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All about Hedging in Forex

  • #41
  • Sep 30, 2019 7:12am Sep 30, 2019 7:12am
Quoting clemmo17
Stopping an unrealized loss from becoming a realized loss is not idiotic. 'Freezing' an equity drawdown until a murky situation clarifies itself (news release, election result) is not idiotic. Would I use hedging as a strategy by itself? Not in the 'forex' definition of having opposite trades on the same pair, but hedging risk in one trade by taking a smaller position in another instrument is not idiotic. If you do trade counter-trend (I'd need to know your trading horizon to really know what this means) then you have been taken by surprise by a...
Interesting point.

However; you could argue; that if you are sure that taking a hedge position against that trend; is going to work; why not use that as a strategy on its own.

What happen if the hedge trade turned against you once you enter that trade? and especially if it went against you by a bunch of pips; will you exit the original CT trade (that is profitable by now); and leave the hedge in negative territory. how do you exit the hedge; what strategy do you use?
  • #42
  • Sep 30, 2019 9:59am Sep 30, 2019 9:59am
Quoting alphadude
{quote} My concept of "idiot" refers to the fact the trader does not realize the above point. I find many trading educators talking about hedging; but they have no clue about the above.
I 100% agree on this one. There are traders that admit using a hedge on the same pair is just more expensive & does not provide an edge. These people researched the concept but chose to hedge because of the psychological aspect. The other group just lives a dream of having no losses in trading.

Quoting alphadude
{quote} They get into complex scenarios; of hedging a hedge, and sometimes even hedging a hedging hedge; and so on.
True, fixing the root of the problem is the way to go. For example, back in the days I always chased the market and got burned a lot so I used a simple trick which allowed me to chase the market with a small lot size. The trick did work (I still lost money doing it but they were very small), however personally I dont like doing things knowing they dont have any edge so I completely changed my strategy instead. Now my trading is completed based on chasing the market. No more pullback-waiting for me..
  • #43
  • Sep 30, 2019 3:36pm Sep 30, 2019 3:36pm
if you want to make big money, you invest in trending instruments.
the best are the stock indices like S&P500, Nasdaq, DAX etc.
you scale in on the way up or after a pull-back and a resumption of the trend.
you keep all those trades for a long, long time.
but, nobody knows when this long-term trend will end.
so you hedge the last trades when price go past them.
when price turns around, I close out the hedge(s).
when price changes direction again, I`ll hedge again.
no big deal for me: I don't trade very often and have all the time in the world to work on my hedges.
I find it easier to hedge, than to close out the top trades, because price can jump around a lot and I might miss my place in the queue.
  • #44
  • Sep 30, 2019 6:41pm Sep 30, 2019 6:41pm
Thanks for your insights yonnie.
  • #45
  • Sep 30, 2019 6:45pm Sep 30, 2019 6:45pm
Quoting yonnie
if you want to make big money, you invest in trending instruments. the best are the stock indices like S&P500, Nasdaq, DAX etc. you scale in on the way up or after a pull-back and a resumption of the trend. you keep all those trades for a long, long time. but, nobody knows when this long-term trend will end. so you hedge the last trades when price go past them. when price turns around, I close out the hedge(s). when price changes direction again, I`ll hedge again. no big deal for me: I don't trade very often and have all the time in the world to...
hi yonnie , my question is long term with hedge do swaps play a part mate
people leave, but this thread will go on for ever
  • #46
  • Sep 30, 2019 7:23pm Sep 30, 2019 7:23pm
Quoting Aussi
{quote} hi yonnie , my question is long term with hedge do swaps play a part mate
hi ozzie,
I invest mainly in the Nasdaq; in good times it will reach for the stars and in bad times, it will drop more than DJ or S&P500 percentage wise.
every 3 months I have to switch to the front month and that will cost me a little bit of money.
most of the time I don't have a hedge on, but if I do, then the hedge will earn me a tiny bit.
I`m not trading this on cash cfds where you have to pay a crazy amount of money on overnight charges.


I also buy stuff at historical lows like GBP/CHF and BRE/USD.
I don't go in heavy, `cos I will buy more when price gets lower.
just have a look at the monthly chart to see what is possible in a couple of years time.
in the meantime I`m earning interest on my positions.
  • #47
  • Sep 30, 2019 8:09pm Sep 30, 2019 8:09pm
Quoting yonnie
{quote} hi ozzie, I invest mainly in the Nasdaq; in good times it will reach for the stars and in bad times, it will drop more than DJ or S&P500 percentage wise. every 3 months I have to switch to the front month and that will cost me a little bit of money. most of the time I don't have a hedge on, but if I do, then the hedge will earn me a tiny bit. I`m not trading this on cash cfds where you have to pay a crazy amount of money on overnight charges. I also buy stuff at historical lows like GBP/CHF and BRE/USD. I don't go in heavy, `cos I will buy...
thank you mate for your reply
people leave, but this thread will go on for ever
  • #48
  • Sep 30, 2019 8:51pm Sep 30, 2019 8:51pm
Quoting alphadude
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...

hedging is usually backed up with strong fundementals and risk data. not a simple martingale just cause your first position took a loss.. why i say it is impossible to hedge within the NDF market is simply because the correlation is not alway obvious, nor is it always accurate. the simplest explanation i can give is that because currency are quoted in pairs.

what is the textbook hedging scenerio for money markets? single tickers with a underlying derivative market or a options market.

u own ABC shares, due to a natural disaster, the shares fall. u hedge. buy selling it's derivatives. whist still holding in to ur shares, because 1)fundementals of the company has not changed 2)u are looking at the bigger picture than scalping

in the CFD market it is also possible to hedge with fx.
u bought some indices on your broker. sudd donald tweets and markets take a tumble. u can hedge it with a fx position
will not go into detail of what position as it is usually case by case? but backed by all, u need a key conviction.

1) if ur guess is tt donald is just bluffing, u can hedge with a USDx or USD base pair. buying it. (why buy usd, cause it the entire market sentiment is tt donald is bluffing, then smart money are gonna buy this index dips. buying US index requires USD, so USD becomes the hot money. follw tt train of tot. btw this is the main reason why when fed cuts and dollar rallies just re arranged. and not banks taking out stops as per all the comments when news breaks.

2) if ur guess is tt donald is merely the first of a escalation between him and whoever he is tweeting about, u do the safe haven side or prep to buy tt country's base pair if u think they will try to pacify donald. not forgetting tt that country has its own index to manage too.

but to hedge a fx position with another fx position. tts not hedging its martingale.

in the real financial world. there is a saying,
buy futures, hedge with options, manipulate the spot. that is the only way u effectively hedge a fx position against a fx position

to sum up
hedging within the same currency pair on the same market. is not hedging but martingale.
hedging is backed by solid research and analytics. which should have also been the basis of your initial position
hedging is a tool for those with greater forsight than scalpers.
  • #49
  • Sep 30, 2019 10:29pm Sep 30, 2019 10:29pm
Quoting Bicarus
{quote} hedging within the same currency pair on the same market. is not hedging but martingale.
sorry Bicarus, but I get confused here with your statement.
so according to you if I sell 1 lot GBP/CHF and later hedge this trade and buy 1 lot GBP/CHF, then I am martingaling?
  • #50
  • Sep 30, 2019 11:31pm Sep 30, 2019 11:31pm
I don't think I've ever gone into a trade with hedging specifically in mind. Like most others have said, I can't really see the logic in that... or at least the required timing and discipline required is beyond my capabilities. The few times I've hedged it's been more of an "emergency" tactic. I mean when I've over-leveraged (I used to do that a lot!) and holding on to an underwater trade that's moving slowly, just patiently waiting for it to come back my way. But then because of some news or whatever, things get even worse, and it starts to move faster against me... to the point where I'm getting close to crashing my account. At that point I had the choice to quickly close the trade at a big loss, but keeping the account alive, or hedging... opening an identical trade in the opposite direction. That stops the bleeding and allows you to catch your breath, and decide what the next move will be. But at the same time, you're then kinda stuck and are gonna have a real hard time deciding exactly when to start closing (usually bits and pieces at a time). And in my opinion, at that point there's also some "luck" involved, and if you manage to get out of both trades alive, you're like "Wow, impressive... although I have NO idea how I pulled that off!"

So basically, no it won't bother me one bit if I never again need to "hedge"!
  • #51
  • Edited Oct 1, 2019 1:11am Sep 30, 2019 11:44pm | Edited Oct 1, 2019 1:11am
Quoting yonnie
{quote} sorry Bicarus, but I get confused here with your statement. so according to you if I sell 1 lot GBP/CHF and later hedge this trade and buy 1 lot GBP/CHF, then I am martingaling?
hi yonnie

if you were to enter into such a trade, tell me what is your positioning, are both trades equal? if so, what is your exit strategy? to increase margin, and to continue trading other pairs to draw down this hedged trade equally?

if you were to do aforementioned, what is your new trade's be it another pair/same pair not hedged parameters. highly likely that the 3rd trade's risk profile will be substantially higher, because you will want to draw down the hedge asap. wouldnt that be considered a martingale?

hedging is not about coming out profitable at both ends or breaking even, thou possible if u can pick tops and bottoms.
it is about accepting the loss, just having the tools to minimize it at a lower risk profile.

perhaps its different in the retail industry when it is your own money and you control the withdrawal timeline, but as a fund manager/instituitional it is a big nono to tell your clients they cant withdraw because their portfolio is being hedged in trades. an ongoing example is woodford funds.

eg. GJ is against me 80 pips. im down 800 bucks. whereas an upcoming option which expires at NY gives me the same premium but netted at a 580 bucks loss.

it will be wise for me then to be -800 + 220 = - 580. than to lock in an opposing GJ and seal the 800 bucks loss. slowly decreasing it with future earnings.

why?

because freed equity is > netted equity. + going back to the basics of trading, that past performance is not indicative of fut performance. betting on fut earnings to offset the hedge is a significantly high risk profile. what if you are caught in another rut? and now have to double hedge?
  • #52
  • Edited 7:12am Oct 1, 2019 5:11am | Edited 7:12am
If you read Mark Douglas Trading in the Zone (highly recommended, or watch the dvds on youtube), you realize that hedging on the same currency pair to rescue a losing position is not recommended.
  • #53
  • Oct 1, 2019 7:17am Oct 1, 2019 7:17am
A good scenario where hedging on same currency pair can be used:

Let's say you have a swing strategy; and you have a position open with SL and TP set.

There is a High Risky news event coming up; such as brexit vote, FED rate, NFP, etc.
The volatility of this event may trigger the SL.
also, The broker may restrict leverage during this event; and your current position may be in a high leverage above the threshold.

You can hedge the position before the event (going net with the broker); then close the hedge after the event; and after the market has calmed down.
When you open the hedge; make sure you disable the SL/TP if they are set with the broker. Or if you are running an EA that executes the SL/TP, then you need to stop the EA; so it does not trade when the hedge is on.

If the price action has went beyond your SL position; then just close the hedge and the position; and take the loss/or profit.

If the price action return to normal away from your SL/TP, then close the hedge; and let the position continue.
  • #54
  • Last Post: Oct 2, 2020 6:30pm Oct 2, 2020 6:30pm
Hedging on the loosing side, turned out in more losses for me.
But hedging on a winning position is different, in my opinion. It helps locking in profits at the highest peak, and in case of a pullback that can really pull back to BE, you don't leave money on the table. The trick is to know when to open the hedge position. Also, if the trend continues, you could close the hedge at a profit.
Unfortunately I often forget to use this, when manually trading, but IMO, it's better than trailing stop, or taking out positions, or putting fixed small R:R, or hope that the price will go back to where it was. From habit, i secure profits with SL, but it's not a good solution.
This also depends on the visual scale of the trade.
We are where we are. Not up, or down. Past Equity is not a reason to trade.
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