Hey...what about Volume?

OK....this has gotten too out of hand and I am going to put a stop to it right now. I mentioned the USD/MXN trade to show an example of how to use your leverage in a current to trade to your advantage. I had no idea that the troll(s) would descend. So here is the idea, and you can dispute this until you're blue in the face...I have shown you with an open, live, on the right hand edge trade...and I challenge you (or anyone else) to dispute it with the same.

The markets (and by markets I mean participants producing the order flow) cannot be "boxed in" by absolutes, ie "never", "always", "impossible". In fact the only absolute about the markets that can be said is, the market is "never" absolute. It is always relative. That relativity is dependent on the market structure factors themselves...Time, Order flow, Volume, and finally price. That being said here is the deal about hedging and I use the trade I posted earlier as an example. Back in November I was not "hedging loss" I simply entered a position that took time (3 months) to develop. That development (as luck would have it) produced the envious position of profit with the possibility of further profits IF I can hold it long enough. All original trades had stops and where at one point "at risk" trades...they are no longer. The only risk in these trades is not whether they will make a lot of money or a little money, but they WILL make money.

While we're on the subject lets talk about "risk" as that is really the base line question here...RISK. Unlike many here, I speak against the dogma of "low risk or high risk"....there is no such thing. The "risk" in any trade is constant and unchanging. The only thing that matters is how much of your account your expose to that risk. And the risk is simply this...that price will move against your entry creating a negative open trade balance. THAT's IT!! That risk never changes. That is why we use (or at least should use) stop losses to prevent exposing that risk to the entire account.

Now on to the matter at hand. Let's say you have a trade going and its a winner...a big winner and you want to hold it for as long as possible because you "theorize" that this trade might continue for 1000 or more pips in your favor. If that is possible why wouldn't you want to take advantage of that? But then there is that old "risk" scenario again, that price might move against your position and may even hit your stop. In fact when price does start to stall and range back and forth, that creates a bit of uncertainty about your trading theory that might make you doubt yourself and your trading idea.

Enter the "hedge". First lets define what I am talking about. By "hedge" I mean an equal position in the opposite direction on the same instrument. So in this instance I have engaged a short position which has been so successful I have closed 1/2 of it in profit the remaining position I entered at what I believe to be a very long term top. But I could be wrong on that, so I have a stop loss protecting the position against all losses. The current price action has stalled and is no longer moving in my favor, and this uncertainty could cut short good profits. And that old "risk" scenario tells me that sooner or later price WILL move against me. But instead of closing my short, I chose to keep it running because, (due to my analysis) I feel there is more down side coming and want to participate. I have already taken good profits out of this first leg and that is booked and off the table...so...

Why not use the counter price movements to my advantage and enter an opposing trade...with a stop (that is already paid for)...and gain even more pips from the counter price movement. It may be a little it may be a lot but the where I entered the long is a good area for longs. The only question is will this long actually produce? No one knows...so I hold both positions.

Now lets say I did the opposite. Instead of holding my shorts I closed them and opened longs...OK...I booked profit on the short and now I have an "at risk" trade that may or may not produce. If it does I pat myself on the back and call myself a "genius"...if it doesn't I've missed out on a tremendous opportunity that I was in from the beginning and let it go because of some idea that it is "impossible" for a hedge to make money.

REALLY?

So here's the bottom line...If you don't like hedging or don't think it will work...don't do it. I won't criticize you that is your choice. But if you (like me) chose to buck the "trading dogma" and use this technique to your advantage...it can be done successfully but requires a little (OK a lot) of patience and planning. But don't come into MY thread and tell me its impossible for me to make money when I have clearly shown you in a live in the market trade that's not true.

Then what's the point...are you gathering data?

DonPato if you instead of hedging ( opened the buys ) if you placed your take profit for the sells where you bought, when that take profit was hit what would happen is that two 0.02 lots buy orders would enter the market and your positions would be closed. this is a fact not an opinion. And what im saying is that you are out of the market. you just choose to get out with a hedge rather than with a take profit. From now on you can only profit when you release your hedge and the point that im making is that if you closed your positions and opened a new position in the moment in where you would release your hedges you would pay less comissions.
I had enough with you and like i said hedgers live in denial, they dont even realize how stupid some of the things they say are.

Sorry Don. I will delete. I don't give opinions on how others trade nor do I derive any opinions from what I read on forums. Those days are long gone. This topic on nedging has been beaten to death by a thousand swords all over the internet. Regardless, your last post on risk was, respectfully, just disappointing to read so had to stop reading right after this sentence "The "risk" in any trade is constant and unchanging". Time to find my exit out of here.

Good luck bro. Didn't mean to offend anyone and don't care if I did :-)

Last post (as Hedging is not applicable to US based traders and to share where I stand regardless of factoring trading costs):

 

1. You will always lose money if you hedge your floating losses. True or False? true ( im taking lose money as trading costs) True
2. You will always win money if you hedge your floating profits. True or False? false True
3. You can never turn a losing hedge into a profitable position by hedging the hedges. True or False? false True
4. You can never turn a winning hedge into a losing position by hedging the hedges. True or False? false True
5. There is no edge in hedging losses using same pair/instrument. True or False true True
6. There is a significant edge in hedging your profits using same pair/instrument. True or False? false True
7. Scenario #6 is only true if SL of each leg of your hedge is moved to BE in order for edge to exist. True or False? false True (read up on long term position trading in the millipede thread)

Hi Don, do you use the hedge to lock in winners or manage losers?

I don't usually hedge as a matter of my regular trading routine but have already answered this question here: https://www.forexfactory.com/showthr...1#post11954411

I did read that, and I came away unclear on your answer. The reason that I ask is because I do lock in winners as I am an infinite yield trader. My purpose is not to get into a hedge no hedge discussion, as I know that hedging has it's uses but the average trader should not do it.

I hedge when I reasonably believe that the current trade has much more left to go and do not want to give up my "base" position. So I will "hedge" the position with an opposing position to take advantage of the movement contrary to my base position. When that contrary move rolls over again I will add in a newer position to take advantage of the new move in my original position...take 1/2 off at a reasonable take profit and continue to build into the move. I've been able to finish with four add in positions that sometimes takes 9 months to accomplish and this final take profit can turn a 50% year into a 100% or more year.

That's a plan. That will fit on a 3 x 5 index card and is clear. I do something very similar in one of my strategies except that I cut losses immediately. As someone has mentioned, this will produce a draw on equity if this is done too frequently, but if positions are held over the course of a quarter or more, then it should work out. This month was a horrible month as the EU formed a near perfect doji. But the a market that has a range of 1000 pips a year cannot stay within that monthly candle for long.

Finally!!! Someone who can think past the end of the week!! Thank you JMN!!! I wish you the best of luck.

Hi DonPato, great thread! Thank you for all your input and knowledge shared. Please see the attached BTC 3 day chart. Your thoughts please?

You have done well with this analysis. I don't think that I could add anything more. Congratulations!! We'll done!!

The only thing I would add is that on the last few candles. You correctly noted increasing volume but also note how "muted" the price action is. Further each candle seems to show a real battle between buyers and sellers. While many might referer to this as "accumulation" I would advise caution simply because both sides of the market seem determined to dominate the other, making for choppy directionless price action. The increase in volume seems to suggest that neither side can must enough volume to dominate the order flow for very long....read... balanced order flow.

Again very well done.

Thank you DonPato! Appreciate your feedback sir. I hope others will find value in your offering and apply and share here accordingly.

You are most welcome... I'm gratified that you found something of value here. Please don't hesitate to contribute when you feel the desire

Hi DonPato, I was wondering what is your view regarding volume feeds in the crypto exchanges, examples of Luno, Binanace ect.? Thank you

As I don't trade or even look at crypto currencies I'm afraid I could not give you an informed opinion. My experience has been that if the broker is reputable and regulated by a transparent agency their data feed (which includes volume) should be reliable. I do not however know if the volume data is tick volume or actual buying and selling volume lots.

Sorry I cannot be more helpful.

I see, recent crypto news on fake volume by crypto exchanges! Basically, volume based trading is not available option to the general traders.

I will have to defer to your view as again, I really don't trade these markets. But it does further strengthen the point that transparent and well regulated markets work in favor of all traders, especially us "little guys" who only participate using minimum requirements.

This is a big reason why I only use US futures markets for my day-to-day trading and use FX for longer term trading and only then with a well proven a regulated (transparent) broker

Just wanted to see what people think about this.

Using tick volume to see big banks, MM's etc. trading volume and why it doesn't matter which broker you get the tick volume from:

From my understanding tick volume counts a trade transaction (e.g. one tick, one trade). When a big bank etc. tries to move a lot of currency they rely a lot on the small retail traders to buy/sell their currency. An analogy might be the big banks put a lot of honey out on the market and the retail traders are the ants going after it. The retail traders are gobbling the honey up a little at time until the honey (currency offering) is gone. Every time the retail trader trades on the currency being offered one tick is recorded. Therefore, when there is a spike on the tick volume indicator it means the big banks just put a lot of currency in the market and there are a lot of retail traders trading on it creating the volume spike. If this is true then the tick volume indicator shows when the big banks etc. are trying to move a lot of currency. This is especially true when there is a large price movement. If the price does not move much then it might indicate there is a battle (a lot of trading) of price over a small amount of currency.

The big banks etc do not use brokers retail traders use. The brokers are ants nests. When the ants go after the honey it doesn't matter what nest (broker) they are from. The ants see the honey and they want it. The retail traders will trade on the currency being offered no matter what broker they are using. This is why tick volume is pretty much the same from broker to broker.

I'm afraid it does matter. And a great deal, unfortunately. Many brokers (especially those that use MT4), give you tick volume data that is accurate only within their own platform or brokerage. Again, I must remind all who read this that forex data, including volume, is decentralized and private. The only data available comes from major banks or liquidity providers. There is no central repository for this data. This is what makes the forex market so easily "scamable". So your broker may supply you with data from Saxobank (for example) and mine from Deutschabank, and another from Credit Suisse. I'm sure you understand the point. Each major bank has their own data and do NOT report that data to any centralized or regulated agency be it privately or publicly owned or regulated.

So while your data may show slightly increasing tick volume on one day...mine might show a large increase or none at all. This is why I have always advocated that your data come from an independent and reliable 3rd party if possible. Some, like e-signal, use an amalgamate of several large liquidity providers. Most brokers use only their liquidity provider, and some only quote what is happening inside their own agency...broker. Oanda, and FXCM are famous for this.

This too is a bit inaccurate. Retail brokers are actually a double edged sword. On the one side they allow us with small resources to participate in a multi-trillion-dollar-a-day market, using highly leveraged accounts which allow us access to the same movements the larger participants trade. On the other side, our positions are so tiny they don't even register and cannot even be put out onto the open market until they are of a minimum size of 1 million dollars. So the broker, takes your trades "in house" and holds them (being the counter party to your trade). Once the collective orders of any position size reach a certain level (which is different for each broker). That broker then puts the order out onto the open market via his liquidity provider and "off loads" your order. The liquidity provider will also do the same thing until the "volume" size reaches a minimum that he can then transact with one of the major banks...THEN it registers as a tick...but it is a collection of many different small micro and mini lot positions.

So your order or transaction does NOT directly produce a tick on the open market, but may inside your broker's platform. This is a HUGE difference in data.

Just to be precise...a tick is simply a transaction...nothing more. It says nothing about how big that transaction really is. Remember the minimum is $1,000,000. Some transactions are multi millions. This again, is the difference in "true" volume and "tick" volume. Think of it this way...how many mini lots ($10,000 transactions) could a single minimum order of 1 million absorb and still NOT move price?

Big banks ARE the brokers to the rest of the world. All transactions that occur on the foreign exchange occur between these large banks. Again NO central exchange. Thus the transactions are private and unregulated. They are mutually agreed on transactions INSIDE the banking system. Even Governments have to use banks to exchange money between countries. Retail brokers are granted access to one or more of these banks via a liquidity provider. You are then granted access via your account to the retail broker. However it is a very long way from your mini lot transaction to a tick on the FX exchange.

It is these facts that lead many to discount completely the tick volume on their charts and with good reason. However, I am of the opinion (and its only my opinion) that when the data is from a reliable source AND the broker is well regulated and transparent, tick data can be and is a useful component of analysis, especially for those of us who use it to analyze order flow.