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Do you hedge?

  • Poll

  • Do you ever hedge a trade by taking the other side?
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  • #1
  • First Post: Edited 9:32am Nov 12, 2007 8:32am | Edited 9:32am
Do you hedge a trade?

By hedge I mean if a trade is losing, you open a trade in the opposite direction on the same pair, for example you would have both a long and a short trade open on the GBP/USD, of the same lot size.

Just to keep it simple, let's not get into correlating pairs, using one pair to hedge another, etc. If you do this, answer no.

I do believe a good trader might have strategies wherein a hedge is used.

From my inexperienced viewpoint, a person opens a hedge when he has a trade he doesn't really know what to do with, or can't bring himself to just close it and take the loss.

So they open a hedge, now they have 2 trades they don't know what to do with. That would be the case with me.

When I play out the possible scenarios in my mind, I just see a lot more opportunities to be whipsawed.
  • #2
  • Nov 12, 2007 9:14am Nov 12, 2007 9:14am
I have an MT4 broker who's software will routinely widen preads to hit my stops and just not hit my take profits, so to counter that I've found that Stop and Limit Orders can be effective ways of getting a better price for each.

As far as placement of these pending orders, I find extreem areas of support/resistance for their location. This gives the trade plenty of breathing room and often I will close the trades manually before price reaches the pending orders.

I'm not a pro, so any further guidance in this regard would be appreciated.
  • #3
  • Nov 12, 2007 10:00am Nov 12, 2007 10:00am
No, I don't hedge personally, but some traders seem to do well. I just try to buy currencies when they are trending and try to get in when they are cheap.
  • #4
  • Nov 12, 2007 10:26am Nov 12, 2007 10:26am
Quoting Micro-MiniMe
I have an MT4 broker who's software will routinely widen preads to hit my stops and just not hit my take profits, so to counter that I've found that Stop and Limit Orders can be effective ways of getting a better price for each.

As far as placement of these pending orders, I find extreem areas of support/resistance for their location. This gives the trade plenty of breathing room and often I will close the trades manually before price reaches the pending orders.

I'm not a pro, so any further guidance in this regard would be appreciated.
ill give you one guidance : Dont believe that your MT4 broker routinely widens the spreads to hit Your stop-losses (you are no pro so no big account I hope?). It would be unwise to base trading decisions on the basis of a subjective assumption.
  • #5
  • Nov 12, 2007 10:35am Nov 12, 2007 10:35am
Great thread overall, and good post here. Just happened across it. A smart viewpoint on hedging. I disagree that it's free, you pay the spread again.

http://www.forexfactory.com/showpost...23&postcount=3
  • #6
  • Nov 12, 2007 10:38am Nov 12, 2007 10:38am
Quoting FrankS
ill give you one guidance : Dont believe that your MT4 broker routinely widens the spreads to hit Your stop-losses (you are no pro so no big account I hope?). It would be unwise to base trading decisions on the basis of a subjective assumption.
I agree that you have to make your trading decisions sound and let the pips fall where they may, even if the brokers play their dirty tricks.

I doubt he meant his stops specifically. Brokers most definitely run stops when there are many piled up around a particular price, and widening spreads is surely a good way to run them and keep their risk down.
  • #7
  • Nov 12, 2007 10:45am Nov 12, 2007 10:45am
I've used hedging before and in fact, doing it now. It is really tricky, but can save your account sometimes. I have a large short eurusd trade on, that got really close to margin call after the Chinese official put foot in mouth last week. I could've added more money to the account, but it would be at least 12 hours before I could. I felt that the London session was going to run with this jump so I opened up the same size buy. No more losses but of course no easing either. The price did go up, and I put in stops at my entry. When price came back down, I was lucky it kept going. Now the trade is back to manageable and I am trying to look at obvious places for pullbacks to hedge and hopefully leg out of soome of the shorts. I do not recommend this, but it is the best way for me to get out of this trade without too much damage.
In a ranging market, hedging can be quite good.
  • #8
  • Edited 11:12am Nov 12, 2007 10:53am | Edited 11:12am
Quoting FrankS
ill give you one guidance : Dont believe that your MT4 broker routinely widens the spreads to hit Your stop-losses (you are no pro so no big account I hope?). It would be unwise to base trading decisions on the basis of a subjective assumption.
You're right,
I should have said that when price is near my stop losses they always get hit even in slow markets, but when price trades above and below my take profits for as much as 30min, they will often not get hit. I've seen this with my own eyes on several occasions and after reading my brokers disclaimer (something like stop loss and take profits are treated as market orders, that is "at best price") there's no reason for me to trust take profit or stop loss orders.

In all fairness I should say that my other two brokers have done similar things in the past. This sort of thing is not uncommon, that's just part of trading and hedged orders is how I handle it. If I was a pro, the spread payed for hedges would add up to a conciderable amout of money, so I would need to do something else.

bhale has a good point about hedging in a ranging market. It's quite handy, but takes a different mindset. i.e. close winners 1st and let the loosers return to profit next. Lots of strategy involved and it can be tricky.
  • #9
  • Nov 12, 2007 11:19am Nov 12, 2007 11:19am
Hedging is a very powerful tool for people who know when and how to use it

This is also the main reason why oanda only allow hedging on a sub-account , this way they give you to understand they would like you to realize losses instead of freezing them
  • #10
  • Nov 12, 2007 1:53pm Nov 12, 2007 1:53pm
I do hedge. Hedge is in my opinion the best trading strategy to make money!
Trainee at UBS Investment Banking
  • #11
  • Nov 12, 2007 2:12pm Nov 12, 2007 2:12pm
Quoting th_ngue21
I do hedge. Hedge is in my opinion the best trading strategy to make money!
The question was about hedging on the same pair !!
Could people who are hedging on the same pair give us a numerical example where it is beneficial to hedge instead of buying / selling ( I mean a complete example with price and timing for entry, for hedge entry, for main exit and for hedge exit).
I cannot imagine any theoretical example, so I am very interested.
  • #12
  • Nov 12, 2007 2:21pm Nov 12, 2007 2:21pm
Quoting jlpi
The question was about hedging on the same pair !!
Could people who are hedging on the same pair give us a numerical example where it is beneficial to hedge instead of buying / selling ( I mean a complete example with price and timing for entry, for hedge entry, for main exit and for hedge exit).
I cannot imagine any theoretical example, so I am very interested.
Yes, I do hedge on the same pair bro. I trade the EUR/USD only and I am very succesfull in it.
Trainee at UBS Investment Banking
  • #13
  • Nov 12, 2007 3:33pm Nov 12, 2007 3:33pm
My vote is no.

Same pair hedging is nothing else but an excuse not to admit your mistake.
Technically and phisically it equals to close your open position and make a re-entry decision till you have a clearer mind.

Try persuade yourself before trying to persuade me.

Cheers.
凹凸 only
  • #14
  • Nov 12, 2007 3:51pm Nov 12, 2007 3:51pm
Quoting jlpi
The question was about hedging on the same pair !!
Could people who are hedging on the same pair give us a numerical example where it is beneficial to hedge instead of buying / selling ( I mean a complete example with price and timing for entry, for hedge entry, for main exit and for hedge exit).
I cannot imagine any theoretical example, so I am very interested.
Here's a GBP/USD chart with a range highlighted by an elipse. Several factors alerted me to the strong posibility of a ranging market so I was ready. Confluence of fib levels and sup/res levels showed a likely range ahead of time. This along with absence of substantial expected economic data gave a strong likelyhood of range.
It's difficult to describe when, where and how I placed pending orders, because I was experimenting with various times and levels as the days went by. I remember that the easiest orders to manage were when I placed two offsetting orders, one buy and one sell, soon after the start of a trading day (8PM EST) when price was near the median price of the range. By the time I woke the next day price was usually near the top or bottom of the range, so I would close the profitable order then place another pending order to act as a hedge stop for the remaning order. Most times the price would return to the opposite end of the range within a day or two. I would then close that order when it was in profit and start the whole process over again.

The attached chart shows the time period of the trades that are detailed in the Word Doc.

This is the best I can do right now. I'm fairly new at this so mistakes were made. Even so substantial profit was had during this period of time.

I can't provide evidence that this resulted in more profit than simply buying or selling one order at a time, but the main reason for me working like this was that I don't have much time to sit at my PC watching for price action and reversals. This method allowed me to harvest many pips with very low risk while working, sleeping and doing work around the house.
Attached Image (click to enlarge)
Click to Enlarge Name: gu_daily_range.gif Size: 22 KB
Attached File(s)
File Type: doc HedgeDoc.doc   80 KB | 507 downloads
  • #15
  • Nov 12, 2007 4:01pm Nov 12, 2007 4:01pm
Quoting Samuri
My vote is no.

Same pair hedging is nothing else but an excuse not to admit your mistake.
Technically and phisically it equals to close your open position and make a re-entry decision till you have a clearer mind.

Try persuade yourself before trying to persuade me.

Cheers.
I agree. Although hedging can seem like a miracle the first time you use it, over the years I have seen it literally destroy large accounts and the psychology of the traders behind them.

I know of one trader in particular with a 60k account that paid interest every day for 8 months in a GBP/USD hedge because he refused to close the trade. Not only did it cost him daily in interest to hold those positions, but opening the account daily to see large negative positions has a very negative influence on ones psychology. In my opinion Psychology is 90% of trading.

I offered to bring his account into my managed account, but made it clear to him that the first thing that would happen is the closing of that 8 month old position. He eventually came over, but it cost him nearly 25k on day 1.

Even in it's simplest form, hedging to same position can at best only cost you double the spread. At worst, it can make you give up on trading.

I do not mind multiple broker hedging and cross currency hedging for interest positive scenario's. I have seen these done very profitably.
The basis of a democratic state is liberty. ~ Aristotle
  • #16
  • Nov 13, 2007 3:41am Nov 13, 2007 3:41am
Quoting Micro-MiniMe
Here's a GBP/USD chart with a range highlighted by an elipse. Several factors alerted me to the strong posibility of a ranging market so I was ready. Confluence of fib levels and sup/res levels showed a likely range ahead of time. This along with absence of substantial expected economic data gave a strong likelyhood of range.
It's difficult to describe when, where and how I placed pending orders, because I was experimenting with various times and levels as the days went by. I remember that the easiest orders to manage were when I placed two offsetting orders, one buy and one sell, soon after the start of a trading day (8PM EST) when price was near the median price of the range. By the time I woke the next day price was usually near the top or bottom of the range, so I would close the profitable order then place another pending order to act as a hedge stop for the remaning order. Most times the price would return to the opposite end of the range within a day or two. I would then close that order when it was in profit and start the whole process over again.

The attached chart shows the time period of the trades that are detailed in the Word Doc.

This is the best I can do right now. I'm fairly new at this so mistakes were made. Even so substantial profit was had during this period of time.

I can't provide evidence that this resulted in more profit than simply buying or selling one order at a time, but the main reason for me working like this was that I don't have much time to sit at my PC watching for price action and reversals. This method allowed me to harvest many pips with very low risk while working, sleeping and doing work around the house.

Thank you very much for these details. It is nice to see that somebody can say more that, "yes it works for me".
My point is just on the order part and not on the strategy or if orders are pending or market because hedging or not doesn't change anything.

As you have examples in you Word file I just will illustrate my pint with the first trades:
56937248 2007.10.18 01:13 buy 0.01 gbpusd 2.0410 0.0000 0.0000 2007.10.19 10:57 2.0480 0.00 0.00 0.05 7.00
56734073 2007.10.17 00:34 sell 0.01 gbpusd 2.0305 0.0000 0.0000 2007.10.18 11:57 2.0450 0.00 0.00 -0.15 -14.50


The first order was sell at 2.0305 (10/17 00:34) closed on 10/18 11:57 at 2.0450
The second order was the hedge buy at 2.0410 (10/18 01:13) closed on 10/18 10:57 at 2.0480

You could have done (it is just a matter of clicking a different button on the platform at the same time or put the equivalent pending orders)

first order sell at 2.0305 (10/17 00:34) closed on 10/18 01:13 at 2.0410
second order sell on 10/18 10:57 at 2.0480 closed on 10/18 11:57 at 2.0450

With 2 orders no overlapping. It is the same no? (except for the swap)


In this case the swap was slightly better with the hedge but in general it will be the opposite as with 2 opposite orders on the same pair you will always get a negative swap.
  • #17
  • Nov 13, 2007 12:38pm Nov 13, 2007 12:38pm
Quoting Samuri
My vote is no.

Same pair hedging is nothing else but an excuse not to admit your mistake.
Technically and phisically it equals to close your open position and make a re-entry decision till you have a clearer mind.

Try persuade yourself before trying to persuade me.

Cheers.
This is true but only for people who think that a position having an unrealized loss is a mistake because it has such a loss , they usually get panic attacks and close their positions to realize those losses while in fact having a losing position doesn't mean anything - as long as the loss was a part of your plan.So obviously it's all about the plan and not whether hedging is right or wrong
  • #18
  • Nov 13, 2007 12:55pm Nov 13, 2007 12:55pm
Quoting fx_amateur
This is true but only for people who think that a position having an unrealized loss is a mistake because it has such a loss , they usually get panic attacks and close their positions to realize those losses while in fact having a losing position doesn't mean anything - as long as the loss was a part of your plan.So obviously it's all about the plan and not whether hedging is right or wrong
Good point fx-amature,

A loss is only a loss after you close the position for a loss. Until then it's just an open position.

There is no 'one system fits all' that I know of, but some methods work better in certain markets than others. The tricky part comes from catching the changes in market conditions quickly enough to switch methods in time to make profits.

It's true that trend based systems do better in the long run and they are easier to profit from. It's also true that trend based systems become frustrating during ranging and choppy markets. There are ways to see likely upcomming changes in market conditions. If you're ready and willing to adapt, you can increase your profit. That decision is up to you.
  • #19
  • Nov 13, 2007 5:26pm Nov 13, 2007 5:26pm
Well written thread gentlemen.

I would like to say that I believe a person can use hedging as an excellent, and powerful tool if you could use it in the right way. I believe the best way to use hedging is to use it in a trending market when you think the trend is about over.

EX.
I placed a buy and sell on the GBP/USD on 2007.10.31 4:29. Thinking that it would go up and then come right back down. I kept that position until 2007.11.09 4:36 when I closed the buy locked in those pips and everything on the fall back down was profit. (Because you are still negative from sell) I then closed all the sells around 2007.11.12 4:27.

I also added more hedges all the way up, closing all of the buys at the same time and all of the sells at the same time. Making gobbs and gobbs of extremely safe reliable pips that you don't have to worry about when you are going to bed at night.

Now about the psychology of it all. If you can remember that this currency pair will fall because it is getting pumped up like crazy to record breaking highs and you are going to be making a lot of money when it is all said and done you will make it through this.

It's extremely powerful if you know how to use it to your advantage and I hope it makes someone some pips someday. besides me!

Happy Trading,
Wyatt
  • #20
  • Nov 14, 2007 8:59am Nov 14, 2007 8:59am
wyattster,
I hedge also, to stop bad trades from losing anymore, but from your approach, I see a problem if one was to trade a hedge on EURUSD at it's all time high. If it started to drop back to more sane levels, it might not ever come back to 1.47. This would look good when the prices are between 30% and 70% of the last few months range.
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