All about Hedging in Forex

No doubt many of you have heard about Hedging in Forex; and that it can be useful to reduce losses or recover positions, or lock in profit of main position.

I have done research about it in the past; but I have come to conclusion that hedging is a myth. It is simply applying a stop loss to your position in a different way.

This thread is to discuss hedging.

All comments, critics, pros, cons, are welcome here. It is a matter for discussion.

My aim is to learn more about it, and see if I can use it to my advantage.

In my current forex broker, there is no such a thing as hedging. When I open a position to buy 1 lot EURUSD, then open another position to sell 1 lot of EURUSD; at the brokerage account; the position is flat. There is no holdings. The two positions only exists in my software per se.

The following questions may help navigate through this topic:
1. When do you decide to start heding your position (i.e. if a loss reached x pips)

2. When do you decide to close the hedge (i.e. if the hedge position reached x pips profit)

3. What do you do if the hedge started losing money (i.e. -20 pips loss, in addition to main position loss)

4. What happen if you close the hedge with a loss; then the market went against the main position again; do you enter another hedge again?

5. Whan happen if the market kept going against you for at least 500 pips; do you wait until your main position makes profit? when if the market does not return to your entry price?

6. Why hedging is used in the first place? is it to reach 100% winning positions? why don't you accept you were wrong in opening the main position?
in other words; when do you decide that the main position was not a good call; and that we should close it?

7. etc


Interesting Threads and Posts about this topic:
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Hedge Trade-panel

- Hanover did extensive research on this subject:

https://www.forexfactory.com/showthr...56#post7907056

https://www.forexfactory.com/showthr...07#post7908007

- dancingphil explains how hedging is done for recovery
https://www.forexfactory.com/showthr...61#post7756061


Update on 29 Sept 2019:
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I have done tons of research in recent weeks; and done lots of experiments on hedging. I reviewed many styles of hedging; and tested them.

Here is my conclusion:

Hedging is for Idiots !!!

If anybody in FF, or in Forex forums; tells you he is hedging losses; yawn for a bit; then take a 180" turn and RUN for your life! You have spotted an idiot.

Hanover is the most who have spoken about hedging; and I agree with him 100%. If you would like to know more about hedging; and why it is for idiots; read all Hanover posts.

Hedging was supposed to be for earning the swap-difference in the same pair(s) across multiple (attractive) brokers.

how do you earn the swap; when you are paying the spread and commission?

also; the swap fee for the same pair on the same broker; is not net. meaning; the broker passes on the swap + a markup on that swap. Basically it is a commission on the swap itself.

I was not talking about hedging with the same broker.

And the times are over where you could earn some easy money by doing this.

Sounds like you are alluding to zone recovery related work.
What are your thoughts AD?

There are different ways to hedge, really what you want is something called double alpha where you earn off your trade and earn off your hedge. It does not necessarily need to involve different asset classes.

You have to be a bit careful with it as I recall someone fairly recently took a position on oil and natural gas and destroyed his fund. His view was that energy always goes in the same direction.

Think there is a video on you tube some on this

That's correct; the zone recovery area. That's where it is mentioned most of the time.

So far my research shows that hedging does not work in zone recovery.

I am not sure how others are using it.

For example; checkout this 4xdat guy; he explains how he is "not using" stop losses; and using hedging instead. I did test his ideas; but it did not work. The complexity of how he was using it gives you illusion that it works; but mathematically it doesn't. Heding is simply akin to using a stop loss; and then re-enters later on.

Here is another video on zone recovery and hedging.

Hi Alpha,

I knew DancingPhil. He used hedging. I coded things for him.

Here you have a post explained why he hedged his positions instead SL:

https://www.forexfactory.com/showthr...85#post8532185

"Without going deeply into it, the primary reason why I don't close out a trade with a stop, and why I hedge instead is because with a hedge, the trades are balanced, and all margin is once again free margin. I then have the time and luxury of considering my position.
....
Hedging allows me to continue at my full lot sizing. Stop loss concepts mean I would have to drastically reduce the size of my next trade, and it would take much longer (more pips) to claw back my loss."

hi David, what do you think about his hedging method, does it really work? perhaps an example will be great.

btw, dancingphil RIP claimed in his profile that he made millions trading forex. is it true?

I'm very interested in hedging as an alternative risk management, but I don't know how to start. I think the best thing is to use an expert advisor, so as not to risk making mistakes due to emotion.

It's not of any great benefit, but it's much better than a fixed SL.
I use it primarily as a protection against unexpected big movements and increasing the margin, +1 lot - 1 lot request 0% margin (not working with all brokers).

I haven't found a way I can profit from hedging yet, you can use stop loss and enter a position later you will save swap, or other fees. Hedging is good for being both sort and long at the same time and having different targets, not all brokers offer hedging and for them who not you have to close first your buy position to open a sell and the opposite.

The only way he made money was by ripping off his "students".

No millions/Gold were ever been seen.

Poor guys.

assuming we use a hedge (long and short) and have different targets for each.

you can do the same thing by not opening a position. once the market moves to either position target, open the opposite position. this way you haved saved yourself commission, spread and potential swap fees.

opening long and short at the same time means you are flat. you just given your broker free money.

i have personally never understood hedging if you have time tested fool proof strategy in buy and selling any instrument like currency , stocks , commodities etc would you focus on entry and exit of that specific instrument or again to so call reduce the losses you would enter trade into some other currency , stocks , commodities etc to cover the losses what if the both the instrument go into wrong direction that means you will be having double the loss . Which means you don't have fool proof strategy in trading in your first instrument on the first place which is technically gambling and not trading as per fixed trading plan and entry exit rules and you are not going to invest trillion dollars on trading anyways so logical would be to focus on one instrument at a time and be expert in it

I have been hedging in same currency pairs for more than 15 years.

You have to select hedging-frinedly pairs that have strong mean-reversion tendancy and have high liquidity.

I would say 60% role is played in selection of the pairs.

20% is with timing. If you enter a period where there is no momentum and choppy trading, then you end up running up big swaps bill in nursing persisent Drawdown and may end up with a loss.

Example: Brexit kind of geo-political event is good for hedging. You know there will be a lot of momentum and you won't face choppy trading.

Hedging works only on a platform where the broker allows hedging of same currency and with same margin. If there are three buys and three sell then no margin is used . Whole margin deposit become free equity as long as there is equal number of buys and sells irrespective of position size.

20% is in management of trades and drawdown.

Those who procrastinate should not attempt manul hedging. They should go for EA trading.

I have extensively tested an EA for three years and have shared all the results on FF in a very transparent manner. I don't belive in having any secrets as I have received benefits from several mentors who have same views that I have now. It is hard work . It does pay. I invested $20,000 demo money and targetted $50,000 capital in an year. And achieved 19% of the annual target in a period of 82 days.
Because of Brexit I thought of trading. and I chose GBPJPY. Chose a broker who allows hedging. Ask and Bids difference can affect margin levels nominally. Not a big deal.
On the whole as long as you keep both sales and sell position same, your margin used is 0.
https://www.forexfactory.com/showthread.php?t=921297

The conclusion is that

1. EA should be used to enter trades . Manual decisions should be made as to baby-sit Drawdown. It is a hybrid kind of trading.

2. EA should have a strategy that never stops in producing TP of a small 15 pips to 20 size and execute at least 15 transactions in a days if not more.
The pip producing machine needs thrust (momentum) and on an active day 15 to 20 times market makers algos do provide momentum.

3. The logic is let both equity and drawdown grow together. The idea is that at no point drawdown should go out of hand. 60% of drawdown is the normal if anyone wants to make 100% returns in a year. Roughly you can count 60% to 80% of the annual returns . With that calculation, drawdown can be 5% if the return expected is 8% a year.

4. If you are an experienced breakout trader, you can take chances manually. I have no intention of practising hedging manually.

5. EA should be coded in such a way as to:

(a) control suspension of trading by a variety of methods to stop accumulating drawdown beyond a point

(b) assist drawdown in having a comfortable breathing space. At least 3 months of breathing space when the pip producing machine stops. Nothing happens provided you select a mean reverting symbol and are not caught in a multi-year book balancing exercise routinely conducted at least once in 3 years time by the big market markers through their algos.

6. Equity Profit and Equity Loss should be used for controlling risks.

Hedging should be treated as a risk control method and not as an account recovery or martingale trading strategy.

It is my experience that is extremely difficult to find consistent opportunities for trading in spot fx. You should have an eye for when to trade.
I stopped trading after Brexit lost momentum.

I am 70 , not tech-savvy with poor Excel skills. Still because of my 35 years manual trading experience I can supply trading logic and risk control methods.

If it interests you, I will be happy to help you code a profitable EA.

But before that you have to go through my findings unveiled in the mentioned thread and convince yourself that hedging is viable.

Yep, it was, I fixed a copy software for him since he mánaged 7-8 accounts with 6 figures each. Don't want to post much here from him, since nobody is going to believe me. He was just a outlier. Not normal person at all.

20k to million in 2.5 years, yes , trading phenomenons do exist

Yes, they do exist but he's not one of them.

You were probably one of Phils victims.

Only this