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What is a "Hedge" order?

  • Post #1
  • Quote
  • First Post: Oct 5, 2006 10:59am Oct 5, 2006 10:59am
What exactly is this "Hedge" button on my FOXSol demo account? What does it do? And what is its ultimate purpose? Thanks.
Binary Options Trader
Without taking the Spread into acount... It allows you to be BOTH Long & Short any particular pair effectively putting your position at zero. {20 pip move = 20 pip gain on one trade while it also = 20 pip loss on the other.}

It is most commonly used when you believe there is a large move immenent but you are not sure in which direction. So.. go both ways via a Hedge Order and close the wrong one ASAP and allow the correct one to run to to your TP or whatever.

As in all trading techniques, it is not infalleable.

hth
Quoting Bemac
Without taking the Spread into acount... It allows you to be BOTH Long & Short any particular pair effectively putting your position at zero. {20 pip move = 20 pip gain on one trade while it also = 20 pip loss on the other.}

It is most commonly used when you believe there is a large move immenent but you are not sure in which direction. So.. go both ways via a Hedge Order and close the wrong one ASAP and allow the correct one to run to to your TP or whatever.

As in all trading techniques, it is not infalleable.

hth
But why not simply buy or sell the currency pair when it begins to move in the direction of your liking?
Binary Options Trader
Quoting Yoda_Glenn
But why not simply buy or sell the currency pair when it begins to move in the direction of your liking?
Because you are already "In" before the Event and not trying to "Get In" During the Event when spreads can/will be much wider.

See the Newsroom thread here.

http://www.forexfactory.com/forexfor...ead.php?t=8634

If you had been holding a Profitable position for a few days or whatever Before the Event, you may wish to Hedge it until you see the results of the Event.

There are a number of conditions where you might consider hedging.
Quoting Yoda_Glenn
But why not simply buy or sell the currency pair when it begins to move in the direction of your liking?
Yoda,

This is an excellent question.

As explained, there are actually 2 types of hedging that serve different purposes:
- a hedged order is actually a long AND short in the same currency.
- a correlated hedge can actually be 2 different correlated currencies that are either both bought or both sold (if they are negatively correlated) OR 1 sold and 1 bought (if the are positively correlated)

The MAIN purpose of hedging is to mitigate risk.

In a hedged order, the purpose of taking the SECOND order is to actually PROTECT profit during unexpected volatility. So, let's say you've made 100 pips going long on the USD/CHF PRIOR to NFP, and you'd like to STAY in the market during the release, but don't want to exit the market during the release...so, before NFP, you take out an equivalent SELL position in the USD/CHF. Thus, after NFP, if the movement is in your favor, you can drop the SELL position and continue with the trade OR drop the BUY position and reverse OR drop both positions and keep your LOCKED in profits.

Another reason you'd take out a hedged position (and probably the more popular reason in the bigger circle) is to avoid a margin call on week overnight or overweekend positions. If you are running close to margin call, some companies either require you to liquidate the position OR take out a hedged position in order to avoid a margin call (especially when brokers have different requiremetns for overweekend positions).

The purpose of a correlated hedge is to mitagate risk by interacting with a pair of rates that are strongly correlated (either positively or negatively correlated). This gives you the unique opportunity of collecting interest, or even profit. For example, the USD/CHF and GBP/USD are strongly-negatively correlated rates. Theoretically as the USD/CHF moves up, the GBP/USD moves down by a very very close percentage (and vice versa). If you were to buy both of these currencies and distribute the weight accordingly, you could potentially collect enough interest on the USD/CHF to offset the charged interest on the GBP/USD so you can profit from a long-term carry trade. Furthermore, there are times when the swap rate between the crossover rates (the GBP/CHF) moves favorably to your position such that both the USD/CHF and the GBP/USD rise (and fall) at the same time (diverge in correlation) and you can collect profit. The theory is, you can hold out for much longer as the rates move opposite each other, and then when they do move in the same direction, you can collect the profit...all of this while collecting interest on the swap. It isn't risk-free money, but it's less risky than buying a single currency. SisterCurare was experimenting with this a while back.
Quoting Yoda_Glenn
What exactly is this "Hedge" button on my FOXSol demo account? What does it do? And what is its ultimate purpose? Thanks.
This is a button with a help of which you will make lots of money in future
Quoting mrmikal
Yoda,

This is an excellent question.

As explained, there are actually 2 types of hedging that serve different purposes:
- a hedged order is actually a long AND short in the same currency.
- a correlated hedge can actually be 2 different correlated currencies that are either both bought or both sold (if they are negatively correlated) OR 1 sold and 1 bought (if the are positively correlated)

The MAIN purpose of hedging is to mitigate risk.

In a hedged order, the purpose of taking the SECOND order is to actually PROTECT profit during unexpected volatility. So, let's say you've made 100 pips going long on the USD/CHF PRIOR to NFP, and you'd like to STAY in the market during the release, but don't want to exit the market during the release...so, before NFP, you take out an equivalent SELL position in the USD/CHF. Thus, after NFP, if the movement is in your favor, you can drop the SELL position and continue with the trade OR drop the BUY position and reverse OR drop both positions and keep your LOCKED in profits.

Another reason you'd take out a hedged position (and probably the more popular reason in the bigger circle) is to avoid a margin call on week overnight or overweekend positions. If you are running close to margin call, some companies either require you to liquidate the position OR take out a hedged position in order to avoid a margin call (especially when brokers have different requiremetns for overweekend positions).

The purpose of a correlated hedge is to mitagate risk by interacting with a pair of rates that are strongly correlated (either positively or negatively correlated). This gives you the unique opportunity of collecting interest, or even profit. For example, the USD/CHF and GBP/USD are strongly-negatively correlated rates. Theoretically as the USD/CHF moves up, the GBP/USD moves down by a very very close percentage (and vice versa). If you were to buy both of these currencies and distribute the weight accordingly, you could potentially collect enough interest on the USD/CHF to offset the charged interest on the GBP/USD so you can profit from a long-term carry trade. Furthermore, there are times when the swap rate between the crossover rates (the GBP/CHF) moves favorably to your position such that both the USD/CHF and the GBP/USD rise (and fall) at the same time (diverge in correlation) and you can collect profit. The theory is, you can hold out for much longer as the rates move opposite each other, and then when they do move in the same direction, you can collect the profit...all of this while collecting interest on the swap. It isn't risk-free money, but it's less risky than buying a single currency. SisterCurare was experimenting with this a while back.
I'm sorry mrmikal, I should have thanked you for this detailed explanation when you first posted it. But to be honest, I figured I would study it in the near future, as my brain was over loaded with FX at the time. Well, the near future is now, and I'm thanking you for this clear explanation, which I now perfectly understand. Thanks.
Binary Options Trader
  • Post #8
  • Quote
  • Edited 1:45pm Oct 20, 2006 11:45am | Edited 1:45pm
You could also do a synthetic hedge as in

1 long EURUSD
1 long USDJPY
1 short EURJPY
Guys
So in Gold, i have an equal lots buy and sell, so when i bought, the price dropped and so i put in a sell order, so yes, my account is hedged, but, now i need to clear it without blowing the account, how is this done?
Quoting loyalFX
{quote} This is a button with a help of which you will make lots of money in future

Is Hedge kind of similar to SL. What is the different?
Hedged order allows the trader to be both short and long at any particular pair by including your position at zero.

Its mostly used when traders think that there is considerable movement but not sure in which direction.
When your trade is positioned at zero, hedge order allows a trader to be short and long to any particular pair. Traders mostly use it when there is a constant movement in various directions.
We can say that hedging is a measure taken to insure risks that may arise during the trading process.
  • Post #14
  • Quote
  • Edited Jul 15, 2021 4:45pm Jul 14, 2021 7:52pm | Edited Jul 15, 2021 4:45pm
Question: U.S. citizens HEDGING in other countries?

are there any U.S. citizens with experience trading literally/physically outside of the U.S.? I’m specifically wondering if U.S. citizens are only barred from HEDGING within the physical U.S.? it seems like it would be based on either where your residence/banking is or where your Broker is based? I use OANDA which I’m told allows hedging, but i cant do it in the U.S. – i guess I’m wondering if the law applies once I step outside physical U.S. since my Broker is in England and otherwise apparently allows it? It’s not like the IRS could tell after the fact how i earned by money by hedging in another country on their servers, haha? so it must be that OANDA simply bans U.S. citizens from hedging at all, no matter where they are?

(actually, I'm not even interested in hedging per-se, I want to work in multiple time-frames on the same chart (have one order going long-term and the smaller timeframe to mop up the pips i otherwise would have missed) -- and it wont let me create orders in opposite direction on same chart/same account. I know i can open multiple accounts and do it that way (and there are other options), but it would be easiest if i could just get around these hedging laws)

*edit* i can't lower my lot sizes & use the same account (it's already as low as it can go), and i'm not willing to raise it until i meet a certain dollar benchmark, and the indicators I use restrict me to (are only coded for) MT4. I'm not super concerned w the definition of "hedging"... I have a method that works. I simply want to know if U.S> citizens can open multi-directional orders (whatever the definition; separate buy & sell orders on same chart) in the same account we use inside the U.S. -- while we travel outside of the U.S.? currently the U.S. "Hedging" laws restrict me from doing this inside the U.S. using my method, so hopefully going forward you can forgive the use of the term if you dont believe it applies*


- I cant find a good place to post this (have to do replies only because I'm new/wont let me start new thread), and at least youre talking about hedging here (I'll start my own thread asking same question if i dont get a reply and they open that option up to me) -
Hedging does not mean to open a position in the same asset in two different directions. It is a common misconception among retail traders affected by the way MetaTrader and some retail brokers use this term.

To better understand hedging, you may read this article: A Beginner's Guide to Hedging

In your case, you are willing to open counter trades based on lower time frame signals. You don’t need a broker that will allow you to do that. You just reduce the main position size at each time a counter trade signal appears.

Instead of thinking in orders (as in MT4 accounts and MT5 Hedge accounts), think about positions (MT5 netting accounts). You only have one position that you increase and reduce. That’s how markets really work. Participants only have one position that they increase or reduce.

If you keep the wrong hedging concept and open orders in opposite directions at the same time, you will pay too much more commissions than those you would have paid with a netting account following the same strategy.

You don’t need to open an account offshore, just keep your US account as it protects you from these types of mistakes.
Algos Coder
@MRMIKAL "Another reason you'd take out a hedged position (and probably the more popular reason in the bigger circle) is to avoid a margin call on week overnight or overweekend positions. If you are running close to margin call, some companies either require you to liquidate the position OR take out a hedged position in order to avoid a margin call (especially when brokers have different requiremetns for overweekend positions)"

...never thought of that, and before i learned how i could fix my issue w my method, that would have saved me a ton of money while i waited on my position to return. not being able to "hedge" blew my first account on a margin call
  • Post #17
  • Quote
  • Last Post: Oct 12, 2021 1:16pm Oct 12, 2021 1:16pm
“Hedging” in this context is simply playing trading costs twice.
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