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whats with this "hedging" thing??

  • #21
  • Feb 4, 2008 9:53pm Feb 4, 2008 9:53pm
Quoting forexlion
Suppose, lets say EURUSD moved from 1.2700 to 1.4800

Lets say someone had a hedge at 1.2700 with a Buy and SL at 1.2600

And a sell at 1.2700 with SL at 1.2800

The market moved up to 1.4800

The sell hedge met SL and closed.

The buy hedge continued, raking in all the profits.

This is meant by the term hedging.

It is a very calculated move also termed as straddling during news times.
Then what would happen if the market moved to 1.2800 and then right back down to 1.2600? You lose both positions. Why not just enter long at 1.2800 with a 1.4800 target and 1.2600 stop loss, and pay the spread ONCE? (with the possible exception of news events, as you mentioned, where execution is of the essence)

This form of "hedging" is irrational in most cases (it is in fact not even hedging in the true sense of the word). Just because you CAN be profitable with it, doesn't mean it is the OPTIMAL method. It isn't. Honestly, steviet, if you are profitable with it then great, but take a look at alternatives and I guarantee you your profits will increase - the only thing you'll lose is the annual Christmas card from your dealer.

Please take a look at the link I posted above so I don't have to post the same thing twice.
  • #22
  • Edited 7:46am Feb 5, 2008 12:12am | Edited 7:46am
It isn't a completely horrible tool if you are a scalper trying to make a volatility bet (straddle) for a news event. I wouldn't recommend new traders to use this because you really have to have a keen sense of the market and it is always susceptible to whipsaws.

But a simple entry a few minutes before a large news event (but not too large) even with a 20 pip SL on either side can be great if you get a 30+ pip sustained move in one direction after the news. One position clearly gets stopped while the other is slightly in the positive.

Again, NOT for the faint of heart...
  • #23
  • Feb 5, 2008 2:05am Feb 5, 2008 2:05am
Quoting JFX81
It isn't a completely horrible tool if you are a scalper trying to make a volatility bet (straddle) for a news event. I wouldn't recommend new traders to use this because you really have to have a keen sense of the market and it is always susceptible to whipsaws.

But a simple entry a few minutes before a large even with a 20 pip SL on either side can be great if you get a 30+ pip sustained move in one direction after the news. One position clearly gets stopped while the other is slightly in the positive.

Again, NOT for the faint of heart...
Exactly, and NOT for the wide of spread.
  • #24
  • Feb 5, 2008 2:46am Feb 5, 2008 2:46am
I think there's a difference to the "hedge as excuse to not being stopped" and a short term(1-15 days perhaps) counter-trend trade on a larger retrace.

I've had a perfect example for this becoming a problem on USDJPY when we retraced to 114 from the 107-108 lows - 700 pips "the other way", while I was certain the longer term positions would reach below some time, which we then did => 105 low currently.

However, if your broker doesn't allow hedging your stuck tyrying to decide whether to watch your PL ebb and flow and missing the 0-xxxx??? who knows how many pips after a counter setup shows for the retrace, and taking a counter-long-term-position TRADE. This is then a seperate TRADE, not a "hedge against losses". It's a seperate market exploitation attempt; not a "oh no, money, please don't leave me" thing.

Different approach imho. A middle ground is people who can hedge at the place of their stop loss and "let the hedge go" in the right place where it offsets so that it causes less loss than the original stop size(they beat the new spread + utilize the market). Not that I'd have the nerve or skill to do THAT on a lower TF; but some people say they can
Trust price. Know yourself.
  • #25
  • Feb 5, 2008 8:08am Feb 5, 2008 8:08am
Quoting Plutonite
Hey Vensik! I noticed you're not too far away from me here (I'm in Arlington) and we're around the same age. We should have a forex traders day out or something! Also: Do you trade for a bank/desk in VA? Up here they don't even know what currency trading is

PS: well said.

Hey Plutonite,
Yeah, my grandparents live up in Fairfax so I know DC pretty well. I'm actually about 20 minutes north of Richmond. Look me up on skype sometime, I think it's on my profile still. I'm closing on my new house in a month or two, so I'll be making some trips up there to ikea most likely. Umm... long story short I traded in-house money for a company that eventually became a brokerage, left when they became too greedy and traded managed client accounts for another company, have now branched off and started my own managed account company with my Father (also a trader). I think that sums it up without advertising...




Back to hedging, the "counter trend trade" might be valid, but also proved my point on them just not being sure enough to actually close their negative trade and open in the other direction. It's all a mental game with hedging, younger traders fool themselves into thinking it's safer.
The basis of a democratic state is liberty. ~ Aristotle
  • #26
  • Feb 5, 2008 12:15pm Feb 5, 2008 12:15pm
hedging was not good for me...tried, in stocks, and when profit, i instead of close them, i hedge them with cfds, but the real outcome, was that i payed 2 more comisons, plus spread when i closed evrything...well i could have waited and close both with profits,...but i couldnt do it,.....meanwhile i dont like the idea of hedging looses.... that would be very bad for my mind, to constantly look at loosers wishing to turn into winners....but evrybody has their own aproch...maybe good for swinging, if u play right could be the only way...
its just money
  • #27
  • Feb 6, 2008 1:55pm Feb 6, 2008 1:55pm
there have been a lot of false statements in this thread, imo. before i address them individually, let me make a blanket statment...

lets pretend we are long EURUSD with 10 lots.

to close this position, what do we do? we short 10 lots, right?

if we short 10 lots via a market order, the position is closed.
if we short 10 lots via a limit order, the position is closed.
if we short 10 lots via the hedge feature, the position is closed!

sure, the hedge feature will show two positions open on the platform, but in reality the position is closed. we do not make or lose money as the market moves, which is the same situation as if we had no position at all.

SO, there is absolutely no different in using the hedge feature or using a regular order. can anyone dispute this??
Relax and be happy.
  • #28
  • Feb 6, 2008 2:00pm Feb 6, 2008 2:00pm
Quoting Vensik
Actually, having two identical positions in the same size is the same as paying 2 spreads for nothing at all.
there is NOT an extra spread to pay!

pretend the market is at 1.3000 bid, 1.3002 ask. we buy 10 lots at the 1.3002 ask price. now, if we "hedge" the position, we will short at the bid of 1.3000. if we instead use a regular order to close the position, we will also short at 1.3000. both result in having no position (dispite what the platform shows). where is the difference here? the hedge and the regular order are exactly the same!
Relax and be happy.
  • #29
  • Feb 6, 2008 2:02pm Feb 6, 2008 2:02pm
Quoting blueruby
Bottom line, I didn't know what to do with a position, I hedged, then I had 2 positions I didn't know what to do with.
not true! after you hedged you had NO position!

when you have a position in the market, it means your PL fluctuates when the market moves. similarly, if the market movement has no effect on your PL, you have no position.
Relax and be happy.
  • #30
  • Feb 6, 2008 2:05pm Feb 6, 2008 2:05pm
Quoting capitalist88
If they would just set it up so that I could do each separate trade by itself, regardless of the other positions in the same pair, my accounting would have been so much easier. That's where this "hedging" thing would come in handy.
ok this is the first bit of value i can see from "hedging"...it makes the accounting easier. but it still doesnt effect your money!
Relax and be happy.
  • #31
  • Feb 6, 2008 2:09pm Feb 6, 2008 2:09pm
Quoting capitalist88
There's no trading advantage, just an "ease of accounting" advantage.
yeah after reading this thread a bit, i agree this is the only advantage.

one thing i was just thinking of.... what are the rollover ramificaitons for this hedge feature? having never used it i dont know, but i suspect the advantage is on the broker's side. hmmm, i may have just figured out why brokers offer this feature. since the feature doesnt give the broker any extra spreads, and they pay out lower rollover than they charge, i am guessing they make the money on the rollovers. anyone know for sure?
Relax and be happy.
  • #32
  • Feb 6, 2008 2:34pm Feb 6, 2008 2:34pm
merlin, you're absolutely right about pretty much everything except the fact that you DO pay spread twice when you "hedge" because opening a "hedge" doesn't entirely get you out of the market. You have no net position as you already said, but you still didn't get back your margin. In order to get your margin back you have to still close each of the positions. Look at it this way:

Say you open a long EUR/USD position at 1.5000 with a 2 pip spread, and then immediately close it without the market having moved at all. That means your closing price would be 1.4998 and you lost 2 pips because of the spread.

Now say you open that same long EUR/USD position at 1.5000 with a 2 pip spread, but instead of closing it immediately, you immediately open another position in the opposite direction. Now you have a long position from 1.5000 and a short position from 1.4998. You have lost 2 pips, but you are not entirely out of the market because your positions are still taking up some of your margin. In order for you to completely close your position, you have to now close each one separately. Say you do so immediately, so that your long position is closed at 1.4998 with a 2 pip loss and your short position is closed at 1.5000 with another 2 pip loss. Your total loss is now 4 pips, so you have in fact paid the spread twice.

The rollover also helps I'm sure, but make no mistake, dealers love this because of the spread.
  • #33
  • Edited 3:32pm Feb 6, 2008 2:52pm | Edited 3:32pm
what?!? the broker takes away your margin? wow, i had no idea about that. so yeah your right then, this feature is about double spreads.
Relax and be happy.
  • #34
  • Feb 6, 2008 3:03pm Feb 6, 2008 3:03pm
Quoting merlin
what?!? the broker takes away your margin? wow, i had no idea about that. so yeah your right then, this feature is about double spreads. wow. so basically this hedge feature is a huge, widely believed lie. i would love for someone to convince me im wrong, because this is an extremely ugly business practice to be fooling novice traders with this feature. just think of how many people are using it!
I don't know about other brokers but I am using Saxo Bank and if I have 3 long positions at 50,000 and 3 short positions at 50,000 on at once my margin utilisation is 0%.

Steve
  • #35
  • Feb 6, 2008 3:11pm Feb 6, 2008 3:11pm
From Fxsol

Hedging with Margin Exclusions
FX Solutions is one of the few FCM’s that offers hedging. This function allows the trader to be both long and short in the same currency pair at the same time without incurring additional margin.
-------------------------------------------------------------


So they allow you to hedge without using additional margin, but you do get charged the spread again.

Benefits, I see none beyond the fact if you have a position open long term and you want to trade the other way short term(which I do often). They call it a hedge on their platform. For me I have to have sub-accounts set up on my brokers to trade counter any long term trades that would be closed out otherwise.

So actually if my broker was FXsol, this would be a benefit in the fact that I wouldn't get charged margin on that second position. You are still charged the spread again of course, which makes the word hedge just seem made up.

For the newbie, they see this function as follows "Until I close my position it isn't a loss. So if I hedge I can collect the profits from them one way, and then wait for the other to come back". The reality of course, this isn't true. People who say they hedge their position to get a grasp on the situation have no idea what they are talking about if you ask me. I have heard traders say, I would rather hedge then just close out. They say they know they lose the spread, but it gives them time to figure out the situation before admitting defeat. Bunch of bullshit.
  • #36
  • Feb 6, 2008 3:30pm Feb 6, 2008 3:30pm
Quoting steviet
my margin utilisation is 0%.
whew! i got scared for a minute there. yeah margin should be at 0%, anything else would be scammish.
Relax and be happy.
  • #37
  • Feb 6, 2008 3:38pm Feb 6, 2008 3:38pm
Quoting mbqb11
For me I have to have sub-accounts set up on my brokers to trade counter any long term trades that would be closed out otherwise.
yeah having multiple accounts is much better for keeping the accounting straight, imo. we need multiple accounts to trade effectively anyway, so you might as well use the opportunity to separate your strategies this way. and the other benefit is you can trade the strategy with the broker who is best suited for the style of trade. i find that every broker has a few weaknesses, and i usually find a reason to trade a certain strategy with each.
Relax and be happy.
  • #38
  • Feb 6, 2008 3:40pm Feb 6, 2008 3:40pm
Quoting merlin
yeah having multiple accounts is much better for keeping the accounting straight, imo. we need multiple accounts to trade effectively anyway, so you might as well use the opportunity to separate your strategies this way. and the other benefit is you can trade the strategy with the broker who is best suited for the style of trade. i find that every broker has a few weaknesses, and i usually find a reason to trade a certain strategy with each.
Right on
  • #39
  • Feb 6, 2008 9:36pm Feb 6, 2008 9:36pm
Quoting merlin
yeah after reading this thread a bit, i agree this is the only advantage.
Merlin

You don't think scalping news events would be an advantage? Being long and short when a number comes in way off of consensus, with tight stops either side, can be great because trying to enter in a fast market can get you requotes and slipped fills.
  • #40
  • Edited 11:21pm Feb 6, 2008 10:52pm | Edited 11:21pm
Quoting merlin
what?!? the broker takes away your margin? wow, i had no idea about that. so yeah your right then, this feature is about double spreads.
Most dealers will take away your margin for ONE of the positions, some of them for BOTH positions. If Saxo is smart enough to actually give back your margin on these "hedges", as steviet says, then that's great, I was not aware of it. But my point wasn't really about margin, it was about how you pay the spread twice, and that still stands - I just thought the margin example would make it clearer.

So for example, at Saxo you open a 1 std lot long EUR/USD @1.5000 and 1 std lot short EUR/USD @1.4998 (2 pip spread) and you are using NO MARGIN. Great. Look at your floating P&L though. If price stays at the same level, your first position is down 2 pips ($20) and your second position is down 2 pips ($20), so you have just paid $40 to have NO NET position.

Now the market moves by 1000 pips to bid = 1.3998, ask = 1.4000. Your short position is in profit by 998 pips (+$9980) and your long position is down by 1002 pips (-$10020). So guess what, you're still out $40 bucks. No matter where the market goes from here on, you will ALWAYS be down $40 because you have taken price fluctuations OUT OF YOUR EQUATION, so in fact your floating P&L is not floating at all - you have simply thrown away $40 - and your dealer was happy to take it off your hands. I don't understand why this concept is so difficult to grasp.

And yes, JFX81, straddling news events using this method could be an advantage, as I have mentioned here and in other posts on the subject, but slippage and widening spreads generaly negate this advantage to some degree.
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