/lost, regardless of which trades are winners, and which are losses. IMO that is where our thinking differs.

Hi hanover and kiads, your examples are hedging on winning position, how about example hedging on loosing position?

The examples were designed to illustrate the point that it's possible to replicate any nedged position, by netting it out, and using a single equivalent position, at every point along the way. Hence it will work with a winning position, a losing position, any position.

For example, suppose you have two positions on EURUSD: one is a buy of 5 lots, and the other is a sell of 3 lots. If price rises one pip, you'll gain $50 on the buy, and lose $30 on the sell, for a net result of +$20. Agreed? So if price rises by 2 pips, you'll gain $40; by 3 pips, you'll gain $60, etc etc. And if price falls by one pip, you'll lose $50 on the buy, and gain $30 on the sell, for a net result of –$20.

Now 5 lots minus 3 lots equals 2 lots. Supposing I have one buy position of 2 lots. Then every pip that price rises, I'll gain $20, and for every pip it falls, I'll lose $20. In other words, exactly the same result as you. Why does this work out the same? Because the net effect of being 5 lots long and 3 lots short, is always 2 lots long. 5 - 3 = 2.

Now if you extrapolate this thinking, you'll come to see that you can replace the numbers with anything you like, e.g. being 4 lots long and 7 lots short is exactly the same as being net 3 lots short. No matter what numbers you use, the mathematical principle is exactly the same. And you'll see that any combination of long and short positions ultimately resolves itself into a single position. For example, if you have buy positions of 5 lots, 3 lots and 2 lots, and sell positions of 1 lot and 4 lots, then your net position is 5+3+2-1-4 = 5 lots long. Hence, for every 1 pip that price rises, you'll gain $50, and for every pip that price falls, you'll lose $50. But I could replicate that by having 1 buy order of 5 lots. And while you're paying the spread on 5 different orders (totaling 15 lots), I'm paying the spread on one order only (totaling 5 lots).

Now the nedged trader, when "hedged" (or "locked") has 1 buy order, and 1 sell order, that cancel each other out. Hence every pip he gains on one of the orders, he loses on the other order. Of course that is the whole point in "hedging", to reduce the overall position to one of neutrality. But the net effect is 1-1=0, hence I can do the same thing by simply staying out of the market. And when the nedged trader decides to release his "hedge", by closing one of the two positions, he becomes net long or net short. I can easily copy that by simply opening 1 buy order, or 1 sell order. No matter what the nedged trader does, I can copy his net position.

Because every position can be reduced to a net position AT EVERY POINT ALONG THE WAY, I can copy the nedged trader's position with a single order, and therefore make exactly the same number of pips, and the same P/L. Hence the nedging offers no additional benefit, except for the br0ker who will gain more swap interest, and possibly more spread, from the nedged trader. This will necessarily always apply, regardless of whether the end result is positive pips overall, or negative pips overall, for both traders.

The illusion with nedging comes from the idea that having two open positions seemingly gives the nedger more options, i.e. that he has the opportunity to mange (rescue) both of the positions back to a profit. But what he fails to see is that I can copy any future decisions that he makes, by simply opening and closing additional orders, to replicate his net position.

Do you see it now?
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BTW, it is not a case of being smart or dumb. Whether hanover is a genius, or a the world's most deranged idiot, doesn't change the reality of the math involved. 5 lots minus 3 lots will always equal 2 lots. The math speaks for itself.

Some folk (e.g. here) have attempted to argue along the lines that they know more about trading than I do, and nedging works profitably for them, therefore I don't know what I'm talking about. But this topic has nothing to do with trading. I could be the world's most incompetent and unprofitable trader, and yet still understand that 5 lots minus 3 lots will always equal 2 lots. It is about being able to perform Grade 2 school math, not about one's ability to understand price behavior, or to trade profitably.

With trading, there is room for opinion. Some traders believe that, in a given situation, price will rise, while others believe it will fall. The market will prove each one of them right or wrong, depending on their trading horizons. But with math, as redlion pointed out, on the question "does nedging in itself provide any benefit?" there is no room for opinion. No matter what anybody believes, or how fervently they believe it, 5 lots minus 3 lots will always equal 2 lots. There is no room for debate.

People either understand that any nedged position can be replicated by a single, net position — and at every point along the way — or they don't.
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As I see it, the problem with nedging, and rescue systems, is that people become fixated on the trade itself, instead of their overall pip (or dollar) bottom line. In the example I posted back in post #137, the nedger succeeds in making two winning trades (+20 and +40), but he still doesn't outperform the non-nedger who makes 1 win and 1 loss (-50 and +110). Both end up with +60 pips. I suspect that it is this "loss avoidance" mentality that is one of the biggest causes of the high failure rate: traders focusing on their P/L rather than market behavior and probabilities. All recovery systems, approaches that use wide or no stoplosses, averaging down, martingale variants, etc all have the same thing in common: they seek to avoid losses. Recovery systems also make the implicit assumption that recent losses are somehow more significant than historical losses. Maybe they are emotionally, but mathematically all losses are the same.

Here are hypothetical examples of the results (pips) of some trades:
Trader "A": +20, +40, +10, +50, -500 (win rate: 80%, total pips = -380)
Trader "B": -20, -40, -10, -50, +500 (win rate: 20%, total pips = +380)

"A" takes profit quickly, and uses a 500 pip stoploss. Result = high win rate.
"B" uses stoplosses, but lets his profit run. Result = low win rate.

This is merely a hypothetical, rather than a typical, example. All I'm trying to show is that win rate isn't everything. Ultimately it's the total number of pips that determines bottom line. The win rate is of secondary importance.

Bottom line is the result of (pips made on winning trades) minus (pips lost on losing trades). Hence making my losses smaller will contribute pips to bottom line just as much as making winners bigger. In the trend following approaches that I use, I try to achieve both. Of course this will have a negative impact on win rate, hence my goal is to attain the best possible compromise.

Happy New Year to everybody. Many pips for 2013.

David

Unfortunately I find myself in this situation now. I left a sizeable short order on a couple of weeks ago at a weekly pivot on the GBP/JPY thinking that there is no way it will every get there and I did not bother with SL. I was going to take it off at one point but xmas got in the way. Sloppy, lazy and I deserve the situation I have now.


For anyone following the JPY recently they will know it has made 500-600 pips in December. I have posted the weekly chart to show the pivot and where I am now on the hourly. I am about 130 pips negative, approx 14% of my account value.

So here are my thought processes about this trade.

1) I understand this bet was made counter trend on a significant pivot point, which failed. The smart thing would have been to have the stop loss but cannot cry about that now.

2) I understand my position means nothing to the market, so I have to ask myself if I were to put a trade on now would I still go short. The answer to that is no but the range is really over extended, so I would be watching for signs of a reversal, I guess that is why I put this one on in the first place. Also the weekly RSI is at a level not seen since 2005 and 1996. These last 2 are the things that are going to let me wait and see, so I am not going to close yet.

3) My options are first off set a point ahead where I really will have to take the pain, I know I must do this. Secondly look at the recent retraces, how large have they been ( around 100-130 pips in the best case). As I am in a bit of shit here I cannot afford to be too greedy. If we get 100 pip retrace I will close and thank my lucky stars that is could have been worse.

4) I have thought about hedging and in this situation it could be ok, opening a long position because the JPY really is so technically oversold there is a large probability of it coming back 200 pips or so pretty soon but to do that I really do not need a plan where to close or I could just end up with 2 losing positions. I see there is a lot of negativity to doing that here but in this situation where you are waiting for a reversal of a mammoth uptrend perhaps psychologically at least it can give you some comfort but you really need to understand your bias and where you think it is going and alsowhere your SL should be....Basically you should look at it as if you were going long.


Hope is not a good strategy here, what you have to do is be unemotional about it, draw in your lines, look at all timeframes and come up with an exit strategy based on where the market is. There is no right or wrong answer here. It depends on your tolerance for risk, your account size and what you perceive to be happening.

Hanover and Nubs,

I'm talking HEDGING when did i ever say Nedging i have never heard of nedging sounds like BS to me.

I think that is a term of ridecule.

Nedging is holding buy and sell positions (net effect = zero) simultaneously in the same pair. The term was coined by merlin:

It is absolutely no sense to buy the same GBPJPY in such situation. You have to hedge it with other pairs.
I do not know how big your lot size is for the short GBPJPY but if to assume that it is 1.00 lot then I would buy 0.44 lots of AUDJPY and 0.66 of CADJPY as soon as market opens. Such basket will help you out safely.

For whatever it's worth, if I was in your situation, this is what I'd be thinking:
Agree, what's done is gone forever, we can't re-live it.

Exactly! The question is: what is most likely to happen henceforth?
--- If you believe (or your system tells you) that price will continue to rise, then close your short and open a long.
--- If you believe (or your system tells you) that price will reverse, then keep your short open.

If you're unsure, then you can either:
--- Close your short, thereby cutting your losses, and wait for the next suitable setup (i.e. a point where, through prior testing/market knowledge, you've satsified yourself that either a directional or behavioral bias exists).
--- Take a position that leaves you either long or short, depending on your convictions, but be ready to exit quickly if it moves against you, or to maximize your gain, if it moves in your favor.

Basically, it comes down to whether you're a trend trader, or a counter-trend trader. If the former, you simply buy, on the assumption that there are valid reasons (e.g. macroeconomics) why the trend exists, and that it will continue, until these reasons change. If the latter, you need some pretty solid rules as to WHEN the trend is likely to end, and (IMHO) you need to exit quickly if the market proves you wrong. However, all XXXJPY pairs are massively overbought at this point, hence there is plenty of scope for a sizeable reversal, when it does occur.

I beg to differ here. These types of decision suggest that you're basing your decisions on hope ("if we get a 100 pip retrace") and/or your P/L, which the market takes to cognizance of. IMO all trading decisions should reflect probable market behavior and probabilities; and to whatever extent we don't have some kind of statistical or historical basis for making these decisions, we are merely guessing.

"Hedging" and closing your current short are mathematically the same thing.

That's what I presume Nub's was saying that way, but no the Scammer Commericial section have invented a new money management method to sell there BS so it seems, Hanover Commericial Member kinda confirms that doesn't it.

Nub's and his Anti EA code being decompiled, wonder where he makes his money, ohhhh yes selling BS nothing in it whatsoever, why he doesn't want it reversed or copied EA's.


If you can trade, you don't need to sell method's or EA's to people, stay away from the lot of them.

So you are basically looking to neutralize the JPY component, and believe that AUD and CAD will outperform GBP in the foreseeable future?

There is no guarantee the the 2 orders you've split don't perform both worth than just going the JPY route in the first place,l your betting it'll take less damage and part of this you must assume is it'll also take the same proportionally less profit, so the R:R remains unchanged, therefore your confusing stuff for no tangible logical reason.

Am I missing something ??

GBP is overbought in comparison with AUD, so sooner or later they will move towards each other. The idea of adding a CAD pair is that 3 pairs can have less drawdown than 2 pairs. The more pairs, the more balanced is the basket. But 4 pairs or more is already too safe. Better to have some DD but also quicker positive result.
The calculation of lot sizes comes from Arb-O-Mat. That is what I use in my trading.

In the case of any pair against the jpy recently all the charts look the same. So not really a good suggestion.

Have you even bothered to read any of the material that's being discussed in this thread?

If you believe that the term 'nedging' is pejorative, then your argument is against merlin, not nubs or me.

Moreover, neither nubs nor I have invented new MMs to sell, LOL. If you want to make those kind of accusations, then at least support them with some evidence. The only product I've been selling is a visual order editor, that operates completely independently of any trading or MM strategy. Get your facts right, my friend, or be prepared to look foolish.

Both nubs and I have posted mathematical proofs that nedging is the same as staying out of the market. The math either stands or falls on its own merit. 5 lots minus 3 lots = 2 lots regardless of who is a Commercial Member and who isn't, LOL. If you want to make a case against the material that I've posted, come out from behind your straw men, and focus your efforts on debunking the math in my earlier posts.

It is even not suggestion, just math I only said what I would do for sure.
Forget JPY and open GBPAUD chart, then you see, which is under and which is above. JPY is not relevant at all in this game.
Of course, one option is to wait until GBPAUD will give short signal and then open the basket. Lot sizes might be a bit different then, have to recalculate.
What you do is up to your decision, of course.

I see it the same way as you. To whatever extent AUD and CAD outperform GBP, then the position will improve; otherwise, it will worsen. Like nedges, baskets can ultimately be broken down into less complex, net positions.