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whats with this "hedging" thing??

  • #41
  • Edited 8:09am Feb 7, 2008 7:56am | Edited 8:09am
Quoting merlin
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!

If you "hedge" the position you would short at 1.3000, and the hedged position would be -2 pips for the spread. So you would have a buy at 1.3002 with -2 open, and a sell at 1.3000 with a -2 open position. Net -4 pips, double spread. If you opened the position at 1.3002 and then closed it immediately, you would net -2 for the 1 positions spread.

Also, most brokers will only charge you for 1 position worth of margin, but it is still using up your margin. There are still a few brokers that will charge both positions worth of margin. I don't hedge and haven't looked into it, so I don't know if there are brokers that release your original margin when you hedge. Brokers come in all flavors, so I'd imagine there is.

Just googled for a swap chart and took the first one, but you would also be losing swap daily. Hence my story of the 6 months worth of negative interest slowly bleeding the trader dry. He had over 80% of his margin tied up in the hedge, it was alot of money lost daily in swap.

http://www.dukascopy.com/swiss/english/forex/overnight/
The basis of a democratic state is liberty. ~ Aristotle
  • #42
  • Feb 8, 2008 10:53am Feb 8, 2008 10:53am
Quoting JFX81
You don't think scalping news events would be an advantage?
absolutely not. why would a broker treat a "hedge" order any differently than a regular market or limit order? i believe this is the fundamental misunderstanding about this hedge feature...the only difference from a hege and a regular order is that it will make your platform show two positions instead of zero. there is no monetary difference.

however, what i am finding in this thread is that there are two disadvantages to using a hedge over a limit order... first you get screwed on the rollover (not sure if it happens with all brokers), and second some brokers will take the margin on one or two positions. and if they take your margin, eventually you will have to close your zero position (sounds stupid just saying it) which will incur another spread. if you are tricky you can get around this double spread by using the positions to form new positions you would have taken anyway, but i doubt the traders using this feature will figure that out LOL.
Relax and be happy.
  • #43
  • Feb 8, 2008 10:56am Feb 8, 2008 10:56am
Quoting Vensik
Hence my story of the 6 months worth of negative interest slowly bleeding the trader dry. He had over 80% of his margin tied up in the hedge, it was alot of money lost daily in swap.
yes i see your point now. as you see in my post above i now recognize the swap problem. and now that i read your story again i can see how damn dangerous this can be!
Relax and be happy.
  • #44
  • Feb 8, 2008 10:58am Feb 8, 2008 10:58am
Quoting fierceman
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.
if a broker takes margin for even ONE position then it is dead wrong. there is no position, why in the hell would you need margin?!?

can we get some confirmations from people using this feature with various brokers? are you being charged margin on one or both of the positions?
Relax and be happy.
  • #45
  • Feb 8, 2008 11:47am Feb 8, 2008 11:47am
Quoting merlin
if a broker takes margin for even ONE position then it is dead wrong. there is no position, why in the hell would you need margin?!?

can we get some confirmations from people using this feature with various brokers? are you being charged margin on one or both of the positions?
Just to clarify what I said in a previous post...

If I am holding for example 2 long positions and 2 short positions at 0.5 lots per position then my used margin is zero.

However, once one of these positions is closed for profit, my used margin is as though I was holding 1 position at 0.5 lots. If I choose to then take a new position in the direction of the recently closed trade, the used margin returns to zero.

I only use market orders and look to take advantage of a range formed from the daily charts. For example, GBPJPY has been stuck in the 204 to 214 range since 14th January and I've been able to pick up a few thousand pips in that time just playing the range.

For me however, 1000 pips means around 4.5% of the account balance and as we all know its the %'s that count.

As soon as the range is broken, I may take a couple of losses and then need to re-asses where the next support and resistances are likely to be. There's a lot of discretion involved and of course, as with any method discipline is the key.

Kind Regards
Steve
  • #46
  • Feb 8, 2008 1:58pm Feb 8, 2008 1:58pm
Quoting merlin
absolutely not. why would a broker treat a "hedge" order any differently than a regular market or limit order? i believe this is the fundamental misunderstanding about this hedge feature...the only difference from a hege and a regular order is that it will make your platform show two positions instead of zero. there is no monetary difference.

You are correct as far as now is concerned, however it took the brokers a while to catch on to this as well. When brokers first started changing to fight scalp spike traders, They would slip entry orders all over, not let people out of the market, ect... however some of the larger brokers were still guaranteeing stops. Even though it is fundamentally the same thing, you could call and argue with a broker that they state guarantee'd stops and that this order was a stop. I don't believe they are so naive nowadays, however I weened myself off of spike trading profits a long time ago because I believed it to be a dying breed of trading.

I believe I have talked on FF before about the wonder of a guarantee'd margin call in the same light. Though I don't know if it has changed, FXCM used to guarantee margin calls. So what I did on a non-farm spike was enter into the trade with 95% of my margin. Essentially, if I was wrong it would margin call me and I would only lose 5% of the account. However, being right skewed the R/R in my favor a great deal. Within the first few seconds my 11k account was at 24k, I reentered back up to 95% of the now 24k in the market. At that point, if it had reversed I would have been margin called and only lost 5% of the 24k in equity that I had in the market. Essentially doubling my account with a guarantee'd stop from the broker to control the risk. I continued to do this all the way up the spike, and ended up 43 minutes later with 64k in the account, from a start of I believe $10,400. Those were the easy days right?
The basis of a democratic state is liberty. ~ Aristotle
  • #47
  • Feb 8, 2008 5:49pm Feb 8, 2008 5:49pm
Talk about hedging being only for the desperate and clueless..

http://www.bloomberg.com/apps/news?p...WtU&refer=home

Enter BS. What a fitting acronym they do carry.

Sorry if it's a bit off topic, but I just found it funny to spring up in the headlines while this topic was on
Trust price. Know yourself.
  • #48
  • Feb 8, 2008 6:03pm Feb 8, 2008 6:03pm
i know we've talked about hedging when you open both short and long positions.

But has anybody hedge their spot forex with forex options?? I don't know other broker offers it, but Oanda ahs this option call box options.

I don't know much about options (puts, calls, etc.) so I was wandering if anybody can hedge that way?
  • #49
  • Feb 8, 2008 6:55pm Feb 8, 2008 6:55pm
Quoting hilmy83
i know we've talked about hedging when you open both short and long positions.

But has anybody hedge their spot forex with forex options?? I don't know other broker offers it, but Oanda ahs this option call box options.

I don't know much about options (puts, calls, etc.) so I was wandering if anybody can hedge that way?
Oanda's box options are kind of a joke. There's no real market for them, Oanda takes the other side of every trade and determines the pricing, and the pricing is usually way out of line with a level expectancy. Oanda has a huge edge.

You might want to read this old thread, especially the last page:

http://www.forexfactory.com/showthread.php?t=5418

Your general idea of using options for hedging is spot on though. Just don't use Oanda's "fake" options for the purpose.
  • #50
  • Feb 8, 2008 7:23pm Feb 8, 2008 7:23pm
Merlin

Check out this scenario:

You are a news trader who wants to potentially benefit from the Fed cutting rates more than market has priced(.25%) in but you know the likelihood of getting a fill the second after the market jumps is nil. So a few minutes before the announcement you decide to go long and short just in case the market jumps the other direction. Stop is put 20 pips on either side of the trade because the likelihood of getting your stop filled is better than getting your entry in an illiquid market.

Surprise! The Fed decides not to cut rates at ALL! Market gaps 30 pips instantly and makes a sustained move 70 more pips over the next 10 minutes.

One position is closed out at -20 pips and the other is +100. Thank goodness you had a position in the market because you would not have had an entry order filled after such an astonishing move.

This is the correct play if you are extremely careful and have a sense of movements post Fed announcements.

That is an example of a nearly textbook volatility play.

What say you
  • #51
  • Feb 8, 2008 8:13pm Feb 8, 2008 8:13pm
Quoting JFX81
Merlin

Check out this scenario:

You are a news trader who wants to potentially benefit from the Fed cutting rates more than market has priced(.25%) in but you know the likelihood of getting a fill the second after the market jumps is nil. So a few minutes before the announcement you decide to go long and short just in case the market jumps the other direction. Stop is put 20 pips on either side of the trade because the likelihood of getting your stop filled is better than getting your entry in an illiquid market.

Surprise! The Fed decides not to cut rates at ALL! Market gaps 30 pips instantly and makes a sustained move 70 more pips over the next 10 minutes.

One position is closed out at -20 pips and the other is +100. Thank goodness you had a position in the market because you would not have had an entry order filled after such an astonishing move.

This is the correct play if you are extremely careful and have a sense of movements post Fed announcements.

That is an example of a nearly textbook volatility play.

What say you
I am not much of a news trader, so if I am wrong please set me straight, but when the news comes out usually on these brokers that allow long and short trades at the same time, don't they also widen the spread dramatically at that time? If that's the case, wouldn't the price just skip past the stop, because price never traded at the stop level?

A year or so ago, when I tryed this concept, I just got requtes on the stop side and was not able to get out for a profit.. Maybe that has changed since then?
  • #52
  • Feb 8, 2008 10:31pm Feb 8, 2008 10:31pm
Quoting smjones
I am not much of a news trader, so if I am wrong please set me straight, but when the news comes out usually on these brokers that allow long and short trades at the same time, don't they also widen the spread dramatically at that time? If that's the case, wouldn't the price just skip past the stop, because price never traded at the stop level?

A year or so ago, when I tryed this concept, I just got requtes on the stop side and was not able to get out for a profit.. Maybe that has changed since then?
The spread can widen so stops must be set accordingly. And sure, slips can happen but they aren't as likely on the stop.

I think it is only worthwhile if you believe the market has the potential to move at least 100 pips or so.
  • #53
  • Feb 8, 2008 11:29pm Feb 8, 2008 11:29pm
Quoting JFX81
Merlin

Check out this scenario:

You are a news trader who wants to potentially benefit from the Fed cutting rates more than market has priced(.25%) in but you know the likelihood of getting a fill the second after the market jumps is nil. So a few minutes before the announcement you decide to go long and short just in case the market jumps the other direction. Stop is put 20 pips on either side of the trade because the likelihood of getting your stop filled is better than getting your entry in an illiquid market.

Surprise! The Fed decides not to cut rates at ALL! Market gaps 30 pips instantly and makes a sustained move 70 more pips over the next 10 minutes.

One position is closed out at -20 pips and the other is +100. Thank goodness you had a position in the market because you would not have had an entry order filled after such an astonishing move.

This is the correct play if you are extremely careful and have a sense of movements post Fed announcements.

That is an example of a nearly textbook volatility play.

What say you
That's a straddle. It's different from the "hedge" that Merlin described because with a straddle there is the possibility of having a net long OR short position over SOME price points as opposed to a long AND short position over ALL price points.

What you describe makes perfect sense. It's a way to take advantage of expected volatility without committing to a direction. You end up with a net position one way or the other.

The "hedge" Merlin brought up makes no sense (except to my laziness in accounting ). It involves having a net zero position no matter what the price is.

Both start off "delta neutral" but the hedge stays delta neutral while the straddle does not.
  • #54
  • Feb 9, 2008 12:32am Feb 9, 2008 12:32am
Ah yes, I apologize for any confusion. I suppose it would have been appropriate for me to be more precise instead of haphazardly lumping both terms together because, as you articulately stated, they are two different things altogether yet the straddle is made possible because of the "hedge" feature.
  • #55
  • Feb 9, 2008 11:00am Feb 9, 2008 11:00am
AFAIK, hedging is taking opposite positions in a separate correlated instrument....no the same instrument.

two equally opposite positions in the same instrument is like no exposure @ all...just more spread expense.

And that is why brokers advertise it so that they can earn more.
100% of traders are losers. Just that some win more than they lose!
  • #56
  • Feb 9, 2008 11:04am Feb 9, 2008 11:04am
Quoting merlin
if a broker takes margin for even ONE position then it is dead wrong. there is no position, why in the hell would you need margin?!?

can we get some confirmations from people using this feature with various brokers? are you being charged margin on one or both of the positions?
the margin usually is nil. therefore it is the same as no position @ all
100% of traders are losers. Just that some win more than they lose!
  • #57
  • Feb 9, 2008 11:29am Feb 9, 2008 11:29am
LOL, OK so what I do isn't strictly hedging as I hold long and short positions on the same pair.

It seems like there are very few that trade anything like the way I do which is actually quite encouraging given the success rate in this business. I say each to their own and if you can consistently turn in a profit then you're on the right track.

Pound/Yen has been in a downtrend for some time now but as it consolidates at certain levels within say a range of a thousand pips, that's where I can make my 'killing'.

There's nothing wrong in 'hedging' your bets (eek there's that word again by holding positions either side of the current price, as long as the risk strategy is in place. After all no-one actually knows where the price is going to be the next day, week, month. We may have a pretty good idea where prices are heading over the longer term but it can chop around for days or weeks before getting there.

The times I'm more cautious is when the price approaches the extreme of the range and that's where I tend to wait and see if we get a bounce off support/resistance or whether we get a breakout.

Anyway, as I said, each to their own...

Kind Regards
Steve
  • #58
  • Edited 1:17pm Feb 9, 2008 1:05pm | Edited 1:17pm
Quoting JFX81
So a few minutes before the announcement you decide to go long and short just in case the market jumps the other direction. Stop is put 20 pips on either side of the trade because the likelihood of getting your stop filled is better than getting your entry in an illiquid market.
how is this different from a regular old straddle where you put stop-entry orders 20 pips on either side of the market?? (hint: its not)

a buy order is a buy order, it doesnt matter if it comes in the form of a "hedge" or a regular market order. if your broker treats a hedge order differently than a market order (ie less slippage for the hedge) then you should withdraw your money right away because the broker is a trickster. i would be FLOORED if a broker admitted to treating hedge orders any differently.

market mechanics can be quite confusing...UNLESS you break them down into the simplest form. when trying to understand market mechanics, i find it is extremely helpful to find equivalents to put the situation in a familar light. for example....

- if i am long and short the same pair, that means the price movement doesnt effect my money. what is this equivilent to? well, when i have no position at all, the price doenst effect my money either. so we can safely say that a "hedged" position is equivalent to having no position, simply by looking at the bottom-line-end-result. by looking at the end results, we can cut through all the crap and see the hedge for what it really is.

- now, speaking directly to the scenario you described... if you are long and short before a news event, you now have no position (see above point). you said you put a stop order 20 pips on either side of the market. SO... you begin with no position, you have a stop order 20 pips away. those stop orders are really ENTRY orders, since you have no position to begin with. when one of your stop-market order triggers (to close the other side of the hedge) it puts you in the market (ie price now effects money). notice this is the same exact thing as the traditional straddle??

dont let all these market mechanics and strange order names fool you...break it down into its simplest form and you will understand what is really going on! the failure to understand equivalents is why so many traders are confused about this hedge feature! (and thus the point of this entire thread).
Relax and be happy.
  • #59
  • Feb 9, 2008 1:10pm Feb 9, 2008 1:10pm
Quoting Mr demark
AFAIK, hedging is taking opposite positions in a separate correlated instrument....no the same instrument..
exactly! a REAL hedge is when you minimize your risk WITHOUT removing the potential for gain. and the only way to do that is to use two different instruments.
Relax and be happy.
  • #60
  • Feb 9, 2008 1:20pm Feb 9, 2008 1:20pm
Quoting Vensik
I believe I have talked on FF before about the wonder of a guarantee'd margin call in the same light.
great post! yes a guaranteed margin call is equivalent to a guaranteed stop-market order. if a broker is stupid enough to guaranteed margin calls (and i doubt there are many) then we should be taking full advantage of the broker using the technique you described. glad to see you got away with it at least once!
Relax and be happy.
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