Hedge a losing position?

hi guys, i was curious, should you hedge a losing position to get a good idea of market direction/stop losses from mounting? I have heard someone speak of this but wanted to know if this is a great strategy or not.

I for one do a lot of hedging on my accounts... however, it can be both a blessing and a curse. Hedging is a unique strategy that can allow you to work your profits both ways but can be difficult to master. It is a good way to prevent stop losses from taking control over your account. Instead of placing a stop loss at a certain level, you place a hedge at that point. If your original trade continues to go negative you can take the profit from the hedge and then decide eventually if the decision on your original trade still has any merit to return back to your original target or not. If not, then it may be time then to buck up and eat the loss or just look to maybe break even on the trade... but either way it requires diligence.

Good luck.

GirlFlyer

I agree with GF. I know people do it, and I have on very rare occasions, but mostly I feel that if it's time to get out, then it's time to get out.

The only benefit I see is that it could allow you to gather your thoughts and figure out what to do when things are getting wild.

IMHO, a trader hedges because they have a trade they don't know what to do with. After the hedge is put on, then they have 2 trades they don't know what to do with.

I think it has no reason to hedge. If you want to cut loss, close your position. Hedging is expensive because you pay spread and swap to your broker. You pay for it and can't earn a cent because if you are hedged your position is 0 - spread- swap difference. If you close your position is 0 (without spread and swap)

I hedge when the market has me baffled. In other words, if I feel strongly that the price will go one way, but for some reason unknown to me, it moves the other direction, the hedge will keep my loss at a minimum until I get more information about why the price is going where it is. It's important to size your initial orders small enough so that you can safely hedge several more times if need be. This past week in GBP/USD was a good example. At one time I had five separate positions open at the same time which almost maxed out my 3% allowable risk. Each time a position was well into profit I closed it and placed another pending order to limit my risk in case of more 'crazy' price action. The week ended well as I closed all orders and positions for + 250 pips, even though I was down by more than that at one time.

Another good reason to hedge depends on your brokers policy regarding stop loss and take profits. Many brokers, including mine, do not guarantee sl or tp, but instead treat them like market orders. This means they might not get filled when price reaches them or they will get filled at a price you don't like. Pending orders instead of tp or sl will be filled with much less slippage and are preferred to market orders by most experienced traders.

One thing is for sure. Nothing is for sure!

I did read all the posts above before this answer.

When I have resorted to hedging it is really down to then having 2 trades you 'don't know what to do with'. Except when I was stuck in a losing GbpJpy position back in July/August, unfortunately my broker would not let me increase the size of my hedged position. I just had to sit and watch the price moving at 25 pips a minute although I was not losing at that point (I did lose eventually).

There is a school of thought that says 'open a hedged position in a ranging market'. Try to be in the middle and close the various trades in profit. Sounds a bit too scary for me.

I think the whole hedging thing is a good exercise for a demo account. Particularly for Blueruby's scenario. You can play the trades for maybe days and see what profitable exit plays could be attempted.

After reading the original question "hedge a losing position?" I must change my reply.

If a position is losing you should already have a stop or a hedge strategy in place and should stick to your original plan. Don't change your mind and replace a stop loss with a hedge or vise versa. Your trade should be planed in detail before entering it and if your not sure what to do, don't trade.

Hedging is risky and I don't wish to encourage inexperienced traders to do so with real money until your comfortable with it on a demo. Newer traders need to keep things as simple as possible, in fact we all do. My appetite for risk is high at times and I apologize for appearing to encourage others to do as I do, even if I am good at it. I wasn't able to develop my hedging strategy over night and it does get 'helter skelter' at times.

One more thing: a losing position is a loser only after you close it for a loss. Oh no! That sounds like I'm hedging again!

Good luck with your market orders,

I hedge with my scalping strategy (see http://www.forexfactory.com/showthre...t=56671&page=3
particularly post 1 and post 37 on)

The caveat with my hedging strategy though is that it ONLY works well in a trending market. In this case (my strategy) you only open positions in the direction of the trend and if the trade goes against you (common with a retrace) you hedge and draw fibs and then close the hedge as the market goes back in the direction of the trade making money on both the long and short position. Don't hedge when the market is choppy, it can kill your trade.

What will happen is you will hege only to find that the market goes back in your favor so your original bad trade turns out to be a good trade but then your hedge becomes the bad trade. If this happens it is best to let the hedge sit tight and wait for the market to end it's choppy period and become more predictablle (such as a range) and then close the long on a overbought condition and close the short on an oversold. Even if you don't break even at least you will minimize the loss this way.

Don't let the hedge become the bad trade. This is why I think hedging can be risky. There have been times where I have hedged and regretted it, because it was too difficult to get out of the hedge safely and it would have just been better to use a stoploss.

Also, another somewhat negative aspect is you use up more of your account ballance keeping 2 opposite positions open at the same time.

On the positive side though if used properly, you can turn what would have been a loosing trade into a winning trade with a hedge or at least a breakeven trade.

Jared

Well said blueruby, that's why i use stoplosses if a trade goes against me to the point where i know it's wrong. For me, the best way to gather my thoughts after a trading SNAFU is to have NO postion, not a frozen loss.

Hedging can be very helpful if done properly. There are risks but show me a trading stlye where no risk exists. Trading is an art and not a science. If you want to paint your picture with hedge trades to become profitable by all means. Its not an end all, though, and you still must "trade". I suspect many brokers dislike hedging.

One way is when you are trading with the trend as Jared said. I like to trade with the trend as many people do. If a trade goes against you, you can place a hedge trade until price comes back with the trend. The question is when do you close the hedge? This is where the art comes in. The market cannot be "boxed". When you think you have it figured out where nothing can hurt you, something does.

In a nutshell, I use grid trading with trending markets and use hedge trades when the market is ready to turn in the short-term. If the hedge goes against you, you are still earning profits on the grid trades. You can either close out the hedge with a loss but are still gaining pips, although more slowly. Or you can average down on the hedge trade. This is a little more risky but thats trading. Trade small in any event.

Hedging is secret of successfully Big Banks.

Hedging will harm you from the difference in price between the buying and selling,

salaam

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Not much difference between stooping a loss with an hedge or use SL.

Hedging is just to own and hold 2 instruments. But "hedging" is not an strategy by itself.

The swap could be a problem with a few currencies but most are not.

J.

funny nobody ever talks about hedging a winning position..

I would focus on why you are losing before looking at ways of holding on to them

The past 2 weeks ago it was 30% floating loss but i start hedge and minimizing my loss to just 6% , if i don't hedge it was big loss.
Hedge need long term trading the minimum time to unlock the hedge need 2 weeks if your loss more than 200 pips on majors.

The best of hedge is to Defrost the loss slowly and smoothly

I'm gonna guess i'm not the only one here who has no idea at all what you're talking about

30% drawdown on 1 trade? can't see why anybody would want to trade like that, so thats 30 losers on the trot if you risked 1% per trade with a stop loss..

yes it was 6 levels with different lot sizes on same direction , on GBPUSD it was rally against my direction.