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whats with this "hedging" thing??

  • #61
  • Feb 9, 2008 9:28pm Feb 9, 2008 9:28pm
Two years ago, I was loosing money on a short GU position. I did not close fast enough and it went against me. I thought, it will go my way again but it did not. So I hedged myself to "FREEZE" the loss.

Indecision. I was tired and confused; should I close or what? THINK THINK THINK. OK Hedge and think about it later.

After a sleep and realizing the frozen -50% of my account later. I came to my senses and CLOSED BOTH!


Brokers offer this feature so, instead of you closing a position, they actually got you to open another one! Broker end up with x2 spread profit! very clever.
  • #62
  • Feb 10, 2008 2:11am Feb 10, 2008 2:11am
Quoting merlin
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)
It is different from a regular old straddle because if the news comes out as expected and doesn't move the market at all, YOU STILL PAID SPREAD TWICE! VS not being out anything. See the subtle difference there? Hehe...

No, some of the bigger dealing desks really did used to fill stop orders before entry orders on their server. So you had a better chance getting in using the discussed scenario. Not so much anymore though.
The basis of a democratic state is liberty. ~ Aristotle
  • #63
  • Feb 10, 2008 12:48pm Feb 10, 2008 12:48pm
Quoting Vensik
It is different from a regular old straddle because if the news comes out as expected and doesn't move the market at all, YOU STILL PAID SPREAD TWICE! VS not being out anything. See the subtle difference there? Hehe...
true true, so really this method is worse than the traditional straddle.

Quoting Vensik
No, some of the bigger dealing desks really did used to fill stop orders before entry orders on their server. So you had a better chance getting in using the discussed scenario. Not so much anymore though.
i doubt that forex market makers even know if the order is an entry or exit. all they see is a buy order, they dont know the purpose of the order (and why should they even care?). at least this is how it should work. like i said, if your broker is treating orders differently, withdraw your money FAST
Relax and be happy.
  • #64
  • Edited 5:35pm Feb 10, 2008 5:19pm | Edited 5:35pm
I know of several ways you can take advantage of hedging:

The first consists of opening two separate accounts. The first with an interest paying broker and the second with a non-interest paying broker.

Long one broker and short the other.
In effect as Merlin stated, you would in this instance have "no" position open.

You collect spread on the interest paying broker's account and balance funds between the naked positions on each account to make sure you don't get margin called. A bit of a golden goose strategy that requires you feed the goosey and give it a bath now and then in redemption for sliding ur greedy hand under its unsuspectingly warmly feathered butt for your golden egg.

The second requires that you open an account with a broker that pays at least double or triple interest on particular days of the week.

Then, Long and Short GBP/JPY after Midnight (GMT+2).
Close the short before, but intimately close to midnight. Liquidate the remaining long position immediately after interest is rolled over, repeat.

There are other strategies available which include opening long positions on two negatively correlated pairs on the same account to collect interest, or hedging a loosing position on a corrective trade then adding an additional 10% or more impulsively, in the direction of the long term trend to slowly offset losses. You can carefully bleach losses reductively through the month like this, but deems necessary a predefined trend, a lot of patience and balls the size of church bells.

Regards,
E. Lang
"One Grows Tall After Walking Through A Forest Of Tall Trees."
  • #65
  • Feb 10, 2008 6:24pm Feb 10, 2008 6:24pm
i don't consider this one as hedge, but for example, i buy gbp/usd, and then some prediction say volatile week ahead for USD, so i put buy at usd/jpy

this practically hedge the USD side,and synthetically change the pair into GBP/JPY........ walla (found on some old thread)
  • #66
  • Feb 10, 2008 7:46pm Feb 10, 2008 7:46pm
Hey all,

Here is my reason for a hedge. Over all trend weekly chart is with positive interest. So I have a position lets say "short". I am going to hold that short for days, maybe weeks because its off the weekly chart. And I will trade the corrections, and make trades that don't draw more than a couple days neg interest on longs. The short can take as long as it wants to unfold because it means more returns. In the mean time I take small longs on daily, and 4hr charts.
  • #67
  • Feb 10, 2008 11:01pm Feb 10, 2008 11:01pm
Quoting merlin
i doubt that forex market makers even know if the order is an entry or exit. all they see is a buy order, they dont know the purpose of the order (and why should they even care?). at least this is how it should work. like i said, if your broker is treating orders differently, withdraw your money FAST

This was back in the day, but it was FXCM.
The basis of a democratic state is liberty. ~ Aristotle
  • #68
  • Feb 11, 2008 2:00pm Feb 11, 2008 2:00pm
Quoting Vensik
This was back in the day, but it was FXCM.
raise your hand if you remember when most all brokers guarenteed stops. if that wasnt the easiest money in trading...

Relax and be happy.
  • #69
  • Feb 11, 2008 2:03pm Feb 11, 2008 2:03pm
Quoting effilang
I know of several ways you can take advantage of hedging:

The first consists of opening two separate accounts. The first with an interest paying broker and the second with a non-interest paying broker.
yes this is a great way to take advantage of brokers, but its more of an arbitrage than a hedge.

btw, let me make it clear that hedging (the real kind) is an exceptionally useful tool in trading. my points in this thread only relate to the hedge feature in retail forex platforms.
Relax and be happy.
  • #70
  • Feb 11, 2008 4:24pm Feb 11, 2008 4:24pm
It comes down to strategy. Personally, I think hedging is nonsense.

If you're down on a trade, and you decide to 'hedge', you might as well close out the position. If your original trade turns in your direction, your 'hedge' isn't helping you at all. You might as well have closed out your position. If your original trade continue to go against you, your 'hedge' caps your losses. Again, you might as well have closed out your original position.

At the end of the day, you pay your money and you take your chances.

BTW, I love that 1000 pip stop loss strategy for 50 pip gain. Now that's genius.
  • #71
  • Edited 7:48pm Feb 11, 2008 6:42pm | Edited 7:48pm
The hedge option offered by retails brokers has fooled me for some time now. Now in retrospect I realize that the main reasons I had for holding two opposing positions in the same pair were based on false assumptions, the first being the illussion of guaranteed order fills.

Recently I noticed a statement by my broker that clearly states 'in fast moving markets stop loss as well as stop orders and in some extreem cases limit orders will be treated as market orders' or 'at best price'(for the broker of coarse). I guess that about covers all order types.

The second reason for the 'hedge' was psychological. The phoney hedge gave me the illussion that I hadn't lost anything yet because I hadn't closed my original position for a loss, yet the loss does show in equity, but who cares about equity, right? (well at least until the margin call)

Even in lite of these revelations I will continue to use stop orders in place of stop loss and take profit simply because I have witnessed my take profits passed over in slow markets on several occasions but have yet to see a stop order passed over. (and I've seen this happen with brokers that don't offer the 'hedging option' as well). The prudent method is, of coarse, to baby sit my positions, close them before major news releases and close them manually with the aid of alarms. Oh boy! Just when I thought it was safe to leave the house, BAM! Some nobody banker opens his mouth and there's a stampeed. Phew, the bar just keeps getting higher!

A few years from now I expect to be telling my son, "Back in my day, we had to trade by clicking on buttons with a device they called a mouse! Now your robo-nanny trades for you." Yikes!

Yes, I agree, this hedge thingy is a ploy to extract more cash from the cows, but if you're afraid of losing your peanuts, stay away from the circus.
  • #72
  • Edited 11:49pm Feb 11, 2008 7:02pm | Edited 11:49pm
Quote
Recently I noticed a statement by my broker that clearly states 'in fast moving markets stop loss as well as stop orders and in some extreem cases limit orders will be treated as market orders' or 'at best price'(for the broker of coarse). I guess that about covers all order types.
Don't even get me started on "At Best", this is not the time or the thread. But that is an MiFID regulation now isn't it? So if you get screwed, complain, and complain loudly and continuously. If you can prove they did not do everything in their power to execute at best for the client (you), threaten legal action, they have to adhere to regulation and should comply (may even get some compo you never know )

As far as the hedge goes, I wish I could have posted in here a couple days ago, but mr. Demark beat me to it, and I'm glad he said "instrument" not just another currency pair. I don't know the definition of a true hedge, even the text-books I used to study regulation don't clearly define it, but it is in effect a position to reduce/mange risk in a non-correlated, even non-related alternate financial derivative. Like the good old fashioned "I'll hedge the copper stockpiles I have sitting in my factory with some futures or options as I expect a drop in the underlying metals prices that are going to eat into my profits".
Now that's a hedge.
What retail fx brokers are doing is unethical if nothing else imho.
Carpe Divitiae
  • #73
  • Feb 12, 2008 7:55am Feb 12, 2008 7:55am
Quoting fsiltd
Don't even get me started on "At Best", this is not the time or the thread. But that is an MiFID regulation now isn't it? So if you get screwed, complain, and complain loudly and continuously. If you can prove they did not do everything in their power to execute at best for the client (you), threaten legal action, they have to adhere to regulation and should comply (may even get some compo you never know )
Your right about it being another conversation. However that is certainly how I kept the 50k from using FXCM's guarantee'd margin call as a stop. They removed it on Monday, 3 phone calls later it was returned on Wednesday.
The basis of a democratic state is liberty. ~ Aristotle
  • #74
  • Feb 12, 2008 7:57am Feb 12, 2008 7:57am
Quoting TheTopBloke
If you're down on a trade, and you decide to 'hedge', you might as well close out the position. If your original trade turns in your direction, your 'hedge' isn't helping you at all. You might as well have closed out your position. If your original trade continue to go against you, your 'hedge' caps your losses. Again, you might as well have closed out your original position.
That’s pretty much what I meant with the whole psychology thing. The people hedging don't have the psychological strength to close their losses, they would rather see a positive and a negative trade open in their account and pay twice for it than see only 1 closed negative trade. I think it puts their mind at ease at least seeing the positive number. No matter the falsity of it.
The basis of a democratic state is liberty. ~ Aristotle
  • #75
  • Feb 12, 2008 10:32am Feb 12, 2008 10:32am
Today was a prime example of the fallacy of a buy and sell hedge. If you look at the chart you can see if one had place a trade at the median of yesterday, on a buy and sell you would have lost both sides of the "hedge". If however, you had placed a buy stop and a sell stop order when the price hit the same median, using the opposite side as the level for a loss to close the stop entry order, you would have lost on the sell stop entry which was activated first, but would have made far more on the buy stop entry which was activated second. this would have turned a double loser with double spreads to a over all winner. Often, what looks like the less risky approach as some have said with the buy and sell hedge is in fact more risky.

This trading concept is from a thread that leeb started and I have posted a couple of testing EAs showing that the buy stop sell stop approach is far more profitable than the buy and sell hedge even though it trades half as much.
Attached Image (click to enlarge)
Click to Enlarge Name: buy and sell v stoporders.gif Size: 20 KB
  • #76
  • Feb 12, 2008 11:43am Feb 12, 2008 11:43am
Quoting Micro-MiniMe
and in some extreem cases limit orders will be treated as market orders'
if a broker filled my limit order at a worse price i would have to sue them on principle. that would be outright criminal theft.

Quoting Micro-MiniMe
because I have witnessed my take profits passed over in slow markets on several occasions but have yet to see a stop order passed over.
thats because a resting "take profit" by nature is a limit order. when you say "stop order" i assume you mean "stop loss", which is by nature a market order (unless its a stop-limit). its all about market and limit orders, figure those two out and all the market mechanics will start to make sense
Relax and be happy.
  • #77
  • Feb 12, 2008 11:46am Feb 12, 2008 11:46am
Quoting fsiltd
Don't even get me started on "At Best", this is not the time or the thread.
ok i will make it quick with "at best" because yes, that is a whole other discussion. basically, "at best" is a market order, just has a fancy name. a market order by definition already means "at best", a lot of traders fail to realize that and thus all the slippage complaints we hear.
Relax and be happy.
  • #78
  • Feb 12, 2008 11:47am Feb 12, 2008 11:47am
Quoting smjones
Today was a prime example of the fallacy of a buy and sell hedge.
nice realworld example there jones
Relax and be happy.
  • #79
  • Edited 1:49pm Feb 12, 2008 1:45pm | Edited 1:49pm
I don't ever use the "feature", as my brokers don't allow it, but just had a quick question to those that do, or understand it better maybe.

I'll keep it simple for the sake of keeping it "light reading" and quicker to sus what I'm inquiring about.

I had a conversation (argument with a friend about this and this is how he seems to use it. (I'll try and use what's on the charts now) I'm GMT by the way, so if I say morning/afternoon etc. you now where I'm coming from.

Let say you're long g/u [email protected] from this morning. Your target's 1.9600.
During the day price retraces some of the run up just after lunch, and you short @1.9530 (1lot/2lots doesn't matter, although he said he doubles up on his "hedge"), clip it for 30 pips down to 1.9500 close and continue about your business with the long still running.
That hits tp @1.9600 late afternoon during NY session.

Arguably, two separate transactions, twice the spread still counts, but kind of an interesting concept, no?

Granted, I still don't call this a hedge in it's true form, but it seems there is some kind of method to the madness. If your broker allows it, and you want to do it, it's weirdly profitable. Unless I'm just not seeing something here.

I know that at the time you have both that long and short open you've zero'd your position, but if you can tp on both, have you really at the end of the day? As they are not placed at the same time. Also the double-up on the short is an interesting spin on it.

Didn't steviet say he does something like this too? Could you confirm mate?
Carpe Divitiae
  • #80
  • Feb 12, 2008 2:08pm Feb 12, 2008 2:08pm
Quoting fsiltd
I don't ever use the "feature", as my brokers don't allow it, but just had a quick question to those that do, or understand it better maybe.

I'll keep it simple for the sake of keeping it "light reading" and quicker to sus what I'm inquiring about.

I had a conversation (argument with a friend about this and this is how he seems to use it. (I'll try and use what's on the charts now) I'm GMT by the way, so if I say morning/afternoon etc. you now where I'm coming from.

Let say you're long g/u [email protected] from this morning. Your target's 1.9600.
During the day price retraces some of the run up just after lunch, and you short @1.9530 (1lot/2lots doesn't matter, although he said he doubles up on his "hedge"), clip it for 30 pips down to 1.9500 close and continue about your business with the long still running.
That hits tp @1.9600 late afternoon during NY session.

Arguably, two separate transactions, twice the spread still counts, but kind of an interesting concept, no?

Granted, I still don't call this a hedge in it's true form, but it seems there is some kind of method to the madness. If your broker allows it, and you want to do it, it's weirdly profitable. Unless I'm just not seeing something here.

I know that at the time you have both that long and short open you've zero'd your position, but if you can tp on both, have you really at the end of the day? As they are not placed at the same time. Also the double-up on the short is an interesting spin on it.

Didn't steviet say he does something like this too? Could you confirm mate?

That is still a matter of the psychology of the trader in not being able to close your long position. If you had sufficient probability to open a short at 1.9530, then there was sufficient reason to close your long. The reason you would leave the long open is because you are, in fact, unsure about that short. Any trade you are unsure of isn't one you should be in. If the confirmations were there and you closed your long, opened the short down to 1.9500, then closed and reversed again, you would net an extra 30 pips on the new long position. Then again there is another psychological issue. If you did that, and the second long went against you 10-15 pips, many people aren't strong enough to link it with the first trade that they took 80 pips on. They see a negative trade, get discouraged, and close without reopening as they watch the currency go to the 4600 target.

Now let’s say you opened that short and hedged at 1.4530, but the short trade never produced profit. The currency continues on toward your long target of 1.4600. What do you do when it gets there? You'll have a negative 80 pip trade in your open box if you close the long. You haven't made a dime since 1.4530 because of the hedge. Are you still sure the currency is going back to 1.4500 if it's gone 80 pips past your entry? In short, you sit there feeling stupid because you doubted your original longer term long toward 1.4600.

Can you do the hedge? Yes. Does it net you any benefit in the long run? No.
The basis of a democratic state is liberty. ~ Aristotle
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