Hedge strategy (not a hedge fund)

Hello all

I have been toying with the idea of a hedge strategy for a system. Now hedging means many things to many people. In my context, I'll illustrate with an example....

At noon the GBP shoots up 75 pips and stays at that level for the next two hours. I was short in the position and stopped out at 50 pips. However, I owned stock in XYZ bank that benefited from the pound's move. My stock rallied on the news and gained 10%.

The idea here is to hedge two securities that act opposite to one another. Yet the goal is that the gain will always outdo the loss.

Has anyone out there implored such a system or strategy? I would be happy to devote time to working on such a strategy with any volunteers.

Best,
Tom

Sure have. I went long in AUS/USD, NZD/USD and short AUD/JPY last month and weighed all of them against a USD/CHF long. It's up about 20% in a month and earning interest everyday. Pitty it's only demo

Not sure if hedging is the same as arbitrage, maybe someone knows the difference?

Another exaple would be long in a stock and taking a small short in its index

Arbitrage as I understand it is seeing a discrepancy in one market vs another for the same instrument and then quickly buying in one and selling in the other at the same time while pocketing the difference. Some people on the trading desk were spending their days looking for such discrepancies.

A hedge, on the other hand, is an investment made in order to reduce the risk of adverse price movements in a security, by taking an offsetting position in a related security, such as an option or a short sale.

How did you know what currencies to hedge? Is there documentation for this strategy?

And what do you mean 'it's only a demo' ... is this a signal services you subscribed to?

Thanks.

I think what he meant by 'demo' is play money.. not a real account.

As for documentation on what currencies to hedge, you shoudl check out ElectricSavant's 'Cash n carry' strategy. It is on this forum.

Ken

sounds very interesting jack,could you go into more detail as to how much of each pair you bought etc

I've been messing around with various baskets ever since seeing the carry trade system spelt out for me. Search for "carry" here and on oanda.

It's just a case of weighting correlated pairs against each other to minimise draw down and expose yourself to interest payments. The one I mentioned was just one of many and it's slightly different. What ever size position you have in usd/chf you divide by three and buy "counter" positions in the other pairs. I then used a grid type metod to scale into the winner while selling bits of the losers. With this particular one I'm I might close it all out if usd/chf starts falling as if it start to reverse i risk a lot of profit. Whether it was luck I don't know but I knew USD would be strong for a bit so I got exposed and got on for a ride with the safety net of the long aud and nzd. I can't remember why I chose aud/jpy right now. I think about it once I get home though.

So this isn't the tradtional sit and wait it out kind. Hope it helps some.

sure did, thanks

Hi tdion,
From what I learned in this bulletin board and on reference in forex factory:

USD/EUR >--< (>--< = moves opposite) USD/CHF, so when one rises,the other tends fto falls and vice versa. Keep word: TEND ,the pair is opposite corrolelated.
usd/eur <--> (<--> moves together (tends) with usd/gbp

So if you hade a long position in EUR/USD, and you wanted to protect it from going down, you'd hedge the decline with a long position in USD/CHF since the decline in EUR/USD would TEND to move the USD/CHF up .

I spent a Sunday Morning, and this is what I found:
http://www.forexfactory.com/forexfor...9&page=2&pp=15

Joe Ross of tradingeducators.com calls this spread trading. Spread-trading.com has some examples. You actually chart the difference between a market and another closely related market, and trade that by going long on one and short on the other.

I'm not sure you can get the same benefits from Forex as with futures contracts. One major benefit of spread trading is reducing margin requirements. With some Forex brokers, spread trading will increase margin usage. But this is easily checked with the broker's demo account.

Also, Forex is already done in terms of spreads between one currency and another. Instead of using a spread, why not just trade a cross pair?

It should reduce volatility, however, because other people aren't directly trading off the same chart you're looking at. I'm seriously looking into how to do this with Forex. If nothing else, it's a way to judge the relationships among the currency pairs at a glance.

Hallo Tom,
You may use correlation analysis for you purposes.

C.A. measures the relationship between two items, for example, a security's price and an indicator. The resulting value ( "correlation coefficient") shows if changes in one item will result in changes in the other item (security's price).

A low correlation coefficient (e.g., less than ±0.10) suggests that the relationship between two items is weak or non-existent. A high correlation coefficient (i.e., closer to plus or minus 1) indicates that the dependent variable (security's price) will usually change when the independent variable changes.

Correlation analysis is also valuable in gauging the relationship between two securities. Often, one security's price "leads" or predicts the price of another security. For example, the correlation coefficient of gold versus the dollar shows a strong negative relationship.

Example

The following chart shows the relationship between GBPUSD and EURUSD. The high correlation values show that there is a strong relationship between the price of these items (i.e., when the price of GBPUSD changes, the price of EURUSD also moves in the same direction). { Link Removed }

http://www.understandmarket.com/imag...d-gbpusd50.gif

hedging brings risk of high draw down, on incorrect entry. I try to further kill risk, and drawdown in my thread, hedging the hedge. check it out, it has lots of detail on entry and correlation analysis on two different ratios that have (- or +) correlation.

http://forexfactory.com/showthread.php?t=53919