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whats with this "hedging" thing??

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  • First Post: Feb 4, 2008 4:04pm Feb 4, 2008 4:04pm
has anyone noticed this new feature that many forex brokers have been offering called "hedging"?? basically they allow you to take two opposite positions on the same instrument, and they call it a "hedge".

i have heard many traders say they choose their broker based on whether or not they offer this feature. i have heard experienced traders sing the praises of this feature. i have even heard people attribute their system's success to this feature! yet i cannot find one single itty bitty reason to use this feature. two identically opposite positions is the same as having no position at all!! hedging, in the traditional sense, is minimizing risk while minimizing potential gain to a lesser extent, and this feature certainly doesnt fit that definition.
please, somebody, tell me what im missing here!
Relax and be happy.
http://en.wikipedia.org/wiki/Hedge_(finance)

Or you could use the search feature here on FF... oh wait you were being sarcastic?
no im not being sarcastic. though i am 95% sure this feature is a widely believed lie, i want to be sure im not missing anything before i hand out a reprimand to all forex brokers offering this:
Relax and be happy.
Quoting merlin
two identically opposite positions is the same as having no position at all!!
Actually, having two identical positions in the same size is the same as paying 2 spreads for nothing at all. However just as you cannot find a reason to do it, Brokers obviously can't find a reason to Not allow it.

I believe hedging has been popular with the masses that have already been burned by trading systems that did not use stops. They have finally come to realize that trading with 100% risk will eventually burn you. Because they have been burned badly, the thought of 0% risk (hedge) is very appealing. They come back to the forex and use their same system, but with hedges. This accomplishes an increase in the account balance while maintaining the loss in account equity. (ie, they will end up with a buy and a sell, when the sell is in profit they close it and rehedge. The account balance shows a profitable trade, however the equity maintains a now larger difference between the buy and sell hedge.)

I have seen a trader take a 150k account to 27k with a slow bleed from this. They ended up with a 500 pip difference between their buy and sell on the GBP and negative daily interest slowly bleed the rest of the account over a 6 month period. He came to me, asking to move his account to my managed fund, the first thing I told him was that I was going to close that hedge and start with the remaining 27k. It is very damaging psycologically to look at an account with 140k or something in the balance and only 27k in equity.

Also alot of the spike traders who are now being squeezed out by brokers tightening their rules are beginning to use hedges to trade the spike. They have discovered that entry orders don't work, but alot of brokerages will honor their stops with less slipping. So they go in to the news event with a buy and a sell and use the stop as an entry order to close the negative position. Obviously this is riskier in from a whipsaw spike, and the brokers love that as well. Of course, you only hear reprimand from the broker when you make money using a spike method. I have yet to see a broker delete orders that lost during a spike.

In the long run, hedging is really something that helps people falsly feel better in their own psycology. Instead of entering confidently with a stop and a limit in mind on every planned trade, they will try to manipulate a hedge to stay in the market with their positive order, or stop the bleeding with a negative order.
The basis of a democratic state is liberty. ~ Aristotle
I tried it a couple times, resulting in a rule for myself, "NEVER HEDGE".

Bottom line, I didn't know what to do with a position, I hedged, then I had 2 positions I didn't know what to do with. I was uncertain to begin with.

Or maybe I was sure the trade would eventually go into profit, but wanted to make some money while getting beaten up?

Successful trading, to some degree, depends on constantly looking objectively at your probability. The farther a trade moves against you, the lower your probability of a profit is, in many cases.

Hedging is like any other sloppy trading. You get away with it sometimes, but it ends up nailing you. You have to know when to close each side, do it wrong and the pain starts all over. And, if unsure or confused in the first place, you'll inevitably close the wrong one.

Apologies in advance if someone has a successful system that uses hedging, and I've stepped on your toes, everyone has their own twists on the art of trading.

Quoting merlin
has anyone noticed this new feature that many forex brokers have been offering called "hedging"?? basically they allow you to take two opposite positions on the same instrument, and they call it a "hedge".

i have heard many traders say they choose their broker based on whether or not they offer this feature. i have heard experienced traders sing the praises of this feature. i have even heard people attribute their system's success to this feature! yet i cannot find one single itty bitty reason to use this feature. two identically opposite positions is the same as having no position at all!! hedging, in the traditional sense, is minimizing risk while minimizing potential gain to a lesser extent, and this feature certainly doesnt fit that definition.
please, somebody, tell me what im missing here!
Merlin, I don't think you're missing anything except the cynicism to call it what it is; knowledgeable brokers ripping off newbs. They know perfectly well how new traders will use the thing and they know that they'll get double the spread income from these people until they figure it out.

That being said however, I can give you an example of where such a feature WOULD in fact come in handy. I actually wish Oanda would adopt the feature just for this reason.

My main strategy involves "trading around" a core position and adding to that core position using the profits from the "in and out" trading. The positions are in carry pairs. For example, suppose I have a 10,000 unit position in NZD/USD, but I'm looking at a sell signal. I sell a portion, say 1000 units and maybe I make 40 pips or something. I close out that trade, and I want to use part of that profit to add to my original position of 10,000.

So far so good right? Except here's the problem. I want that 1000 unit trade to stand on its own. I want it to have its own little stop loss order. But I can't do that with Oanda, because when you enter a trade which just reduces your overall position, you can't put a stop on it. Oanda's system ignores it. It's like they don't consider it a separate trade. So if I want to set it up so that the 1000 units is bought back at some point, I actually have to place another order to do that.

Confused? So was I, trying to keep track of what my "real" stops were vs. what my "engineered" stops were, etc.

If they would just set it up so that I could do each separate trade by itself, regardless of the other positions in the same pair, my accounting would have been so much easier. That's where this "hedging" thing would come in handy.

As it is, I just eventually threw up my hands and created a sub-account with Oanda to hold just my long-term carry positions while I do the round-trip trading in the main account.

Other than a situation like that though, I don't know why anyone would want such a feature either.
It's a silly little thing, and I'll tell you why they do it:

These geniuses enter a clueless trade, and it goes against them. Being the prodigies that they are, they still believe in the initial position as the *ultimate* direction of the market, while they want to make use of the "short term" run against them. So they open a (usually identical) trade in the opposite direction. The reason they don't close the first trade is that they are way too smart to pay for another spread! They are pros! They'll gently wait for it to turn around and hug their first entry, and they expect to TP on the second trade somewhere in between.

Of course, what happens is that instead of paying a spread and a loss, they pay their entire account in drawdown. Do they deserve to be shot? Yes. Can we live without them? No.

People, it's hard enough making simple predictions about the market with decent probability of success. Every time you add a composite speculation, your probability of success (the market playing out your advanced little scenario) is fractioned further, because you are making more uncertain statements about the market. It's called the m*n rule. Take your losses, make sure they are less than your wins, and get over it.


Quoting merlin
has anyone noticed this new feature that many forex brokers have been offering called "hedging"?? basically they allow you to take two opposite positions on the same instrument, and they call it a "hedge".

i have heard many traders say they choose their broker based on whether or not they offer this feature. i have heard experienced traders sing the praises of this feature. i have even heard people attribute their system's success to this feature! yet i cannot find one single itty bitty reason to use this feature. two identically opposite positions is the same as having no position at all!! hedging, in the traditional sense, is minimizing risk while minimizing potential gain to a lesser extent, and this feature certainly doesnt fit that definition.
please, somebody, tell me what im missing here!
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
Quoting capitalist88
Merlin, I don't think you're missing anything except the cynicism to call it what it is; knowledgeable brokers ripping off newbs. They know perfectly well how new traders will use the thing and they know that they'll get double the spread income from these people until they figure it out.

That being said however, I can give you an example of where such a feature WOULD in fact come in handy. I actually wish Oanda would adopt the feature just for this reason.

My main strategy involves "trading around" a core position and adding to that core position using the profits from the "in and out" trading. The positions are in carry pairs. For example, suppose I have a 10,000 unit position in NZD/USD, but I'm looking at a sell signal. I sell a portion, say 1000 units and maybe I make 40 pips or something. I close out that trade, and I want to use part of that profit to add to my original position of 10,000.

So far so good right? Except here's the problem. I want that 1000 unit trade to stand on its own. I want it to have its own little stop loss order. But I can't do that with Oanda, because when you enter a trade which just reduces your overall position, you can't put a stop on it. Oanda's system ignores it. It's like they don't consider it a separate trade. So if I want to set it up so that the 1000 units is bought back at some point, I actually have to place another order to do that.

Confused? So was I, trying to keep track of what my "real" stops were vs. what my "engineered" stops were, etc.

If they would just set it up so that I could do each separate trade by itself, regardless of the other positions in the same pair, my accounting would have been so much easier. That's where this "hedging" thing would come in handy.

As it is, I just eventually threw up my hands and created a sub-account with Oanda to hold just my long-term carry positions while I do the round-trip trading in the main account.

Other than a situation like that though, I don't know why anyone would want such a feature either.
couldn't you do the short NZDUSD on a subaccount? And once you close it just transfer your profits to your other account where you are long NZDUSD so you can use it there?
Working towards CME membership
Quoting hilmy83
couldn't you do the short NZDUSD on a subaccount? And once you close it just transfer your profits to your other account where you are long NZDUSD so you can use it there?
nevermind didn't read your last paragraph..hehe
Working towards CME membership
The point capitalist made is the only redeeming factor I can think of. I may have a long term position on a particular pair. Then I see a scalping opportunitiy in the other direction on the same pair. I don't want to tinker with my long term position.

But then again that's not hedging.

And neither is the maneuver that the brokers promote. They promote it as being able to hold opposing positions on the same pair within the same timeframe and label it as hedging. In reality that has nothing to do with proper hedging.

I don't know why anyone would want to be, for all intent and purpose, out of the trade yet still pay the spread. Using this method to hold onto a losing trade is like cheating at solitaire--nothing to gain.
Hey Vensik! I noticed you're not too far away from me here (I'm in Arlington) and we're around the same age. We should have a forex traders day out or something! Also: Do you trade for a bank/desk in VA? Up here they don't even know what currency trading is

PS: well said.

Quoting Vensik
Actually, having two identical positions in the same size is the same as paying 2 spreads for nothing at all. However just as you cannot find a reason to do it, Brokers obviously can't find a reason to Not allow it.
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
Quoting hilmy83
couldn't you do the short NZDUSD on a subaccount? And once you close it just transfer your profits to your other account where you are long NZDUSD so you can use it there?

That's what I do. That's what I meant by this part:

"As it is, I just eventually threw up my hands and created a sub-account with Oanda to hold just my long-term carry positions while I do the round-trip trading in the main account. "

Also I didn't give all the details about why it's a problem. I'm sure people are going to say, "well why can't you just net it out in a single position?" But I scale into positions, and I have to keep track of my average entry price for a single round-trip trade in order to track my performance, historical expectancy, etc.

With a single position I can't do that. If I'm holding 10,000 NZD/USD at an average price of .7500 and then I do a trade where I go short 1000 at .7800, Oanda's system shows my average entry as .7500 for the remaining 9,000 units. I don't want that. I want to see what my average entry is for my SHORT 1000 units trade only.

Also, when I get a reverse signal on a winning trade for example, I don't just dump the trade and reverse the position. I move my stop into profit and then set my reversal orders behind it, so that if the reversal signal is wrong I can continue on with the original profitable trade. But with Oanda treating my whole position as one single trade instead of the separate trades that I'm actually doing, there IS no stop order to adjust sometimes.

This gets confusing really fast. That's why I separated the activities into two different accounts. But this "hedging" feature would work in the same way. There's no trading advantage, just an "ease of accounting" advantage.
Quoting hilmy83
nevermind didn't read your last paragraph..hehe

Argggghh. I just typed a big long response. You owe me new fingers!
Well, I hedge exclusively on GBP/JPY using very wide stop losses and over the last 5 months have been fairly successful.

When I say very wide stop losses, I use 1000 pips but this only equates to a small % of my account balance per position. I may have up to 10 positions on at once with a maximum of 5 either long or short. Take profit on each position is 50 pips so I need to be successful in 95% of trades.

When I say fairly successful, I've closed over 700 positions, taking 5 losses so far. The last 81 trades have been on an account for an investor and taken the balance from $103500 to $119000 in just under a month with no losses so far.

By far the most important factor is identifying the range on the longer term charts rather than the accuracy of entries. I'm also looking at important support and resistance areas on the dailys .

I'm not trying to 'blow my own trumpet' here, far from it - its important to keep the feet on the ground & the head out of the clouds. I'm just pointing out that it can be done and done successfully but certainly isn't easy and takes a great deal of discipline.

Kind Regards
Steve
Spot on. Real hedging as I understand it involves a position of equal value in some highly correlated instrument.

I used to teach basic option trading at Fidelity, and in almost every class there was some Eisenstein who would try to convince me that it made sense to buy and sell the same contract simultaneously (same strike and Ex; not a spread), and I would always make them actually sit down and go through the trade until they figured out that all they were doing was paying two commissions for the priviledge of having no possible gain whatsoever.


Quoting billflet
The point capitalist made is the only redeeming factor I can think of. I may have a long term position on a particular pair. Then I see a scalping opportunitiy in the other direction on the same pair. I don't want to tinker with my long term position.

But then again that's not hedging.

And neither is the maneuver that the brokers promote. They promote it as being able to hold opposing positions on the same pair within the same timeframe and label it as hedging. In reality that has nothing to do with proper hedging.

I don't know why anyone would want to be, for all intent and purpose, out of the trade yet still pay the spread. Using this method to hold onto a losing trade is like cheating at solitaire--nothing to gain.
Quoting billflet
...
But then again that's not hedging.

....
yes, same here, when i testing mb platform which automaticly deduct my buy position when i put sell for "hedge" i suddenly "enlightened".... and when i try to put grid order, they just pool it up into one position.... again, i "enlightened" once more....
http://www.forexfactory.com/showthre...ng#post1769384
IMO, and I've tried various ways of hedging, using options is still King in my book to hedge against an underlying position because you can use varying techniques, prices, strikes, etc., to create an actual hedge, rather than a make believe hedge.
Mr. Trend
I dunno stevie... 95%. My gosh. I wish you the best of luck, and I hope your winning streak continues! You are not strictly hedging though, because you are not opening one position to reduce drawdown from another. This is what the peeps THINK they're doing.

One could argue with the method being non-optimal and irrational, but its hard to argue with consistent profits and a cool headed stevie Keep it up!

Quoting steviet
Well, I hedge exclusively on GBP/JPY using very wide stop losses and over the last 5 months have been fairly successful.

When I say very wide stop losses, I use 1000 pips but this only equates to a small % of my account balance per position. I may have up to 10 positions on at once with a maximum of 5 either long or short. Take profit on each position is 50 pips so I need to be successful in 95% of trades.

When I say fairly successful, I've closed over 700 positions, taking 5 losses so far. The last 81 trades have been on an account for an investor and taken the balance from $103500 to $119000 in just under a month with no losses so far.

By far the most important factor is identifying the range on the longer term charts rather than the accuracy of entries. I'm also looking at important support and resistance areas on the dailys .

I'm not trying to 'blow my own trumpet' here, far from it - its important to keep the feet on the ground & the head out of the clouds. I'm just pointing out that it can be done and done successfully but certainly isn't easy and takes a great deal of discipline.

Kind Regards
Steve
Virtue finds and chooses the mean. Aristotle, Ethica Nichomachea
Suppose, lets say EURUSD moved from 1.2700 to 1.4800

Lets say someone had a hedge at 1.2700 with a Buy and SL at 1.2600

And a sell at 1.2700 with SL at 1.2800

The market moved up to 1.4800

The sell hedge met SL and closed.

The buy hedge continued, raking in all the profits.

This is meant by the term hedging.

It is a very calculated move also termed as straddling during news times.
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