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whats with this "hedging" thing??

  • #81
  • Feb 12, 2008 2:11pm Feb 12, 2008 2:11pm
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's pretty much what I do although I have rigid rules with regard to position size and stop loss / take profit. I've been profitable for the last 7 months using variations of this method just trading GBP/JPY and I'm quite comfortable doing it.

So many tell me that it can't be done, my risk reward ratio is crazy, what about paying the spread multiple times etc etc but all I can say is it works for me and works very well. I'm confident in what I do so it's all water off a duck's back to me.

I have posted what I do elsewhere in the forum previously but it's so far away from how most 'conventional' traders look at the market that few seem to 'get it'. No worries, plenty of ways to make money consistently and I choose to do it my way

Kind Regards
Steve
  • #82
  • Feb 12, 2008 2:16pm Feb 12, 2008 2:16pm
Quoting Vensik
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.
Whoo, you even managed to switch currencies in all that from g/u to e/u! :
I get what you mean though.
Personally, I added to my long again, rather than "hedge" or close/reverse/close/reverse. I just wanted to understand the logic a bit better.
Carpe Divitiae
  • #83
  • Feb 12, 2008 2:18pm Feb 12, 2008 2:18pm
Quoting steviet
That's pretty much what I do although I have rigid rules with regard to position size and stop loss / take profit. I've been profitable for the last 7 months using variations of this method just trading GBP/JPY and I'm quite comfortable doing it.

So many tell me that it can't be done, my risk reward ratio is crazy, what about paying the spread multiple times etc etc but all I can say is it works for me and works very well. I'm confident in what I do so it's all water off a duck's back to me.

I have posted what I do elsewhere in the forum previously but it's so far away from how most 'conventional' traders look at the market that few seem to 'get it'. No worries, plenty of ways to make money consistently and I choose to do it my way

Kind Regards
Steve
Is your "hedge", or opposing position rather, the same size as your initial position?

I agree, whatever makes you money
Carpe Divitiae
  • #84
  • Feb 12, 2008 2:18pm Feb 12, 2008 2:18pm
"Hedging", as we're calling it, is identical to simply adjusting your position. Let's say you had 5 lots long on GBP/USD. At some point you see that the market is starting to retrace, so you add a "hedge" of 2 lots short on GBP/USD. Now, you are net 3 lots long. This move is identical to simply selling 2 of your lots.

It may appear that you are making profit on the retrace and then subsequently making more profit on the continuing trend. Really, you are simply losing less on the retracement. Think... if you had "hedged" with 5 lots, you would have made even more on the short, right? But at 5 lots long and 5 lots short, your net position is 0! You're not making money, no matter how far the price moves. If you had "hedged" with 6 lots short, then you would actually be 1 net lot short, and you would in fact make profit on the "hedge".

It seems that the "hedging" feature, therefore, is mostly about psychology and/or trade management. If we know that the GBP/USD is in a long term uptrend, we want to have a long position with a wide stop and a far-away take profit level. But we know that there will be intermediate retracements before the pound reaches the target level, and we don't want to lose money on those retracements. "Hedging" allows us to reduce or even reverse our position in the market when we see these retracements, without needing to modify the setup of our long-term trades.

It has been asserted in this thread that hedging actually makes you pay the spread twice. This is because it is the equivalent of reducing and then subsequently increasing your position. With the example above, if you open the long GBP/USD order, then reduce your position, then increase it, and then close out, you do pay twice as much as you would if you had just opened the long and closed it at the take profit level. Please note, however, that whether you use the "hedging" feature or just sell and then buy again to adjust your position, you still pay the spread twice. You must pay effectively half the spread whenever you want to adjust your position. Thus, when you adjust your position twice (eg, you buy and then sell), you pay the spread. If you buy originally, sell partially, buy partially, and then sell, you've made 4 total adjustments, and 4*0.5 = 2 times the spread. Of course, this conceptualization assumes a constant spread, but as long as you trade in normal market conditions, this is true.

Sorry for the long-windedness. I've been brewing these thoughts for a couple days, and I finally got the 1KT status necessary to post in this thread.
  • #85
  • Feb 12, 2008 2:22pm Feb 12, 2008 2:22pm
Quoting drummer486
"Hedging", as we're calling it, is identical to simply adjusting your position. Let's say you had 5 lots long on GBP/USD. At some point you see that the market is starting to retrace, so you add a "hedge" of 2 lots short on GBP/USD. Now, you are net 3 lots long. This move is identical to simply selling 2 of your lots.

It may appear that you are making profit on the retrace and then subsequently making more profit on the continuing trend. Really, you are simply losing less on the retracement. Think... if you had "hedged" with 5 lots, you would have made even more on the short, right? But at 5 lots long and 5 lots short, your net position is 0! You're not making money, no matter how far the price moves. If you had "hedged" with 6 lots short, then you would actually be 1 net lot short, and you would in fact make profit on the "hedge".

It seems that the "hedging" feature, therefore, is mostly about psychology and/or trade management. If we know that the GBP/USD is in a long term uptrend, we want to have a long position with a wide stop and a far-away take profit level. But we know that there will be intermediate retracements before the pound reaches the target level, and we don't want to lose money on those retracements. "Hedging" allows us to reduce or even reverse our position in the market when we see these retracements, without needing to modify the setup of our long-term trades.

It has been asserted in this thread that hedging actually makes you pay the spread twice. This is because it is the equivalent of reducing and then subsequently increasing your position. With the example above, if you open the long GBP/USD order, then reduce your position, then increase it, and then close out, you do pay twice as much as you would if you had just opened the long and closed it at the take profit level. Please note, however, that whether you use the "hedging" feature or just sell and then buy again to adjust your position, you still pay the spread twice. You must pay effectively half the spread whenever you want to adjust your position. Thus, when you adjust your position twice (eg, you buy and then sell), you pay the spread. If you buy originally, sell partially, buy partially, and then sell, you've made 4 total adjustments, and 4*0.5 = 2 times the spread. Of course, this conceptualization assumes a constant spread, but as long as you trade in normal market conditions, this is true.

Sorry for the long-windedness. I've been brewing these thoughts for a couple days, and I finally got the 1KT status necessary to post in this thread.
No worries. Long winded or not, that actually made more sense to me than alot of what I've read about it!
Especially the
Quote
Let's say you had 5 lots long on GBP/USD. At some point you see that the market is starting to retrace, so you add a "hedge" of 2 lots short on GBP/USD. Now, you are net 3 lots long. This move is identical to simply selling 2 of your lots.

It may appear that you are making profit on the retrace and then subsequently making more profit on the continuing trend. Really, you are simply losing less on the retracement.
bit.
Cheers!
Carpe Divitiae
  • #86
  • Feb 12, 2008 2:26pm Feb 12, 2008 2:26pm
Quoting fsiltd
No worries. Long winded or not, that actually made more sense to me than alot of what I've read about it!
Especially the bit.
Cheers!
Glad to hear it. I guess this engineering degree is good for something
  • #87
  • Feb 12, 2008 2:28pm Feb 12, 2008 2:28pm
Quoting fsiltd
Is your "hedge", or opposing position rather, the same size as your initial position?

I agree, whatever makes you money
Yes and no hehe.

On my own piddly live account, I use a fixed % of my balance (excluding any unrealised drawdown) per position. As each position is closed in profit, my balance increases and the new position will be slightly larger. If I take a loss then the next position size reduces accordingly.

On the account I trade for an investor, the risk is a little higher so we have agreed to use the same position size on each position at this stage.

I can go into more detail on what I actually do however I'm not sure if this is the thread to do it as I'm not strictly 'hedging'.

Kind Regards
Steve
  • #88
  • Feb 12, 2008 2:35pm Feb 12, 2008 2:35pm
Quoting drummer486
Glad to hear it. I guess this engineering degree is good for something
You would think so... although, it's not done a lot for me in the financial markets though. Except maybe aided with methodical thinkin
Carpe Divitiae
  • #89
  • Feb 12, 2008 2:37pm Feb 12, 2008 2:37pm
Quote
Yes and no hehe.

Love discretion and the personal touch I do!
Carpe Divitiae
  • #90
  • Feb 12, 2008 2:39pm Feb 12, 2008 2:39pm
Quoting fsiltd
Whoo, you even managed to switch currencies in all that from g/u to e/u! :
Haha, so I did. Sorry I haven't traded the G/U since last year but I've been in the e/u short since mid-november. Everything I think of is in Euro these days.
The basis of a democratic state is liberty. ~ Aristotle
  • #91
  • Edited Feb 13, 2008 4:21am Feb 12, 2008 3:09pm | Edited Feb 13, 2008 4:21am
Quoting merlin
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.
Well, this is a retail broker were talking about and one that offers micro lots (peanut sized candy) I'm not about to sue over chocolate covered peanuts

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
The "take profit" I'm refering to is part of the position i.e. buy 1 lot @1.2000 with "take profit" @ 1.2300 and "stop loss" @ 1.1500. It is in this case I've seen price wander above and below the designated take profit without triggering my profit. When I say stop order I mean a buylimit, selllimit, buystop or sellstop which are pending orders. The terminology varies from one broker to the next, but the main idea is to take a position in one direction and place a pending order for a position in the opposite dirrection to act as the "take profit" or "stop loss". I have yet to see a pending order fail to trigger even in faster moving markets.

My prefered method of closing positions is manual execution, but I prefer medium term positions and can't be in front of the PC for extended periods of time. The hedging feature allows me a relatively safe option to guard against slippage while I'm away.

Edit:
Lets break it down to its simplest form. I buy 1 lot then a sell for 1 lot gets hit. At some time in the future I will decide to go long or short so at that time I close one order and let the other run. What have I lost? Equity on the spread while two opposing orders are open, perhaps.
  • #92
  • Feb 12, 2008 9:27pm Feb 12, 2008 9:27pm
After investigating this hedging I came to the realization that it smacks of letting "Hope and Fear" take over my trade.
If I was in the Baking business then of course I would hedge my cost of future purchases of wheat but this is like being out on a bitter cold day and getting a warm feeling down your leg - you look and realize you just peed yourself.
In trading, there is no bullshit. You either make money or you don't.
  • #93
  • Feb 12, 2008 9:42pm Feb 12, 2008 9:42pm
Quoting mrgreen
After investigating this hedging I came to the realization that it smacks of letting "Hope and Fear" take over my trade.
If I was in the Baking business then of course I would hedge my cost of future purchases of wheat but this is like being out on a bitter cold day and getting a warm feeling down your leg - you look and realize you just peed yourself.
  • #94
  • Feb 13, 2008 8:07am Feb 13, 2008 8:07am
Quoting mrgreen
After investigating this hedging I came to the realization that it smacks of letting "Hope and Fear" take over my trade.
If I was in the Baking business then of course I would hedge my cost of future purchases of wheat but this is like being out on a bitter cold day and getting a warm feeling down your leg - you look and realize you just peed yourself.

Yeah... ok. That one made me crack up.

and to bump the trash off the top of this forum.
The basis of a democratic state is liberty. ~ Aristotle
  • #95
  • Feb 13, 2008 9:16am Feb 13, 2008 9:16am
Quoting Micro-MiniMe
The "take profit" I'm refering to is part of the position i.e. buy 1 lot @1.2000 with "take profit" @ 1.2300 and "stop loss" @ 1.1500.
yes i know, thats why i said what i did.

Quoting Micro-MiniMe
When I say stop order I mean a buylimit, selllimit, buystop or sellstop which are pending orders.
it is impossible to have a "buy limit" as a resting (ie pending) stop order:

there is a stop-limit order, which tosses out a limit order once a certain price level is hit (and is not guarenteed to execute).

Quoting Micro-MiniMe
The terminology varies from one broker to the next, but the main idea is to take a position in one direction and place a pending order for a position in the opposite direction to act as the "take profit" or "stop loss". I have yet to see a pending order fail to trigger even in faster moving markets.
the terminology does differ, but mechanics of a market and limit order remain the same from broker to broker, market to market. understand what a market and limit order are, then try to figure out the name your broker gives to these orders. and dont get confused on whether an order gets in you in or out of a position, it doesnt matter at all. the order mechanics remain the same regardless of your current position.

btw, if you really want to get a handle on order mechanics, go trade stocks or futures for a couple months. i find it is the forex-only traders who get the most confused because forex brokers tend to obfuscate the true meaning of the order types.
Relax and be happy.
  • #96
  • Feb 13, 2008 9:21am Feb 13, 2008 9:21am
Quoting mrgreen
After investigating this hedging I came to the realization that it smacks of letting "Hope and Fear" take over my trade.
If I was in the Baking business then of course I would hedge my cost of future purchases of wheat but this is like being out on a bitter cold day and getting a warm feeling down your leg - you look and realize you just peed yourself.
PERFECT analogy
Relax and be happy.
  • #97
  • Feb 13, 2008 10:14am Feb 13, 2008 10:14am
that "pause" strategy looks good, as i recall ,some broker still forbid scalping,so because we are not allowed to close it too fast,we can hedge the profit and close it later on
.... or just move to another broker
  • #98
  • Feb 13, 2008 10:42am Feb 13, 2008 10:42am
Quoting merlin
it is impossible to have a "buy limit" as a resting (ie pending) stop order:
Oh Oh! I've been doing the Impossible again!
Dum-Dum...Dum-Dum Dum-Dum...Dum-Dum.........DumDumDum............DumDumDuum..DumDum!

Got me there ya did. tee hee hee...

And as far as the guy with alzhimers and the elarged prostrate...I'm glad you're peeing on your leg and not mine.

As far as I'm concerned, this retail brokers hedging thingy will only hurt you if you let it. I've witnessed a number of other ratail trading platform 'features' that upset me far more. Features like a stop loss that must be closed manually if you open a trade in the opposite direction of the first order. Orders should not be bundled together for the sake of convienience.
I do agree that retail forex platforms in general are designed to 'suprise' the newbies. Why else would there be so many diferent order types offered by diferent brokers. Confusion leads to mistakes which frustrate new traders. I would love to see the CFTC require all retail forex platforms to conform to a simple set of feature guidlines i.e. simple basic order types (buy, sell, stop and limit) Let the traders write code to do the fancy order types if they choose.

Good point Gwan
  • #99
  • Feb 13, 2008 11:48am Feb 13, 2008 11:48am
Quoting mrgreen
After investigating this hedging I came to the realization that it smacks of letting "Hope and Fear" take over my trade.
If I was in the Baking business then of course I would hedge my cost of future purchases of wheat but this is like being out on a bitter cold day and getting a warm feeling down your leg - you look and realize you just peed yourself.
Lol

OK but on a serious note (and at the risk of being controversial - who me? surely not ), aren't you really saying that because you haven't worked out a way of doing this profitably, it can't be done?

700 trades in nearly 6 months, 695 winning trades, 5 losing trades, in my 6th consecutive profitable month I beg to differ.

Maybe I could have been more profitable trading another way but I'm telling you it can be done.

Attached is a quick notepad file for my trades on a six figure live account at SaxoBank from Jan 13th when I started trading live. 88 trades, 88 wins.

Look I'm not trying to be boastful or anything, merely saying that it can be done! Just because it's vastly different from the way most trade doesn't make it any less valid.

OK, off me soap box

Kind Regards
Steve
Attached File(s)
File Type: txt jan08.txt   17 KB | 777 downloads
  • #100
  • Feb 13, 2008 11:56am Feb 13, 2008 11:56am
Quoting steviet
Lol

OK but on a serious note (and at the risk of being controversial - who me? surely not ), aren't you really saying that because you haven't worked out a way of doing this profitably, it can't be done?

700 trades in nearly 6 months, 695 winning trades, 5 losing trades, in my 6th consecutive profitable month I beg to differ.

Maybe I could have been more profitable trading another way but I'm telling you it can be done.

Attached is a quick notepad file for my trades on a six figure live account at SaxoBank from Jan 13th when I started trading live. 88 trades, 88 wins.

Look I'm not trying to be boastful or anything, merely saying that it can be done! Just because it's vastly different from the way most trade doesn't make it any less valid.

OK, off me soap box

Kind Regards
Steve
Amazing... 21% in a little over 3 weeks and this is typical. You are da man!
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