The reason why 95% of new traders consistantly lose money

Quoting anyhowtrade

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There has been a nagging thought in the back of my head..

If you close one of the profitable trades, and not touch the other hedged position, your account equity would be still the same. This means there isnt any actual profit gained. Without closing of the losing hedged positions, your account equity will always remain at the original level. How is it possible to grow your account size so you can increase lot size?

Of course its obvious you have suceeded, and I'm very impressed. Just wondering how your broker actually calculates equity balance.

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Quoting hanover

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Anyhowtrade, I agree. Being hedged means that you're net neutral, and is the same as being out of the market altogether (except that you're paying spread and possibly swap differential). Like you say, there isn't any actual profit gained. Hence the hedging is actually irrelevant....... unless, as you point out, their broker(s) operate completely differently to mine.

David

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Quoting pearsonfx

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3. Hedging. What? I can't do that, that exposes more margin, or that doesn't make me money that essentially just freezes my unrealized profit/loss....wake up....if you have 1 2 or 3 positions open in one direction, you look at your charts and see that the price is going to start going in the other direction....hmmm, now is a good time to hedge....why? because WHILE the price is going against your original positions your account balance is increasing 1 2 or 3 times as fast.... your equity remains unchanged though.

so you close the hedge position, and the price starts going back in the direction of your original positions, what does THIS mean? it means that now your account balance remains unchanged but your equity is increasing....IMAGINE THAT. But wait, theres more.....you are analyzing your charts and poof, you see another classic setup that the price will once again be moving AGAINST you.....well guess what, this calls for another chance to HEDGE! you open the hedge position and once again you FREEZE your accounts equity, but this time, your equity is significantly higher than it was when you entered your first hedge. you close out the hedge making your account balance bigger. hooray. The price starts moving back in the direction of your original positions, and once again your equity begins increasing....and after all, THAT is what its really all about.

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Quote

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...if you have 1 2 or 3 positions open in one direction, you look at your charts and see that the price is going to start going in the other direction....hmmm, now is a good time to hedge....why? because WHILE the price is going against your original positions your account balance is increasing 1 2 or 3 times as fast.... your equity remains unchanged though.

Quoting giraia_br

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sorry, i can understand this. You mean that while price are against your initial poisitions you still opening and closing trades, right? if not how can your balance incrase if you did not close any positions?

please clarify if possible.

thanks in advance.

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Quoting pearsonfx

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Yes, Here is a graph of what I mean by effective hedging. ...

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Quoting euclid

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Interesting fantasy world you live in. Here's what happens in reality.

Point A - You Buy 1 lot. Net +1
Point B - You Buy 1 lot. Net +2
Point C - You Buy 1 lot. Net +3
Point D - You Sell 3 lots. Net 0
Point E - You Buy 3 lots. Net +3
Point F - You Sell 3 lots. Net 0
Point G - You Buy 3 lots. Net +3
Point H - You Sell 3 lots. Net 0
Point I - You Buy 3 lots. Net +3
Point J - You Sell 3 lots. Net 0

Tades entered at A,B,C are closed for small loss at D. The following trades entered at E, G & I are all winners and more than make up for the loss. The disadvantages of so-called hedging is that you are living in a fantasy that all your trades are winning and are confusing entries and exits. It is better to be aware of the reality of your situation in order to properly assess risk and measure performance.

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Quoting pearsonfx

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I Hope this helps you better understand what I mean.

Please note that if you did not want to wait for Points ABC to come into profit....at Point F you could have closed trades ABC and still have walked away with a 900 pip gain. At Point F, ABC were about break even, but you had 900 pips from your first hedge trade.

Zack

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Quoting pearsonfx

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lol ok, believe what you want I will continue to live in my fantasy world and enjoying my pips

Have a good day

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Quoting tdion

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The reason 95% of traders lose money: They trade TA.

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Quoting pearsonfx

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Yes, Here is a graph of what I mean by effective hedging. This is a graph of the 4 hour, Eur/Jpy charts around mid to late January of this year.
Please note that in this chart I am not posting any indicators because the indicators and strategy are up to the trader. THIS IS JUST A HYPOTHETICAL EXAMPLE.

Point A - Your indicators suggest a BUY trade. You Buy 1 lot.


Point B - Your indicators suggest a BUY trade. You Buy 1 lot.


Point C - Your indicators suggest a BUY trade. You Buy 1 lot.


Point D - Your indicators suggest a SELL trade. You Sell 3 lots.
- At this point you are approximately 200 pips in drawdown from your original three trades A, B, and C. So at Point D, we enter a Short trade to HEDGE our first three positions. So instead of using 1 lot, we use 3 lots.


Point E - Your indicators suggest a BUY trade. No Trade is entered.
- You do not place an order here, because you are expecting your original trades, A, B, C, to come into profit now. However at this point we close out our original hedge trade (Point D) with 900 pips of profit (3 lots multiplied by 300 pips = 900 pips). Here you have 900 pips added to your account balance, but you have drawdown of 1100 pips, so overall you are still 200 pips negative, hence your account equity remains unchanged.


Point F - Your indicators suggest a SELL trade, You Sell 3 lots.
- Once again we see another drop coming, so we hedge our first 3 positions (A, B, C) with a 3 lot short, again. This time in terms of drawdown of our first 3 positions, ABC, we are now about at breakeven, but we have made 900 pips from our first hedge trade. Now Account Balance is +900, and your account equity is also +900. and since we are hedging again...our account equity now freezes at +900.


Point G - Your indicators suggest a BUY trade, No Trade is entered.
- This time we close our second hedge trade for another 900 pip gain. Remember 900 is derived from 300 pips x 3 lots. So now our account balance is +1800 pips, but our account equity is +900, because from our original three trades, ABC, we have a 900 pip drawdown.


Point H - Your indicators suggest a SELL trade, You Sell 3 lots.
- Once again your indicators show a temporary sell off beginning, a possible retrace. You again hedge your original 3 trades(A, B, C) with a 3 lot short. In terms of drawdown for ABC, we are looking at about 200 pips down.
This time, we freeze our account equity at +1600 pips. our account balance shows +1800, but we have 200 pips of drawdown on out 3 longs.


Point I - Your indicators suggest a BUY trade, No Trade is entered.
- Once again we close our hedge trade with a 300 pip profit, (100 pips times 3 lots = 300 pips). Now our account balance is at +2100 pips, and our account equity is still frozen at +1600 pips.


Point J - Your indicators suggest a SELL trade, Trades A, B, C are now closed.
-Point J we see a SELL trade forming, all 3 of our original trades are now in profit and we close all three for a profit of 650 pips. But we cannot forget about our hedge trades, if we add them into the equation we came out with 900 + 900 +300 +650 = 2750 pips total for this trade.

I Hope this helps you better understand what I mean.

Please note that if you did not want to wait for Points ABC to come into profit....at Point F you could have closed trades ABC and still have walked away with a 900 pip gain. At Point F, ABC were about break even, but you had 900 pips from your first hedge trade.

Zack

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Quoting whenry

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Hi all, first of all I'd like to thank FXTitan and Pearsonfx for their generousity to share their knowledge.

Quick question for Pearsonfx,
Why don't you buy when your indicator suggesting to buy at point E,G, I ? You said that you were expecting that original trades A, B, C to go back and come into profit. But if you follow your indicator suggesting to buy, you will get more pips?

Thanks a lot,
Henry

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Quoting pearsonfx

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Henry,

There are two options there.....IF and ONLY IF, your money management allows for you to add another position would I enter another BUY at Points E,G,and I. I am assuming that your money management does not allow for you to add on extra positions. Yes, IF the market moves in the direction of your original A,B,C trades then yes you make more pips.....BUT if it goes against you....you must realize now your floating loss becomes greater and faster....Its a double edged sword that must be dealt with carefully.

Zack

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Quoting hanover

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Anyhowtrade, I agree. Being hedged means that you're net neutral, and is the same as being out of the market altogether (except that you're paying spread and possibly swap differential). Like you say, there isn't any actual profit gained. Hence the hedging is actually irrelevant....... unless, as you point out, their broker(s) operate completely differently to mine.

David

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Quote

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I believe hedging has been popular with the masses that have already been burned by trading systems that did not use stops. They have finally come to realize that trading with 100% risk will eventually burn you. Because they have been burned badly, the thought of 0% risk (hedge) is very appealing. They come back to the forex and use their same system, but with hedges. This accomplishes an increase in the account balance while maintaining the loss in account equity. (ie, they will end up with a buy and a sell, when the sell is in profit they close it and rehedge. The account balance shows a profitable trade, however the equity maintains a now larger difference between the buy and sell hedge.)

I have seen a trader take a 150k account to 27k with a slow bleed from this. They ended up with a 500 pip difference between their buy and sell on the GBP and negative daily interest slowly bleed the rest of the account over a 6 month period. He came to me, asking to move his account to my managed fund, the first thing I told him was that I was going to close that hedge and start with the remaining 27k. It is very damaging psycologically to look at an account with 140k or something in the balance and only 27k in equity.

Also alot of the spike traders who are now being squeezed out by brokers tightening their rules are beginning to use hedges to trade the spike. They have discovered that entry orders don't work, but alot of brokerages will honor their stops with less slipping. So they go in to the news event with a buy and a sell and use the stop as an entry order to close the negative position. Obviously this is riskier in from a whipsaw spike, and the brokers love that as well. Of course, you only hear reprimand from the broker when you make money using a spike method. I have yet to see a broker delete orders that lost during a spike.

In the long run, hedging is really something that helps people falsly feel better in their own psycology. Instead of entering confidently with a stop and a limit in mind on every planned trade, they will try to manipulate a hedge to stay in the market with their positive order, or stop the bleeding with a negative order.