What's the point of hedging?

I doubt this. See Hanovers post here http://www.forexfactory.com/showpost...41&postcount=5

Losers hedge. They hedge because they are afraid of admitting their losing positions. Plain and simple. Give me crap for that and oh well, I've been there and seen that with more traders than one- real traders that have been around the block, that is.

If you say hedging is being in a short term position while holding onto a long term position for the retracement, then that's great. I'd have to ask why you're going for that small retracement in the meantime, considering your stance on the trend. People who hedge for that reason are also losers because they feel the urge to milk every last dollar out when, in reality, they can't.

The hedging people are describing here is not the same as what you are doing. The hedging people describe here is not really hedging but off-setting risk and it's clearly over your head.

We know having 3 buys and 3 sells in one pair is a full hedge of that pair.

If we have 3 buys and 1 sell we have a net long position. If the pair moves up we add another sell, thus locking in that move.

It's only rubbish and dicky if you're ignorant and don't understand the way the market moves.

If you have 3 buys and 3 sells and over time you close the 3 buys for 75 pips and later the pair reverses and you close the 3 sells for 75 pips. How many pips does that make? [you can do it, it's simple addition]

If you have only 3 buys and you eventually close them for 75 pips how many pips does that make?

Now go stand in the corner with the dunce cap on.

I guess it is every man/women or company for themselves. I have over the years read/seen/known a good number of hedgers and non hedgers go bust. The biggest difference though is that the big hedgers are like a super massive star going Supernova. They tend to get ahead of themselves and over amplify there risk and when they blow they tend to rock the foundations and send ripples through the markets and cause a massive explosion in the process.

My personal view is that it seems like 2 jobs to complete 1 task...

I had an idea once for a system that would place many (100+ at times) trades based on statistical probabilities. The idea was that if you take trades that have a statistical likelihood to make a set amount of profit, you would be right more often than you were wrong (though not by a wide margin) so over time the system would be profitable over all. Each individual trade was left to run on its own until it hit either the TP or the SL.

In a system like this, there's no intention of hedging, but you would end up with a number of longs and shorts at the same time, so overall you would be doing a lot of hedging.

My point is that there are ways of trading that involve hedging but are not intended to be 'hedging' systems. It would be a good example of a time when 'hedging' was beneficial, and not just a wash.

Of course, today you can't use a system like that in America because of the change in the NFA rules...

Whats so funny about hedgers, they're all profitable ! I haven't heard of a single losing hedger !

Love the enthusiasm. One day when it does break, you will know if you truely did the right thing We all start out like that somehow or another. But be warned, the market has its way to reward wrong behavior. When it does correct, it tends to lash hard.

I've personally done "hedging". The small trader style hedging. My bottomline: It doesn't work... unless you have millions to spend.
Reason:
1)If you are in a losing position, it is better to cut losses than to hedge. The "unhedging" part is very tricky. You can never predict with accuracy when is the right time to unhedge. If you really can, you woulnd't be in a losing position to begin with
2)If you are in a +ve position, set a trailing stop

Institutional hedging is a totally different ballgame. No point going there for the average retail investor... unless you have millions to begin with.

Who hedges spot fx trades with fx options? That would be interesting to hear about in some intelligible detail.

From a purely math standpoint, any trades taken via hedging can be done without hedging. There's no edge to be gained from it, it neither benefits nor hurts your trading.

The problem is some people think hedging provides an edge because they can time their exits, not realizing there's a net non-hedged trade that accomplishes the same task.

All that said, hedging can be a convenient accounting trick. I occasionally go long in one pair, then find a short term short opportunity. From an outside an observer, it would look like hedging. It isn't, it's just easier to do that than to re-adjust all of my open trades.

Nobody is saying that you can't make money in the manner that you describe. What's being said is that any hedge can be replicated by a single order, and that it's the net position that determines the P/L.

For example, you are hedged 3 long and 3 short, your net position is zero. I am out of the market, my net position is zero. We both bank zero pips.

Then you close your 3 longs, leaving you net 3 short. So I simply open 3 short. No we are both net 3 short, and again banking the same pips.

Then (for example) you open 3 longs, to restore your hedge, returning your net position to zero. I simply close my short positions.

And so on.

No matter what combo of longs and shorts you have open at any time, I can always create the same net position, without hedging, and therefore bank exactly the same pips.

However, the trader who's hedged pays more swap interest, and possibly more spread, as explained by Merlin here. Previously, Merlin had offered $100,000 to anybody able to invent a hedging scenario that he couldn't replicate with a single order. I don't think anybody managed to win the bet, LOL.

Hence Zarraman is correct. The hedge itself provides no mathematical benefit. This is not an issue of trading strategy, it is simply math (and has already been done to death in at least four other threads). People either see it or they don't.

ahh i dont give a damn , dont HEDGE IT DOESNT WORK ! HEDGE IS FOR LOSERS! THERES NO WAY TO DO IT PROFITABLY , I DID IT AND LOST A MILLION DOLLARS .. JUST STICK TO TRADING .. its settled

David, could you please be a little clearer in stating your opinion? Don't beat around the bush, just come right out and say it!!

Laff. Hedging neither works nor doesn't work. It's not a trading strategy, it's an accounting trick. Instead of calling a position closed, you set two equal positions against themselves.

The net is the same, but it looks different.

If you go long, it goes wrong and you go short to cover it, then wait for the long to go profitable, close it, then wait for the short to go profitable and close it, you might think "oh look, I'm profitably hedging."

But in reality you could accomplish the same thing by waiting till the end, going long, closing, then going short and closing.

The only difference is that with the latter, it's clear that you have to know what you're doing. With the hedging, you can "stumble" into it by closing whenever your profitable. What's not obvious there is the same risk of loss that existed in the non-hedged position is still there in the hedged version. There's a chance that trades could continue to go against you and force a margin call.

You can reduce that by lowering your lot size, but then again you can do the same by lowering your lot size in the non-hedged version too. Drawdown is drawdown, regardless.

Wow, what an original topic.

Seems like it's getting plenty of attention though... so continue!

Since nobody is either right or wrong all the time, an emphasis on how much one is right could help.

If I have a decent trade reason that I underestimated the in-trade drawdown for, I'd be doing one of the trade types you noted.
If I simply flubbed the entry, I'd exit with the loss.
If I was unsure about the trade reason because of a large in-trade drawdown, I'd exit a little at breakeven or a small loss and then deal with the rest.
If I was sure about two potential trades, each with a separate reason for going in the opposite directions from about the same time, I'd enter both trades (if allowed) and then deal with their separate exits.
If I was wrong with my entry reason and figured another reason I was more confident in during the trade, I'd move that money to the new reason and may use one of the trade types you noted to do so.

And of course, if I was right or lucky enough for the trade to work, I'd also just exit.

Happily.

For once.

Hahaha... well, classic discussions are classic for a reason. It's friday, lots of boredom to counter.

You said, "If we have 3 buys and 1 sell we have a net long position. If the pair moves up we add another sell, thus locking in that move. "

What's the difference between that and closing a position?

You said, "If you have 3 buys and 3 sells and over time you close the 3 buys for 75 pips and later the pair reverses and you close the 3 sells for 75 pips. "

What's the difference between that and opening and then closing a short position?


LMAO. I'm all for hedging. It allows you to generously thank your broker for being kind enough to allow you to trade the currency markets by paying for extra unnecessary positions.

The difference is spread. Closing a long means selling, means no spread. If you take a short position, someday you must take an offsetting long, and that will entail a spread. In this way, hedging is actually more expensive.

If I'm wrong why is Hedging in the same account illegal in the U.S.?

Look at me history matee, I have been a member here a long time and most of my recent posts are concerning the 10:1 leverage change by the CFTC.

Then you quote me to make me look like the bad guy as I told you I myself once suffered from the same problem you do.

There are many people on this board with inflated egos think they know everything and do nothing but spout non-sense. If I didn't have the capability to admit I was wrong a few years ago I never would have found what I stumbled upon by accident.

I don't need this board or any other as everyone is looking for nothing but a feebie or handout. You criticize the people who develop strategies and toil day and night on them. You lambast them and chastise them. I tried to do it in a nice way to beat you to the punch as I was once the group you portray to be.

The argument is: "Oh if you open a sell I can open a sell it's the same difference."

Not if you have a buy open it isn't. You have to close the buy first.

1 buy = +25 you close for +25 then open sell.

I have 1 buys = +25 + 1 open sell.

=========

pair goes up

you have 2 sell [ 1 Loser -25]


I have 1 buys +50 + 2open sell [1 loser -25]

====

you have 3 sell [ 1 -50, 1 -25 + 1]

Pair goes up

I have 1 buy +75 + 3 sell [1 -50, 1-25 +1]

======

I close my buy for +75

you can't close a buy you already closed. net difference is 50 pips

=====

pair falls 50 pips


====

you have 1 sell +50, 1 sell +25, 1 sell -25... to do what I do you must close all these for +50 so far your net is +75p

you open 1 buy

===

I open one buy and leave open my 3 sells.

my net is +75p

===

pair falls 100 pips I close out everything a winner.

you close out for a loss.


there are many other things that can happen this is a simple example to show you that what you say is incorrect. It's all I have to say on the subject either you can figure it out using your own brain matter or just keep believing it's impossible either way I don't care.

Uhm. You have your non-hedging scenario completely off...

It's a bit hard to follow, but here's an example:

You buy. Price goes up 25 pips, you sell. Now you're neutral. +25 pips. 1 equal
buy and 1 equal sell is the same thing as nothing at all.

Pair goes up, you have no net position. You now initiate another sell, so you
now have a single net short position. 1 lot, +0 pips.

Pair goes up, say 25 pips. We now stand at -25 pips for 1 lot.

When you close a buy, you are selling. We can replicate that by adding another
short lot. So we go short. We now have 2 lots short, one at +0, one at -25.

Price falls 50 pips. Lot 1 is now at +50, lot 2 at +25.

Pair falls 100 pips now. Lot 1 is at +150, lot 2 at +125.

I close everything out here. That's 25 for the first, 150 for the second and
125 for the third. That's an average of 100 pips per lot.

Nobody is closing out for a loss.

I think you don't understand how the non-hedged version works, which has you
adding stuff that doesn't need to be there. If you can post a more clear
scenario we can work thru it and I can show you where you're getting confused
at.

The downside to this form of trading that it "averages down" your loss. It's not
progressive lots, but it's certainly not drawdown friendly. In either case, you're
going to risk some serious margin call.