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Open-Close Trending with Hedging Discussion Thread

  • #61
  • Apr 10, 2007 9:24pm Apr 10, 2007 9:24pm
that means in a perfect hedge you loss $0.6 per day, if hold for 365 days, it would be $ 219.
if we let a positive only to run ,we got 2 x 365 = $730 per year, or 913 pip in Gbp-jpy.
i count & use that 913 pip as a hedge.

i beleive that SL & TP is kind of hedge too, it is just, one in the run, and the other is on our equity.
  • #62
  • Edited Apr 11, 2007 12:07am Apr 10, 2007 11:08pm | Edited Apr 11, 2007 12:07am
The basic strategy for H1 tKimble is as follows:

1. Open a position north if +50 level is crossed (+50 is 50 pips above the 25LWMA)
2. Open a position south if -50 level is crossed
3. If you have a north bound position and your price crosses the -50 level close the north position and open a south position.
4. If you have a south bound position and your price crosses the +50 level close your south position and open a north position.

[3 & 4] is this mean you need to lose 100 PIPs ...?

Ans. This is correct. In the basic system you would loose 100 pips maximum.


1. Move your SL with the moving trend. If you have a north bound position that is still moving north, adjust your SL up from -50 level, in increments of ???, on an hourly basis in the north bound direction only.
2. The opposite of #1 is also true for south bound positions.

so what are the increments...? will this be like trailing stops...?

* Answer: If you look at the 25 LWMA each hour you will notice that it moves up or down with trend in progress. The increments are based on the ever moving +/- 50 levels as the trend unfolds. Example: llong position taken @ 0:00 gmt 233.00 LWMA is 233.50. @ 1:00 gmt LWMA is now 233.53 you would adjust your SL to match the new -50 level at now 233.03, etc.

* The basic system does not allow for wipsaws (ranging markets) in a given period. The maximum loss per trade is 100 pips.
* The basic system is setup on Stop Losses and your positions close when the reach either the +/-50 level with a range from -100 pips to the current record for this year 896 pips.

* The basic system prevents wipsaws (ranging markets) in a given period. The maximum loss per trade is 100 pips.
* The basic system is setup on Stop Losses and your positions close when they reach either the +/-50 level, which is a range of -100 pips... to the current record for this year 896 pips.

so 896 PIPs is the floating negative unrealized P/L on the account... or a +896 PIPs figure?... okay, I see the unswer... -tks!

* Hedged figures are listed as -



Hypothetical example: You open a position at 0:00 gmt on 4-1-07 with 1 lot @ 230.00 when the price hits the +50 level (without SL's). The trend is going north until 4-2-07 @ 3:00 when it goes through the -50 level. Between 4-1 and 4-2 we are monitoring the trend, once the moving up -50 level [initial distance in PIPs] reaches our price @ 230.00 we set a SL. From there we continue to adjust it until the trend ceases to go north and goes through, then new, -50 level on 4-2-07.

how many PIPs do we adjust each increment by...?

* The PIP amounts are adjusted according to the movement of the 25LWMA as answered above.



** The above is real simple with a trend going in the same direction. The trouble comes when the market is not trending but ranging before we have a chance to adjust (or in this case add a SL) the SL to a 0 or + position. We don't want a margin call and we don't want to loose profits.

Hypothetical example #2: In this example we opened a north bound position on 4-1 @ 230.00, this time the pair went south through the -50 level before we could place a positive SL in place. Rule #1 says to never loose pips so we take out a south bound position in an equal or greater amount than our north position.

* It would look like this: North position (lot size 1.00) on 4-1-07 233.00 @ 0:00 gmt (+50 level). South position (lot size 1.00 or higher) on 4-1-07 232.00 @ 5:00 gmt. Our south position is our hedge position and protects us from our 100 pip loss.

it seams we have already lost 100 PIPs here...233.0 - 232.0 = -100 ??? also, we will not pay 2nd commission only if the lots are the same in opposite direction...

** Answer: this is an unrealized loss that we hope to change to a positive sometime in the future.

You did a good job clarifying my elaboration. Hopefully, I was clear enough in this explanation. If anything else needs clarification, please let me know. I have all of this in my head and this thread is the first time I have written it out so hopefully none of it was lost in the communication process.
  • #63
  • Apr 10, 2007 11:11pm Apr 10, 2007 11:11pm
Quoting Gwan
that means in a perfect hedge you loss $0.6 per day, if hold for 365 days, it would be $ 219.
if we let a positive only to run ,we got 2 x 365 = $730 per year, or 913 pip in Gbp-jpy.
i count & use that 913 pip as a hedge.

i beleive that SL & TP is kind of hedge too, it is just, one in the run, and the other is on our equity.
Gwan,

This is something I've noticed while I hold a hedge in place, but have been unable to clarify the cost. How did you come across with this and how do you calculate it? Does this increase if you have more than 1 position on hold or is it a cost for only 1 hedge position?

Very interesting.
  • #64
  • Apr 11, 2007 12:04am Apr 11, 2007 12:04am
Position take on 4-10-07 @5:00 has now broken even and should continue into positive territory. SL is now in place to protect profits at 234.48 for north bound position. Time stop loss taken 4-11-07 @ 5:00 gmt. Neutral profit preserved currently. Looking to preserve more of position as the trend continues.
  • #65
  • Apr 11, 2007 5:36am Apr 11, 2007 5:36am
Quoting yezbick
Hopefully, I can explain this thoroughly. Ok here we go.

The basic strategy for H1 tKimble is as follows:

1. Open a position north if +50 level is crossed (+50 is 50 pips above the 25LWMA)
2. Open a position south if -50 level is crossed
3. If you have a north bound position and your price crosses the -50 level close the north position and open a south position.
4. If you have a south bound position and your price crosses the +50 level close your south position and open a north position.

* Basic adjustment rules:
1. Move your SL with the moving trend. If you have a north bound position and it is still moving north adjust your SL to -50 level on an hourly basis in the north bound direction only.
2. The opposite of #1 is also true for south bound positions.

* The basic system does not allow for wipsaws (ranging markets) in a given period. The maximum loss per trade is 100 pips.
* The basic system is setup on Stop Losses and your positions close when the reach either the +/-50 level with a range from -100 pips to the current record for this year 896 pips.

Hedging Adjustment to this System are as follows:

Rule #1 is always never loose pips. Rule #2 if we are ever in doubt and you want to loose pips refer to rule #1.

* To achieve rule #1 we will run with out stop losses until our position is positive.

Hypothetical example: You open a position at 0:00 gmt on 4-1-07 with 1 lot @ 230.00 when the price hits the +50 level (without SL's). The trend is going north until 4-2-07 @ 3:00 when it goes through the -50 level. Between 4-1 and 4-2 we are monitoring the trend, once the moving up -50 level reaches our price @ 230.00 we set a SL. From there we continue to adjust it until the trend ceases to go north and goes through -50 level on 4-2-07.

** The above is real simple with a trend going in the same direction. The trouble comes when the market is not trending but ranging before we have a chance to adjust (or in this case add a SL) the SL to a 0 or + position. We don't want a margin call and we don't want to loose profits.

Hypothetical example #2: In this example we opened a north bound position on 4-1 @ 230.00, this time the pair went south through the -50 level before we could place a positive SL in place. Rule #1 says to never loose pips so we take out a south bound position in an equal or greater amount than our north position.

* It would look like this: North position (lot size 1.00) on 4-1-07 233.00 @ 0:00 gmt (+50 level). South position (lot size 1.00 or higher) on 4-1-07 232.00 @ 5:00 gmt. Our south position is our hedge position and protects us from our 100 pip loss.

* After you have taken the above position you would have 2 positions open. Depending on which direction the trend went from here you would adjust and add SL according to the basic rules of always placing SL's when in positive pips. (see above) If the trend went south far enough to put your south position in positive territory you would close your south position after the trend came back through the +50 level. and the process continues.

** Note it is possible to have multiple hedges and or positions in place if the market is in a tight ranging motion.

Hope I explained that thoroughly enough. If I didn't please let me know and I'll try to re-explain an area that may have been unclear.

hope you find the pips your looking for.

yezbick
Hi yezbick

If the trend went south far enough you place your stop at +50 line, then it is hit and your south bound position is closed at be or a profit; now your original long taken @ 230 is at a considerable loss and has no hedge, because its hedge position has been closed.

Please clarify how you deal with the original long at 233 from this stage onwards when its hedge has been stopped out.
Regards
  • #66
  • Apr 11, 2007 6:08am Apr 11, 2007 6:08am
original long @230
Regards
  • #67
  • Apr 11, 2007 7:03am Apr 11, 2007 7:03am
Quoting howard
Hi yezbick

If the trend went south far enough you place your stop at +50 line, then it is hit and your south bound position is closed at be or a profit; now your original long taken @ 230 is at a considerable loss and has no hedge, because its hedge position has been closed.

Please clarify how you deal with the original long at 233 from this stage onwards when its hedge has been stopped out.
Original long @ 230 is left open and protected by a sell stop (adjusting pending order) until it either reverses direction in the - and needs a new south hedge or closes in the positive after a long trend movement north.

* Example trend direction changes direction after closing our short position @ 228.50. The pair travels north until it passes 231.50 where it goes through the south -50 level. We have now closed our hedge in a positive position and open another south bound position. This time we place a pending buy stop to cover us from possible losses.

** The hedge does not change how you treat each position. Each position is treated in the same way to close and open as per the basic rules. Only change is instead of using a SL you use a hedge to proctect yourself from losses to your balance.
  • #68
  • Apr 11, 2007 7:06am Apr 11, 2007 7:06am
Quoting yezbick
Could be possible moving towards the north position. Positive 50 level currently set at 234.51 with a 25LWMA at 234.01. Place a pending order for a Buy Stop at 234.51 to cover the North bound position.

Position taken here @234.51 has been trending nicely north. 25LWMA is at 235.34. New SL is now set 234.84 (-50 level) as of 12:00 gmt
  • #69
  • Apr 11, 2007 9:05am Apr 11, 2007 9:05am
Quoting yezbick
Could be possible moving towards the north position. Positive 50 level currently set at 234.51 with a 25LWMA at 234.01. Place a pending order for a Buy Stop at 234.51 to cover the North bound position.
New SL setting for above north bound position as of 14:00 gmt. New SL is now at 234.96
  • #70
  • Apr 11, 2007 9:33am Apr 11, 2007 9:33am
Quoting yezbick
New SL setting for above north bound position as of 14:00 gmt. New SL is now at 234.96
How do you manage the task of moving the stops on an hourly basis during the night?

This hedging process is in need of constant attention.
Regards
  • #71
  • Apr 11, 2007 10:10am Apr 11, 2007 10:10am
Quoting howard
How do you manage the task of moving the stops on an hourly basis during the night?

This hedging process is in need of constant attention.
Before I go to bed for the night I adjust my stops enter any pending orders if neccessary and then hit the feathers.

I've found that it works best if you pay constant attention to it, but you can go up to 8 hours or more without adjusting it and receive no ill effects.

Trends generally don't end abruptly, most of the time it takes 12 plus hours for a trend to reverse direction. This past week was the exception because the market was ranging for 5 plus days. But in the case of tight ranging markets like we had, your positions remain hedged while you wait for the market to choose the next trending direction.
  • #72
  • Apr 11, 2007 10:32am Apr 11, 2007 10:32am
Quoting yezbick
Before I go to bed for the night I adjust my stops enter any pending orders if neccessary and then hit the feathers.

I've found that it works best if you pay constant attention to it, but you can go up to 8 hours or more without adjusting it and receive no ill effects.

Trends generally don't end abruptly, most of the time it takes 12 plus hours for a trend to reverse direction. This past week was the exception because the market was ranging for 5 plus days. But in the case of tight ranging markets like we had, your positions remain hedged while you wait for the market to choose the next trending direction.
Please throw more light on how you set the pending orders. I suspect it will be an approximation since the LWMA can change. How then can on deal with closing out a winning trade. It would been much better if I can program an alert or SMS message whenever the price touches LWMA 25 + 50
  • #73
  • Apr 11, 2007 10:35am Apr 11, 2007 10:35am
Is there a broker that allows you to place a "Hedge" position? Usually if you have 1 pair long, and you try to go 1 pair short, it closes out the original position... Or does this strategy entail using 2 brokers?
  • #74
  • Apr 11, 2007 10:43am Apr 11, 2007 10:43am
Quoting aelimian
Please throw more light on how you set the pending orders. I suspect it will be an approximation since the LWMA can change. How then can on deal with closing out a winning trade. It would been much better if I can program an alert or SMS message whenever the price touches LWMA 25 + 50
I use Buy Stops and Sell Stops for my pending orders. In Interbank Fx I take the following steps.

1. Open order window
2. Change Type to pending transaction
3. Choose pending order type depending on direction. If current direction is long then we open a sell stop. If current direction is short we open a buy stop.
4. Price placement is done at the +/- 50 levels.
5. If we are using hedging we will place no stop losses on the pending order. If we are not using hedging then we will place a SL at 100 pips above our Sell Stop and 100 pips below our Buy Stop. (+/- 50 levels)

Example of the above in current situation. Our trend is going long, we need to have protection just in case it reverses direction. We will place a Sell Stop at the current -50 level which is 235.04. This will give our trades direction if and when the market decides to go South.

** Remember that we need to adjust the price of our pending order on a frequent basis (hourly or greater) to keep up with the curent trend.
  • #75
  • Edited 10:57am Apr 11, 2007 10:44am | Edited 10:57am
Quoting El Nacho
Is there a broker that allows you to place a "Hedge" position? Usually if you have 1 pair long, and you try to go 1 pair short, it closes out the original position... Or does this strategy entail using 2 brokers?
I'm currently using Interbank Fx and they allow same pair trading. I heard that Oanda and FXCM allow this as well, but I'm not sure. There are many brokers that offer it due to the fact that it can increase the spread fees that they make.
  • #76
  • Apr 11, 2007 11:11am Apr 11, 2007 11:11am
The problem with this is that once you have 3-4 hedge positions that are really far off from closing you are in effect Martingaling on any new order you place when entering normally at the +50 or the -50. Say you have accumulated 3 short positions at 1 standard lot a piece when price penetrates the +50 level. You now have to enter long with 3 (or more) standard lots to maintain the hedge, and then even if the long is closed in profit, you still have the 3 short positions which have grown even larger with the negative pips. What if over 3-4 months you have 10 open positions that need hedging?
  • #77
  • Apr 11, 2007 11:19am Apr 11, 2007 11:19am
I think this system is worth investigating.

That said, if we take a worst case scenario......

you have one bad long position.
Market goes against you -100pips

you open a hedged short position

you travel down 100 pips only.
you move the stop loss to break even.
market reverses immediately and takes out the short.
you place a long position.
market again reverses and travels immediately in a downward direction, taking out the -50 barrier.
What do you do.

in order to continue you now have a long at
-200 pips and a long at -100pips

Your next hedge must cover the 300 pips not the original 100. Your % risk jumps to 8% of capital (assuming an initial risk of 2% per trade)

consider this occurring for some time

you have a grid trading problem

1 trade goes bad
= -100pips

2 trades go bad
= -200pips - 100pips (-300 pip total)

three trades go bad
= -300 pips - 200 pips - 100pips (-600 pips total)

4 trades go bad
= -400pips - 300pips - 200 pips - 100pips (-1000 pips)

lets say the maximum bad trades in a row is 7
= -700 - 600 - 500 - 400 - 300 - 200 - 100 = -2800 pips.

you have no realised profit.

The hedging system advised here is imperfect as you lose (maximum) -100 pips on each open trade every round.

A further important thing to note, however, is that your hedge is now taking up 7 X initial capital risked.

If initial capital risked was 2% , your hedge is now at 14% and your total exposure in the market is 28% at the point of the final trades commencement. (since you have 7 losers at 2% each).

In drawdown situations, the test of such a system is whether it can categorically prevent the number of losers from drawing your account into negative equity.

Backtesting, finding the largest historical drawdown and basing your initial risk capital on that would be advisable.

The above is obviously a simplification, however it does seem to be a potential problem.
quote of the day: . It's like deja-vu all over again
  • #78
  • Apr 11, 2007 11:20am Apr 11, 2007 11:20am
Quoting longhornxtreme
The problem with this is that once you have 3-4 hedge positions that are really far off from closing you are in effect Martingaling on any new order you place when entering normally at the +50 or the -50. Say you have accumulated 3 short positions at 1 standard lot a piece when price penetrates the +50 level. You now have to enter long with 3 (or more) standard lots to maintain the hedge, and then even if the long is closed in profit, you still have the 3 short positions which have grown even larger with the negative pips. What if over 3-4 months you have 10 open positions that need hedging?
I see your concern, and your question is valid. If I understand what your saying correctly your concern is how long are you willing to hold onto a negative position and what will the effects be to your account balance & possibly equity. Is this your question?
  • #79
  • Apr 11, 2007 11:25am Apr 11, 2007 11:25am
it is possible to code an expert advisor to manage pending orders such that in situations where hedging is deemed necessary a pending order can be modified in much the same way as a trailing stop.

Once the breakeven point has been reached one could then swap the trailing pending order for a trailing stop and continue as normal.
quote of the day: . It's like deja-vu all over again
  • #80
  • Apr 11, 2007 11:31am Apr 11, 2007 11:31am
Quoting Gmak
I think this system is worth investigating.

That said, if we take a worst case scenario......

you have one bad long position.
Market goes against you -100pips

you open a hedged short position

you travel down 100 pips only.
you move the stop loss to break even.
market reverses immediately and takes out the short.
you place a long position.
market again reverses and travels immediately in a downward direction, taking out the -50 barrier.
What do you do.

in order to continue you now have a long at
-200 pips and a long at -100pips

Your next hedge must cover the 300 pips not the original 100. Your % risk jumps to 8% of capital (assuming an initial risk of 2% per trade)

consider this occurring for some time

you have a grid trading problem

1 trade goes bad
= -100pips

2 trades go bad
= -200pips - 100pips (-300 pip total)

three trades go bad
= -300 pips - 200 pips - 100pips (-600 pips total)

4 trades go bad
= -400pips - 300pips - 200 pips - 100pips (-1000 pips)

lets say the maximum bad trades in a row is 7
= -700 - 600 - 500 - 400 - 300 - 200 - 100 = -2800 pips.

you have no realised profit.

The hedging system advised here is imperfect as you lose (maximum) -100 pips on each open trade every round.

A further important thing to note, however, is that your hedge is now taking up 7 X initial capital risked.

If initial capital risked was 2% , your hedge is now at 14% and your total exposure in the market is 28% at the point of the final trades commencement. (since you have 7 losers at 2% each).

In drawdown situations, the test of such a system is whether it can categorically prevent the number of losers from drawing your account into negative equity.

Backtesting, finding the largest historical drawdown and basing your initial risk capital on that would be advisable.

The above is obviously a simplification, however it does seem to be a potential problem.

What you mentioned here is valid, Historically only 4 of the 14 bad trades have remained open to date (12-25-06 to present) 10 have ended in a positive situation resulting in 2000 plus additional pips recovered.

4 divided by 14 is 28.6% or if this pattern continues you will be holding 28.6% of all bad trades.

** There have been 41 trades total so and 4 divided by 41 is 9.8%. This means that you could be holding up to 10% of all trades taken at any point in time providing the previous history continues.


Ultimately, it boils down to whether or not it is worth while to take your lumps with the SL's or take on hedged positions for a total of 10% of all your trades taken.

On one hand you would have had -1,088 in SL's hit and the other hand you would have had 2,030 positive pips from closed hedged positions with 4 Trades still being held.

Which is better?
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