[NFA] 4 reasons to ban hedging

0. no financial benefit for trader
1. double spread cost than simply close the position
2. both long and short position has a swap/roll-over
3. cause customer usable margin to drop and potential margin call
4. fund manager (mt4) use hedge order to hide losing order by opening another one that seems to win

Compliance Rule 2-43(b): Offsetting Transactions

NFA has two major concerns about this strategy. First, it essentially
eliminates any opportunity to profit on the transaction. Second, it increases the
customer’s financial costs in several ways.

One way it increases costs is by doubling
the expense of entering and exiting the transactions. In the on-exchange markets, a
customer who carries opposite positions will normally pay twice the commissions.
Similarly, a forex customer will pay the entire spread twice (buying at the high end of the
spread and selling at the low end) rather than paying half on entry and half on exit.

Additionally, the customer pays carrying charges that always exceed the funds it
receives. In a normal transaction, a customer receives “interest” on the long position
and pays “interest” on the short position. Since the two transactions are mirror images,
you would expect the receipts and payments to zero out. In practice, however, the
amount a customer receives on a long position is always less than the amount a
customer pays on a short position. Since these transfers occur daily when the positions
roll over, the loss increases continually over time.

The costs described above are integral to the strategy, but there is an
additional cost that could occur in certain circumstances. FDMs typically determine the
equity balance in the account by calculating the liquidation price of the individual
positions using the bid rate for long positions and the offer rate for short positions. If the
customer holds contemporaneous positions long enough, the carrying charges will bring
the equity below the required security deposit. Furthermore, if the bid-ask spread on
the currency pair widens, as may happen when volatility increases or the FDM
anticipates major market events, the customer’s account equity may fall even faster. If
the account falls below its security deposit requirement while the spread is wider than
normal, the account could be liquidated (margin call) at unfavorable prices even though the customer
has no currency exposure risk.

The strategy also creates significant potential for abuse. An FDM could
promote the strategy to unwitting customers with an eye to collecting the additional
spread and carrying costs. A knowledgeable customer could use it to launder money by
using the carrying charge to take intentional losses. For a managed account,

the
practice could be used to disguise losses and inflate the manager’s performance by, for
example, directing the FDM to offset a winning position and then entering into a new
transaction in the same direction while letting the losing position run.

If you don't think that is enough to drop hedging, then you really dont know how to trade

Good post. It makes sense. I think most people who have beef with this rule are on Metatrader which was designed to make traders think trading is 'easy'.

i agree 100% and think its funny how nobody on this forum wants to read it! they would rather complain!

I dunno guys i think its a bunch of bullshit.....hedging is gonna be done with or with out...this rule...

There are really close correlating pairs which this can be done...

I read all the reasons...and it really just don't add up....except the hiding of loosing positions....when a hedge fund or any other money management company hides a bunch of loosing positions it just makes it all that much more confusing for the auditors... that is the only reason i can see this happening...other than that its bs....what they have done is just taken the option from daytraders to cover positons that are loosing at that time...but like i said theres always ways to hedge...

whatever though....what my beef really is ...wtf whats up with not being able to sl....

(quote from MBC site)
MBC offers gold, silver and forex trading for all traders and accepts all trading strategies without any restrictions, like news trading, scalping, expert advisers (robot trading), swing trading etc. All spreads are fixed, with 2 pips on 8 major currency pairs, in all market conditions, even for EURGBP and EURCHF. A real ECN, with a non dealing desk organization and no stop hunting. Slippage control. Minimum account opening USD1000.
Not allowed for US residents.

Not allowed for US customers BS.........wtf but its aloud for everyone else...How is it the daytraders fault these stupid ass fund management companies abuse everything and we have to pay for it too? perhaps the regulation should be more toward the Bigger fish and less on the little ones!

There are plenty of foreign brokers/banks that will accept U.S. customers. DBFX, Saxobank, and Dukascopy to name a few, none of them have to follow the NFA guidelines.

well first of all I definitely believe stop order is possible even with FIFO,

see what oanda and stocks broker is doing,
if you buy 100 and buy 150 shares, and then sell 150 shares.
it really does not matter you sell 1st 100, and 50 share in 2nd,
or you sold 150 in 2nd...
what it really does is just sell a few of your share holding regardless of what price it is.

now let's say I bought 0.1 lot GBP at 1.42, then price drop to 1.40
I bought another 0.1 lot GBP at 1.40, now price recover to 1.405

if I want to close only 0.1lot, depend on FIFO,
it will close 1.42 long -> 1.405 as a loss order of -150pips.

but someone wants to close 1.40->1.405 as a win order of +50pips
and continue holding that 1.42 long, knowing that it is in big loss even >-2% acc rule... why?

1st explanation is mentality,
trader thinks that while holding a long term loss order, but doing some short term trade helps to cover part of loss.
he want to hold long enough till close at b/e. he simply do not want to close any trade at loss,
this is a dangerous thinking which caused a small mistake to blow the acc.

2nd explanation is related with how fund manages advocate their wins,
by showing only closed order in MT4,
and showing acc balance curve which does not count loss of open orders. (in a separate tab in mt4)

2nd thing is the most widely misuse I see in forex world
by fake fund managers and money making EAs.

for trader's mentality I guess 1st one is still needed... I guess oanda and mbtf guys will figure out how to do it.

but for the 2nd purpose of use that is keep GBP long losing order running,
while still be able to trade a GBP long and close at a profit...
and then report a 100% win and 'no-drawdown' money curve in mt4...

this is the madoff type of money manager behavior that is what the FIFO rule cannot tolerate with....
with FIFO, a G/U only manager cannot trade any long G/U and close at profit,
because he has to close 1st G/U long losing order 1st which shows a loss in report...

if he is as advocated a G/U only specialist and do not take a trade for month (because holding a loss)
his client could soon find out his trick of holding loss order for long time... because sometimes he could hold a loss and force to no trade for months.
(now someone says these manager can trade offshore to continue their play >_<)

this is my personal opinion did not refer to any NFA explanation.

============================================
let's compare a 'FIFO' which means open a 2nd long order while having one open long order running....
what is the different with hedging?? (open a 2nd short order wihle having one open long order running)

you can see from below perspective.... there is no real difference for trader to open a long in addition to a long, or a hedge.
if a person holds a GBP long position in loss, now he wants to long GBP a 2nd order and close 2nd order...
is there any diff with close this 1st losing order directly? no except for mentality...
but to get this mental good feeling the trader pays more spread, swap and margin...
and permits a loss to be big big loss & dynamic drawdown,,,, by hoping it can return to b/e.

[NFA] 4 reasons to ban hedging
0. no financial benefit for trader
1. double spread cost than simply close the position
2. both long and short position has a swap/roll-over
3. cause customer usable margin to drop and potential margin call
4. fund manager (mt4) use hedge order to hide losing order by opening another one that seems to win

this is supporting case of previous post: #11... may need to pgup read that 1st.
http://www.forexfactory.com/showpost...2&postcount=11

this guy claim trading mt4 to have 95% win rate and 5% max draw-down..
and made 2k usd out of 1k deposit in 2 days.

but if you look into his 1st 3 E/U trade total position=100x acc size.
he is in dynamic loss of -50pips (-50% dyn drawdown for 3 out of first 4 trades) and nearly blow up but he did not close that or set a valid stop/loss.

while holding this 3 big loss E/U order, he did 20 more E/U orders and close at profit... which is typically what a selling EA is doing
then luckily he is able to escape the 3 losing order around b/e before a major trend coming which would have blow up his acc.

the use of mt4 have blinded clients of the high risk and irresponsible behavior of the money manager.
(who definitely wants to make money trading clients money and do not account for loss!!!)

ps: since he uploaded word-doc, is it possible to totally edit and remove losing open trades from the report? I think possible.

(ps2: look at front page, a broke r and EA sponsored blog is attacking NFA rule now, what a joke...
a person who profit from trader loss is fighting against trader protections for traders' best interest..........
only thing I know is, if mt4 EA's 100% win, 0 drawdown marketing trick is no longer working due to no hedging & FIFO only... the guy lost 30% of his website sponsor)

Really, I was a very successful hedge trader and made money every month with it. I posted the proof here at forexfactory 'Trading the Aud/Nzd successfully" If you dont understand how hedging benefits you dont knock those who do. Hedging also allows you to balance your books for a period of time so you can walk away from a trade for any reason you want. Sudden emergency, sudden price spike etc. If something came up I could always hedge my trade until I could come back. And dont feed me this garabage how paying another 2 - 4 pips is going to clean out my account. That was a really stupid reason. I loved being able to just hedge my trades, walk away and come back later when a news story was over, or I wanted to just walk away for the day and come back the next day to look at a problem. Who says I have to just take the whole loss now and start my trade over. That is stupid also. There are a lot of good solid reasons to hedge and I just named a couple. One more. I love trading long term charts 4H and higher. I may have to wait a week or a month but price will retrace and I often walk away with a profit or minimum loss by hedging. Now they want to force me to take a bigger loss because I cant hedge. We can argue this all we want but the solution is simple. I am going overseas, probably to Australia and change brokers. No one is going to tell me to take my successful trading strategies and not trade them anymore. We are losing our freedoms folks, one regulation at a time.

I'm with nanningbob

I have a sell on eur/usd and it starts to go against me, then i close and open buy position according to rules. I win on eur/usd buy trade.

1 win one loss. still profit. maybe or break even.

case 2 I have a sell on eur/usd and it goes against me but I open a buy because I know market will come back. I win sell position and the market goes back up and I win buy position also.

I'd rather win 2 trades and within hrs with no swap. stupid rule.

FIFO is stupid also but more stupid than the non hedge rule. I guess you should not trade if you can't do the above scenario

scenario

I open a trade in gbp/jpy and a second trade in eur/usd. I'm ready to close the eur/usd trade right now because I hit my target of whatever but wait, i can't close it because the gbp/jpy trade was opened first.. Therefore, i just see my eur/usd hit it's target then turn around and start to loose now. so i lost my eur/usd I did not have to loose and the gbp/jpy trade i win

again, I'd rather win 2 trades over 1. I'm not discussing these stupid rules anymore. FSA rules!

I wouldn't comment on 1st one. anyone who do math will know there is no difference
except you pay more spread and swap and margin than close it when price hit your stop.

what you're saying is you can accurately predict the top and then exit the reverse order
w/o letting price going further against you and enlarge loss... even do a 2nd short to win more...
everyone know if that is possible but no one want to admit that it is not possible...
it is hinder-sight (you take every bottom and top) or gambling (you assume it will not rise further so you exit the hedge).

even NFA registered FDM agree with above... no trading style can take advantage of hedging to show a financial benefit for the trader.
on other hand it benefit broker clearly.

for 2nd one it's a mislead of FIFO.

if I buy 100 share of Citi and 100 share of G.S.
do I have to sell Citi 1st in order to sell G.S?? what if I want to keep Citi? then I just keep it, no one says you FIFO everything you buy and sell that 1st.

if I buy a coke and a car and drink the coke
do I have to sell the coke 1st in order to sell the car?

people who cries most loudly against the FIFO rules are hiding what they want to do,
i.e. hiding an E/U or G/U losing order in mt4 open tab, not letting peer trader or client see it
while still trading E/U or G/U to show a ramping money curve of closed trades.

I agree there is a mental difference to not close a losing order for some trader.
but that is only the accounting difference, if I buy 100 share of Citi at 50$, then I buy 200 share of Citi at 2.5$
when I sell 200 share of Citi, do I care which one I sell? no real difference in reality, only the profit/loss of this trade show a difference.
if you trade oanda you find it's just like trade some stock shares, it does not remember which trade you win or lose.

only people who trade demo (EA) or trade other people's money (EA again or madoff money manager)...
(only cheated report matters, don't care real profit)
or people who trade own money but like to show off 'no loss'/'no drawdown' will need that mentality
(not trading serious money or how could you allow drawdown >50% of acc, or a future madoff-wannabe)

otherwise we have to admit like my example above,
there is no difference which position of that 100 share or 100 euro you sell, no matter the 100 share you bought at higher or lower price.

bob:
first of all, posting trades in ff does not warrant proof... it really depend on your discipline and honesty.
like you will post your drawdown of EA honestly, but other people will allow it hide in open trade tabe and show a straight ramp to sky money curve.
mt4 allows that to happen it's questionable why it allow cheating methods to happen,
80-90% EA running in zulu takes advantage of hiding losing trades in open order tab and not report it. the FIFO rule alone will clean them out.

I can do a long and a short of a trending pair at 10x leverage in 2 demo acc,
and only post the winning ones... this is what they do in demo acc league.
and I can do a long and a sort of 100$ acc of a pair at 10x leverage, and only submit winning one for broker's live acc league to win award.

I have no comments regarding
'double paying spread is a don't care'
'you have to be protected from news'
logically both things cannot happen together,

when you're trading a spread=1xpip pair,
I guess you won't use position size=10x acc size or each trade the spread cost is >1% of acc, in this case you do care taking double spreads...

on other hand if you trade with position size=acc size, why do you care about news? no news can take-out 200pips movement really...

it's likely you're not talking about same trade here.

regarding not close the order till price come back,
if you compare close the order vs hedge it,
the difference to trader is you double pay the spread and leverage * roll-over all through the period,
and some platform even double charge the margin and cause some margin call for under capital acc.
these are the most widely used tricks for broker to drain trader acc, now it's not allowed no wonder brokers are unhappy.

now think of it, why no broker PR against the 'no order editing after execution rule' but still advise you to go offshore?
because every broker cheats order after execution, now NFA investigate and found it,
and broker have no excuse or valid explanantion, like a thief caught while hands in other's pocket.
and now the rules are protecting trader, and not allowing them to do it unless it's to benefit trader at trader's request.

a broker no longer want to be under regulation gives me impression that it's acting for the best interest of broker itself, not the trader....
but while persuading you, he only tells you that it sounds like a benefit to you.
how terrible it is to trade with such a broker knowing that he do not submit your trades to the market.

think of it why oanda, GTS, NDD, STP or ECN does not have to go offshore,
but bucketshop microlots and mt4 have to? it's all about the way the latter make money has been blocked by the new rules.

I wouldn't comment on 1st one. anyone who do math will know there is no difference
except you pay more spread and swap and margin than close it when price hit your stop.

what you're saying is you can accurately predict the top and then exit the reverse order
w/o letting price going further against you and enlarge loss... even do a 2nd short to win more...
everyone know if that is possible but no one want to admit that it is not possible...
it is hinder-sight (you take every bottom and top) or gambling (you assume it will not rise further so you exit the hedge).

even NFA registered FDM agree with above... no trading style can take advantage of hedging to show a financial benefit for the trader.
on other hand it benefit broker clearly.

for 2nd one it's a mislead of FIFO.

if I buy 100 share of Citi and 100 share of G.S.
do I have to sell Citi 1st in order to sell G.S?? what if I want to keep Citi? then I just keep it, no one says you FIFO everything you buy and sell that 1st.

if I buy a coke and a car and drink the coke
do I have to sell the coke 1st in order to sell the car?

people who cries most loudly against the FIFO rules are hiding what they want to do,
i.e. hiding an E/U or G/U losing order in mt4 open tab, not letting peer trader or client see it
while still trading E/U or G/U to show a ramping money curve of closed trades.

I agree there is a mental difference to not close a losing order for some trader.
but that is only the accounting difference, if I buy 100 share of Citi at 50$, then I buy 200 share of Citi at 2.5$
when I sell 200 share of Citi, do I care which one I sell? no real difference in reality, only the profit/loss of this trade show a difference.
if you trade oanda you find it's just like trade some stock shares, it does not remember which trade you win or lose.

only people who trade demo (EA) or trade other people's money (EA again or madoff money manager)...
(only cheated report matters, don't care real profit)
or people who trade own money but like to show off 'no loss'/'no drawdown' will need that mentality
(not trading serious money or how could you allow drawdown >50% of acc, or a future madoff-wannabe)

otherwise we have to admit like my example above,
there is no difference which position of that 100 share or 100 euro you sell, no matter the 100 share you bought at higher or lower price.

Quote:
Originally Posted by hazelj80 http://static.forexfactory.com/forex...s/viewpost.gif
I'm with nanningbob

I have a sell on eur/usd and it starts to go against me, then i close and open buy position according to rules. I win on eur/usd buy trade.

1 win one loss. still profit. maybe or break even.

case 2 I have a sell on eur/usd and it goes against me but I open a buy because I know market will come back. I win sell position and the market goes back up and I win buy position also.

I'd rather win 2 trades and within hrs with no swap. stupid rule.

FIFO is stupid...

Agree with Nanningbob

not sure of the point of the post...if you don't like hedging then don't hedge. I hedge and therefore, moved my money oversees when nfa banned it. Mathamatically it doesn't make a difference; however that is not the point of the hedge for me contrary to your babble. Its about trade control in ea's. Allowing hedging helps this. IF nfa wants to ban it.. let em. Maybe if nfa would start to police the bucket shops that spike up prices on traders then folks would have more confidence and not be as negative.

oh, this is an old hedging post.

yesterday I post an update coz I just got a thinking of what FIFO rule could be useful for...
I wasn't taking attention previously for quite some time...
coz with some broker like oanda it doesn't matter.
and I think it's ridiculous to say FIFO=no stop/limit orders.

but taking a look why people are so heated with this rule........so
I found that with FIFO rule.
it no longer allow mt4 to keep losing trade in open trade tab and hide it.
this means people have to close a losing trade of E/U before doing next E/U trade and accurately accounting their loss.

previously fake money manager use the mt4 open trade trick
to hide lose in open order tab but still continue trade the same instrument.
it is also widely used by EA to hide losing and drawdown...look at every EA in zulu they play this trick.
http://www.forexfactory.com/showpost...2&postcount=11

I give a recent live example I found lately about a fake money manager who forge 95% win ratio and 5% drawdown,
2 day 200% return report because of mt4 allows hiding losing trade and continue do trading of E/U and close the later trade.
http://www.forexfactory.com/showpost...2&postcount=12