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Hedge strategy (not a hedge fund) 13 replies

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What's with this Anti-Hedge Thing?

  • Post #1
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  • First Post: Feb 8, 2008 12:17pm Feb 8, 2008 12:17pm
Here's my contribution to a discussion that seems to be very one sided thus far:

  1. Only a moron would open two opposing positions at the same time (to establish a position, that is).
  2. Stop losses and Take Profits that are part of a position are less likely to be honored by many brokers during very volitile markets than an opposing stop and limit orders place where you you normaly put stops and take profits.
  3. Being hedged in one currency means the market has done something unexpected and you don't know which way to go right now. When you finally decide you can simply close one order.
  4. I resent comments that imply my use of a hedge is done because I don't know how to trade. What I don't know, unlike so many 'real traders', is where exactly price will go in the next 24, 48hrs... so I employ a hedge to buy myself time to get my screwed up plan back on track.
  5. If your broker guarantees stops and take profits, well bully, bully for you.

B Bye,

I'm no hedging guru, but I'd like to find one and see how they utilize this capability. I have no doubt that there are ways it could be exploited.

So more power to ya, Micro-MiniMe, if you've found a way to harness this technique.
Can't make up your mind? Just kidding.

Going long and short the same pair at the same time doesn't make sense to me, but leveraging another pair against the volatility of one pair, I've done it. Ala, EURCAD / CADJPY. If the Yen pair starts to bone me, the relative low beta of the EURCAD (not lately, but historically) can stem some of the losses, or provide brief profit taking oportunities on unexpected moves. The trick is picking the right one to stick with and the right one to dump. I haven't used that technique for a while. I used to make a lot more money then, now that I think about it, but the Forex market has changed since Aug 2007, IMO.
Quoting Micro-MiniMe

  1. Being hedged in one currency means the market has done something unexpected and you don't know which way to go right now. When you finally decide you can simply close one order.

B Bye,


Unexpected. What can be unexpected? You enter a position, you have your entry, you have your stop loss, and you have your exit method. Price move against you and hit your stop, you are out. Price move in your favor and you implement your exit plan. Where in the equation does a hedge fit in that makes sense? At what point can the market do something unexpected and you say you need a hedge? Certainly if prices move against you and not enough to hit your stop you knew this was a possibility , hence the placement of the stop. If prices move in your favor you were expecting this(based on your system), and now implement your exit plan.

You have still not proven why a hedge is useful in anyway, just sounds like you don't have a solid trading plan.

No offense intended here, if you use it and it works power to you

Mike
Imagine betting a football game and taking both teams...great way to make the book rich.

Same applies with forex, those spreads add up.
I'm not 1KT, so I could not add this to the other thread. Hedging can be useful in at least one way that I know.

If you have a relatively long-term trade (swing, position, etc) in a pair, and you know some significant news is upcoming, you can use hedging to essentially freeze the trade for the news. Instead of closing it, or letting it potentially hit a trailing stop, one can apply a hedge, and wait for the news to be reported.

If the news changes the fundamental value of your currency (or pair), you can simply close both trades and be out. If not, once the dust settles and you are still confident of your trade, you can release the hedge and go on.

Sure it costs you the spread, but sometimes a good position is too valuable to close and re-enter.

Ed
Indicators are to Price as Newspapers are to Bloomberg.
Quoting boiseboy
I'm not 1KT, so I could not add this to the other thread. Hedging can be useful in at least one way that I know.

If you have a relatively long-term trade (swing, position, etc) in a pair, and you know some significant news is upcoming, you can use hedging to essentially freeze the trade for the news. Instead of closing it, or letting it potentially hit a trailing stop, one can apply a hedge, and wait for the news to be reported.

If the news changes the fundamental value of your currency (or pair), you can simply close both trades and be out. If not, once the dust settles and you are still confident of your trade, you can release the hedge and go on.

Sure it costs you the spread, but sometimes a good position is too valuable to close and re-enter.

Ed
A strategy like that is flawed. Let's say I'm long the EUR... I'm up 200 pips and the current price is 1.4600. Let's say my target is 600 pips.

So let's say NFP or ISM is coming out and I'm worried that it could move against me a lot so I buy an ITM put with a strike of 1.4900 (because I want my delta to be close to 1:1), and ISM comes out and boom, price continues to go in my favor.

So now, I just bought a put that is losing money, but of course, my underlying is doing well.

So now it hits my target... well, my profit is 600 pips minus the cost of the put (since it will expire worthless, or I can sell it and lose less).

Hedging is most often used just for insurance. Whether you do the scenario I just outlined (insurance), or you are trying to make some quick money off of minor support/resistance.

People who make money trading typically use hedging for longer term positions. It allows them to reduce their overall risk. They make less money on the underlying, but that's what they are willing to accept for some insurance...

I should've been an insurance salesman instead of a trader... I might make more money...
Mr. Trend
Quoting Mr Trend
A strategy like that is flawed. Let's say I'm long the EUR... I'm up 200 pips and the current price is 1.4600. Let's say my target is 600 pips.

So let's say NFP or ISM is coming out and I'm worried that it could move against me a lot so I buy an ITM put with a strike of 1.4900 (because I want my delta to be close to 1:1), and ISM comes out and boom, price continues to go in my favor.

So now, I just bought a put that is losing money, but of course, my underlying is doing well.

So now it hits my target... well, my profit is 600 pips minus the cost of the put (since it will expire worthless, or I can sell it and lose less).

Hedging is most often used just for insurance. Whether you do the scenario I just outlined (insurance), or you are trying to make some quick money off of minor support/resistance.

People who make money trading typically use hedging for longer term positions. It allows them to reduce their overall risk. They make less money on the underlying, but that's what they are willing to accept for some insurance...

I should've been an insurance salesman instead of a trader... I might make more money...
I don't disagree with you in this situation, but maybe we're not talking about the same thing. (I've read your posts for some time now, and clearly you know what's what)

I'm speaking about a direct, opposing position that hedges the trade to zero in a brokerage account that allows that - effectively freezing the profit during the news. What I didn't mention was, of course, the lost opportunity of a spike in your direction (as you described). That's the sacrifice for the insurance of avoiding a spike in the wrong direction--one that might take you out if you're trailing a stop. In these cases, it's easy to close out the hedge, or both positions, as soon as your reevaluation allows.

Maybe you are including that in your reasoning. I just don't have any experience with hedging with calls or puts, so please excuse me if I'm seeming obtuse.

Very best trading,

Ed
Indicators are to Price as Newspapers are to Bloomberg.
Quoting mbqb11
Unexpected. What can be unexpected? You enter a position, you have your entry, you have your stop loss, and you have your exit method. Price move against you and hit your stop, you are out. Price move in your favor and you implement your exit plan. Where in the equation does a hedge fit in that makes sense? At what point can the market do something unexpected and you say you need a hedge? Certainly if prices move against you and not enough to hit your stop you knew this was a possibility , hence the placement of the stop. If prices move in your favor you were expecting this(based on your system), and now implement your exit plan.

You have still not proven why a hedge is useful in anyway, just sounds like you don't have a solid trading plan.

No offense intended here, if you use it and it works power to you

Mike
No offense taken. Perhaps a refresher of some points Merlin made a while back in regards to market orders and slippage would better explain my preference:
http://www.forexfactory.com/showthread.php?p=1427347

One more point. I don't like being hedged. It means I screwed up, but at least then I have a chance to gather my thoughts before I make any rash moves. I guess it's a mental thing with a hedge that tells me I haven't lost just yet, but if I close out a position, it's gone, period, end of story. In the past I've closed positions only to see price move back in my favor and eventually to my profit target. When my position is gone, I would sometimes jump back in and out, back and forth like a tenis ball and at the end of the day I'm stressed out and out several spreads anyway. Personally, I've found using hedges reduces the urgent feelings I used to experience and I open fewer positions.

I think hedging one currency can be done by anyone and with a little practice it becomes as natural as trading naked. I find it queer that anyone would suggest that a broker who offers hedging is taking advantage of newbies when I can easily think of several other ways many brokers take advantage of newbies.

Perhaps professional traders don't like hedging one currency. OK, fine. I'm not a pro and will likely never be one. I'm undercapitalized, but I enjoy trading as a hobby as well as for the education. Nickel slots do nothing for me, but with trading I can witness global events unraveling before my eyes in the form of price action. Very cool!
  • Post #10
  • Quote
  • Last Post: Feb 9, 2008 12:07am Feb 9, 2008 12:07am
MM... I agree with you.

The point that needs to be made in this thread is that hedging is just another way to trade... nothing wrong with it... if it works with you and you've done your homework, then heck, go for it.

boiseboy: We're saying the same thing for the most part...

I personally only use hedging for long term, weekly-based to monthly-based positions... and even then it's only with options because a) I completely control whether I want to pay for an option, or be paid at the time of the initiation of the hedge, and b) I control when the option expires -- thus a) and b) give me total flexibility in my risk strategy...
Mr. Trend
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