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Hedging

  • #1
  • First Post: Nov 4, 2006 11:37pm Nov 4, 2006 11:37pm
I just want to clarify an idea which I keep hearing being mentioned in passing, this is the idea of hedging to manage trades gone bad. I keep seeing posts with comments like "x had a system where he would trade signal y, if the trade would go againest him he would hedge".

Now by hedge I assume that this means placing an opposite and equal sized trade to balance out the bad trade. On the face of it this seems like a good idea, you can effectively 'freeze' a bad trade, you are going to cross the spread multiple times, but there is the potential to bring a trade back to profit.

The bit I am having trouble grasping is the unhedge part.

Questions...
1. To suffer as little loss as possible it seems you would have to unhedge at the same price you hedged?
2. If 1 is true, then you may not have a trade signal at that place and time, so when you are at the unhedge point, you may have no positive signals that the price will continue in a positive direction for the unhedged trade?
3. If you let the price run past the unhedge point, then both trades will have to closed together or you will incurr loss? thereby mitigating the whole point of hedging in the first place.

So to my mind it may seem like a good idea on entry, but getting out of the hedge would seem somewhat tricky. Have I missed something?
The breaking of a wave cannot explain the whole sea.
  • #2
  • Nov 4, 2006 11:52pm Nov 4, 2006 11:52pm
When I see people talk about hedging ... I usually think about placing two trade at the same time, going opposite direction. A stop loss would trigger the bad trade while the good one continue on to profit enough to break even and perhaps more.

When someone hedge against a losing position ... they usually have to take profit before the price reverses to more favorable side for the original position. Hedging is complicated. I rather straddle with limit orders on both side of the current price then to have two hedging positions...
  • #3
  • Nov 5, 2006 4:54am Nov 5, 2006 4:54am
Quoting Craig
I just want to clarify an idea which I keep hearing being mentioned in passing, this is the idea of hedging to manage trades gone bad. I keep seeing posts with comments like "x had a system where he would trade signal y, if the trade would go againest him he would hedge".

Now by hedge I assume that this means placing an opposite and equal sized trade to balance out the bad trade. On the face of it this seems like a good idea, you can effectively 'freeze' a bad trade, you are going to cross the spread multiple times, but there is the potential to bring a trade back to profit.

The bit I am having trouble grasping is the unhedge part.

Questions...
1. To suffer as little loss as possible it seems you would have to unhedge at the same price you hedged?
2. If 1 is true, then you may not have a trade signal at that place and time, so when you are at the unhedge point, you may have no positive signals that the price will continue in a positive direction for the unhedged trade?
3. If you let the price run past the unhedge point, then both trades will have to closed together or you will incurr loss? thereby mitigating the whole point of hedging in the first place.

So to my mind it may seem like a good idea on entry, but getting out of the hedge would seem somewhat tricky. Have I missed something?
Hi craig,

"Hedging " to me is simply hiding a loss under another opposite trade...and sooner or later, when the hedge comes off, there is an ugly loss exposed...I don't like that concept !!! (However, to those who use them, I say, different strokes for different folks...that is, its a personal choice).


Currently, this is what seems to happen to some Traders...

1. you put a trade on and you put a stop loss of around 40- 50 pips
2. the market goes against you (horrors....I was wwwwwrong !! )
3. let the market continue...it will probably go say another 30 - 100 pips past your stop...who knows ???
4. FINALLY, the market comes back around and starts to head in the opposite direction
5. by now you are totally hacked off with the market and you let it go


The solution that that I found is a pretty simple one but one that has to be executed without fail...

Scenario 2

That strategy is:

1. you put a trade on and you put a stop loss of around 40- 50 pips
2. the market goes against you (horrors....I was wwwwwrong !! )
3. let the market continue...it will probably go say another 30 - 100 pips past your stop...who knows ???

4. PUT AN ORDER IN AT THE EXACT SAME FIGURE AS YOUR STOP LOSS (if you were originally "short" then place a "short" order) This ensures that when the market comes back, as it invariably does, you have a DEFINATE order in place to put you back in the market where you were originally...and you are now in the same direction as the market is moving..

5. FINALLY, the market comes back around and starts to head in the opposite direction
6. The market picks you back up on its new direction

7. THE ADVANTAGES OF THIS (THEORETICAL) STRATEGY IS THAT
a. IT HAS AN EFFECTIVE AND DISCIPLINED COURSE OF ACTION
b. IT GIVES YOU A SPECIFIC "ENTRY" POINT
c. IT REDUCES LARGE DRAWDOWNS
d. IT PUTS YOU BACK IN THE MARKET EXACTLY WHERE YOU GOT OUT

I know that there are DISADVANTAGES with this strategy, buy I think that the overall effect of the advantages outweigh the disadvantages.

I also think that this strategy is more appealing to my business sense of minimising risk than the original concept of "hedging" that initially set me off to discover an alternative strategy to hedging.

I have now been using this strategy for a couple of months and it is working brilliantly.

PLEASE NOTE: I am a medium to long term trend trader. The above method works best on those time frames. It works less well on short term time frames because of the volatile "noise" in the market.

When a stop loss has been triggered, I allow it to go past my SL by a minimum of 50 pips before I set the new order.

When the market has turned and is coming down in the "trend" direction, my order is then opened.
  • #4
  • Nov 5, 2006 5:11am Nov 5, 2006 5:11am
Hey Craig,

Unless you are experienced, you should forget about hedging! I seems more simple than it is in reality which I have learned the hard way. Expecially with a volatile pair such as GBP/USD managing the exit can (or is bound) to be a nightmare. I have had situations where I spend a lot of time and sweat managing hedged positions (you get out, you then find it was not the best exit point as price goes against you again, you end up setting up a new hedge, more spread is lost, your new hedge might be closer to a pivot point, you end up with price lost somewhere between both positions and may end up having to close both at a loss.

Not a good way! I only gained this experience as I found and still find it difficult to accept losses, so cancel or move SL's on the basis that price must come back my way at some point. I usually does, but all you need is a major fundamental news surprise and you'll be stuffed for a while!

Again, I thought it was easy enough to manage but it is not!

Just my 2 pence

Good luck with your trading
Consistency and patience is everything
  • #5
  • Nov 5, 2006 8:56pm Nov 5, 2006 8:56pm
Quoting jacko
Hi craig,

"Hedging " to me is simply hiding a loss under another opposite trade...and sooner or later, when the hedge comes off, there is an ugly loss exposed...I don't like that concept !!! (However, to those who use them, I say, different strokes for different folks...that is, its a personal choice).


Currently, this is what seems to happen to some Traders...

1. you put a trade on and you put a stop loss of around 40- 50 pips
2. the market goes against you (horrors....I was wwwwwrong !! )
3. let the market continue...it will probably go say another 30 - 100 pips past your stop...who knows ???
4. FINALLY, the market comes back around and starts to head in the opposite direction
5. by now you are totally hacked off with the market and you let it go


The solution that that I found is a pretty simple one but one that has to be executed without fail...

Scenario 2

That strategy is:

1. you put a trade on and you put a stop loss of around 40- 50 pips
2. the market goes against you (horrors....I was wwwwwrong !! )
3. let the market continue...it will probably go say another 30 - 100 pips past your stop...who knows ???

4. PUT AN ORDER IN AT THE EXACT SAME FIGURE AS YOUR STOP LOSS (if you were originally "short" then place a "short" order) This ensures that when the market comes back, as it invariably does, you have a DEFINATE order in place to put you back in the market where you were originally...and you are now in the same direction as the market is moving..

5. FINALLY, the market comes back around and starts to head in the opposite direction
6. The market picks you back up on its new direction

7. THE ADVANTAGES OF THIS (THEORETICAL) STRATEGY IS THAT
a. IT HAS AN EFFECTIVE AND DISCIPLINED COURSE OF ACTION
b. IT GIVES YOU A SPECIFIC "ENTRY" POINT
c. IT REDUCES LARGE DRAWDOWNS
d. IT PUTS YOU BACK IN THE MARKET EXACTLY WHERE YOU GOT OUT

I know that there are DISADVANTAGES with this strategy, buy I think that the overall effect of the advantages outweigh the disadvantages.

I also think that this strategy is more appealing to my business sense of minimising risk than the original concept of "hedging" that initially set me off to discover an alternative strategy to hedging.

I have now been using this strategy for a couple of months and it is working brilliantly.

PLEASE NOTE: I am a medium to long term trend trader. The above method works best on those time frames. It works less well on short term time frames because of the volatile "noise" in the market.

When a stop loss has been triggered, I allow it to go past my SL by a minimum of 50 pips before I set the new order.

When the market has turned and is coming down in the "trend" direction, my order is then opened.
Jacko,

I have just been reading your all your posts. You seem very intelligent. You also appear to be a trader of large volumes. In one of your posts here you said that you usually trade 100 to 120 lots of Euro deals at a time

Are you the same Jacko from dailyFX ? He was a very successful trader who just disappeared from the scene after ripping out a huge amount of money from Forex trading live online in a thread there.
Can you contact me to help me in my trading?

newbietrader101
  • #6
  • Nov 5, 2006 9:37pm Nov 5, 2006 9:37pm
Quoting nitman
When I see people talk about hedging ... I usually think about placing two trade at the same time, going opposite direction. A stop loss would trigger the bad trade while the good one continue on to profit enough to break even and perhaps more.

When someone hedge against a losing position ... they usually have to take profit before the price reverses to more favorable side for the original position. Hedging is complicated. I rather straddle with limit orders on both side of the current price then to have two hedging positions...
Nitman,

I have the same understanding of hedging (of course hedging when you trade forex). I just need to add that to me it is a very dangerous business.
  • #7
  • Last Post: Nov 6, 2006 4:24am Nov 6, 2006 4:24am
Quoting newbietrader101
Jacko,

I have just been reading your all your posts. You seem very intelligent. You also appear to be a trader of large volumes. In one of your posts here you said that you usually trade 100 to 120 lots of Euro deals at a time

Are you the same Jacko from dailyFX ? He was a very successful trader who just disappeared from the scene after ripping out a huge amount of money from Forex trading live online in a thread there.
Can you contact me to help me in my trading?

newbietrader101
Hi newbietrader101

I have answered your questions in another post:
http://www.forexfactory.com/forexfor...?t=9701&page=2

Again, thank you for your kind words.
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