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Do you hedge?

  • #21
  • Nov 14, 2007 9:58am Nov 14, 2007 9:58am
It seems reasonable to me if you were trading on multiple timeframes. For instance if you took a trade based on a monthly chart and then in the middle of a month you saw a trade signal in the opposite direction on the 4-hour that wasn't big enough to have you close the entire monthly trade so you got in and out while your monthly trade was still going. Given position size calculating and having different exit strategies and signals to your entries and all that, it seems simpler to hedge rather than closing and reopening a position and furthermore when you're trading a monthly time frame the spread is negligible.
  • #22
  • Nov 14, 2007 10:30pm Nov 14, 2007 10:30pm
bhale,

The whole purpose behind the hedge trade that I take from time to time is not to assume the trade is going to come back to the original position but high enough to know that it is coming back down. (if that makes sense) I'll gladly take a loss iff (if and only if) the other side of my hedge that i just closed for profit was for more than my loss. It might be only 20 pips loss or it could be 200-500 loss depending on how long the trend goes and how hard the fall is, but as long as I just made 40 to 400-1000 gain I can take it. It's kinda a different way to think about trading but used correctly (as far as I know) can generate some substantial results. Now I know that if kept for too long the swap on some trades will kill you, and the spread doesn't help. If anyone can find something wrong with this method besides those two things please bring it up and I would be happy to discuss it with you.

Thanks,
Wyatt
  • #23
  • Nov 15, 2007 5:20am Nov 15, 2007 5:20am
Quoting libertao
It seems reasonable to me if you were trading on multiple timeframes. For instance if you took a trade based on a monthly chart and then in the middle of a month you saw a trade signal in the opposite direction on the 4-hour that wasn't big enough to have you close the entire monthly trade so you got in and out while your monthly trade was still going. Given position size calculating and having different exit strategies and signals to your entries and all that, it seems simpler to hedge rather than closing and reopening a position and furthermore when you're trading a monthly time frame the spread is negligible.
I agree with you on that example.
What you describe is more trading 2 separate strategies that can give opposite orders.
But in the original it is really a hedge to stop a trade from losing. And that is quite different in my opinion.
  • #24
  • Dec 20, 2007 1:25pm Dec 20, 2007 1:25pm
  •  FxChi
  • | Joined Dec 2007 | Status: Cash Rules Everything Around Me | 749 Posts
I'm still experimenting with hedging on the same currency, but I think it can be very powerful under cetain situations and I don't think it should be done all the time.

I.e. lets say you buy 2 units at a support level. You see there is a downward tl (from a higher tf, perhaps 4 hr, or daily) cutting through about 100-150 pips above support so you bank one unit in that area. 2nd unit move stop loss so you're not taking a loss if it comes back down.

Then you watch price action on the 2nd unit. If you get any bearish signals or it looks like price might come back down, hedge.

This way you bank pips coming back down.

This is just my simple way of looking at it (and I'm a beginner). So feedback is much appreciated.

I like wyattster's approach too - very interesting.
"Wishful thinking dies hard." Igor T.
  • #25
  • Dec 20, 2007 2:11pm Dec 20, 2007 2:11pm
Quoting Micro-MiniMe
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.
Hi,

I have just read a white paper which shows that stops tend to cluster in the 00-10 range, whereas take profit orders have a greater tendency to be placed directly at 00 marks. It could be that you have fallen foul of this effect.
  • #26
  • Dec 20, 2007 4:48pm Dec 20, 2007 4:48pm
I have done some mild studies on same-pair hedging in the past and I couldn't find any reasonable use fo it.
  • #27
  • Dec 21, 2007 12:08am Dec 21, 2007 12:08am
I can't see any situation in which hedging is warranted except when not willing to acknowledge you've made a mistake. I hedged several times just in such situations: my losses grew too big by error, I wasn't brave enough to close a position, I had reasons to believe the price will go back, so I hedged in order to free the margin for other positions. However, a better practice would have been not to commit the errors in the first place or to face them early enough once commited...
sans peur et sans reproche
  • #28
  • Last Post: Edited 1:08am Dec 21, 2007 1:00am | Edited 1:08am
Quoting Micro-MiniMe
A loss is only a loss after you close the position for a loss. Until then it's just an open position.
As soon as you open your "hedge", you are in effect closing your original position (at a higher cost I might add, since you are paying spread once again). Depending on who your dealer is, you may also be eating more of your margin.

The only possible uses that I can see are:

1. If you are using 2 completely different strategies on different timeframes (for example if you have a long position trade, and you wanna do a short scalp on 5 min.) Even in this case I'm not sure it can be proven as effective, but I don't see it doing much harm if you can show that the 2 events are uncorrelated because of the huge difference in time frames.

2. Another possible benefit could come from straddle-like scalping strategies where execution timing is of the essence, and it is much easier to have only one order to execute rather than 2 (i.e. just one close order, rather than an open & close). This way you could position yourself ahead of time and simply exit the losing position when the time comes. Again, I don't have any proof of the effectiveness of this method, but I could see a glimmer of hope.

Other than those 2 scenarios, I really don't see much benefit in "hedging" this way as opposed to just closing your position and moving on. The net effect on your equity is the same, except that your transaction costs increase when you "hedge".
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