What's the point of hedging?

I traded it live for over a year. If you have a system without DD then you aren't trading lol.

Anyway you're right... it's impossible.

So how long have been trading and making a living from hedging?

I am now convinced that the is no financial benefit from what you have described. It is dicky and it won't work.

Well, nobody answered me. Not taking it personally. Was not a rhetorical question. FF user toshi used to talk alot about hedging spot trades with fx options. On the reading list is

"Dynamic Hedging" by Nassim Taleb

Hedging is not useless or ineffective. It's just not on the radar screen for the microlot traders who pass through here, mostly...

From my experience, I have never seen hedging as a useful strategy to trade - it seems like a way to pay your broker more money.

The NFA was even nice enough to impose it's no-hedging rule, trying to protect US clients from wasting more money.

So unless you believe that the NFA doesn't like hedging because it's such a largely profitably trading method, then there should be really no point in trying to pursue hedging any further.

I didn't answer because I've never done it, lol. Didn't want to mislead you.

You're talking about a different kind of hedging. The kind of hedging people talk about here is sometimes referred to as "nedging" since it's really just taking a long and short in the same pair at the same time. It's not really hedging as others know it, but it's how forex traders know it, so... when in Rome.

Classical hedging is most certainly not useless, classical hedging is used the world over to mitigate risk.

http://en.wikipedia.org/wiki/Delta_neutral.

This is the type of thing Nassim's book will be referring too.
Option volatility plays can be hedged against directional moves in the underlying.
Note the somewhat obvious difference to what is being discussed here.

It seems I have made a faux pas - calling a hedge a hedge. When I should have called a hedge a nedge. My bad. Carry on.

"A public opinion poll is no substitute for thought."

~Warren Buffet

I believe " hedging " is when a dealer in a physical commodity locks in his profit by entering the paper market ( FX )
ie: a US manufacturer has an order to deliver to GB in 6 months and is to be payed in pounds, he would buy cable.
Therefore he would make up for a rise in the pound in the FX market but lose it in the physical.
Conversly if cable went down he would lose in the FX but gain in the physical.
Actually stay even with the original price he quoted for his goods.

I don't know what you would call taking both side of a FX trade except a waste of money.

I did it as a way to offset risk. Wasting money is taking repeated losses because the direction is not clear.


If I or anyone else used your mentality it would be equal to this:

I don't understand something. So because of this it's a waste of money.

I've laid out everything in this thread on how to do it more or less. You can make excuses, claim you know this or that try to change what I shown in my example... in the end once you put everything in the pot, put the flame on high and boil all the BS away what do you have?

The examples I gave are for those who don't use "herd" mentality as a method of thinking.

"There seems to be some perverse human characteristic that likes to make easy things difficult." ~Warren Buffet

Don’t you have to be like a forex expert to do hedging? And not to mention…have a lot of money for it to be successful?
I trade with broker ac-markets and since they are a Swiss broker they have no problems with hedging strategies, but I’ve never tried it myself.

pip_seeker,

I followed your example, and I think you got some parts wrong. Not saying you're not profitable. But you are incorrect in saying that your profitable due to this nedging (or hedging). You're profitable due to knowing when markets turn. I can easily create the same net exposure and get the same P&L by just staying long or short and going in one direction at a time in the same pair.

But maybe I'm missing something from your point of view... but I'll humbly continue...

I think your scenario was wrong right after the second transaction....

You're wrong here. You have 1 long and then you open another 1 lot short giving you 1 long and 1 short. That's net exposure of ZERO. The pair can go up 100 pips or down 100 pips you won't make any gains in your net p&l. So when you open that 1 lot short, leaving open your 1 lot long... i'll just close my only position of 1 lot long. That leaves me at net exposure zero.. same as you.. What you say I'd ahve to do is not only close my 1 lot long, but then open another lot short, leaving me with a net exposure of 1 lot short. That's incorrect!

I've re-written your trading scenario to show you.

you +/-net p&l (open p&l;realized p&l)

1. action

1. positions after action +/-p&l

1. summary of positions

me +/-net p&l (open p&l;realized p&l)

1. action

1. positions after action +/-p&l

1. summary of positions

========================================
market opens
========================================

you 0p (0p;0p)

1. action: open 1 lot long

1. positions after action: 1 lot long (just opened)

1. summary of positions: 1 lot long (same as me)

me 0p (0p;0p)

1. action: open 1 lot long

1. positions after action: 1 lot long (just opened)

1. summary of positions: 1 lot long (same as you)

========================================
pair goes up 25 pips
========================================

you p&l:+25p (open:+25p; realized:0p)

1. action: open 1 lot short

1. positions: 1 lot long +25p & 1 lot short (just opened)

1. summary of positions: 1 lot long and 1 lot short (net flat)

me p&l;+25p (open:0p; realized:+25p)

1. action: close 1 open long +25p

1. positions: none

1. summary of positions: none same as your net exposure

========================================
pair goes up 25 pips
========================================

you p&l:+25p (open:+25p; realized:0p)

1. action: open 1 lot short

1. positions: 1 lot long +50p & 1 lot short -25p & 1 lot short (just opened)

1. summary of positions: 1 lot long & 2 lots short (net short 1 lot)

me p&l:+25p (open:0p; realized:+25p)

1. action: open 1 lot short

1. positions: 1 lot short (just opened)

1. summary of positions: 1 lot short same as your net exposure

========================================
pair goes up 25 pips
========================================

you p&l:0p (open:0p; realized:0p)

1. action: open 1 lot short

1. positions: 1 lot long +75p & 1 lot short -50p & 1 lot short -25p & 1 lot short (just opened)

1. summary of positions: 1 lot long & 3 lots short (net short 2 lots)

me p&l:0p (open:-25p; realized:+25p)

1. open 1 lot short

1. positions: 1 lot short -25p & 1 lot short (just opened)

1. summary of positions: 2 lots short same as your net exposure

========================================
no market action
========================================

you p&l:0p (open:-75p; realized:+75p)

1. action: close 1 lot long +75p

1. positions: 1 lot short -50p & 1 lot short -25p & 1 lot short

1. summary of positions: 3 lots short (same as me)

me p&l:0p (open:-25p; realized:+25p)

1. action: open 1 lot short

1. positions: 1 lot short -25p & 1 lot short & 1 lot short (just opened)

1. summary of positions: 3 lots short (same as you)

========================================
pair falls 50 pips
========================================

you p&l:+150p (open:+75p; realized:+75p)

1. action: open 1 lot long

1. positions:1 lot long (just opened) 1 lot short 0p & 1 lot short +25p & 1 lot short +50p

1. summary of positions: 1 lot long & 3 lots short (net short 2 lots)

me p&l:+150p (open:+100p; realized:+50p)

1. action: close 1 lot short +25p

1. positions: 1 lot short +50p & 1 lot short +50p

1. summary of positions: 2 lots short same as your net exposure

========================================
pair falls 100 pips
========================================

you p&l:+350p (open:0p; realized:+350p)

1. action: close 1 lot long -100p & close 1 lot short +100p & close 1 lot short +125p & close 1 lot short +150p

1. positions: none

1. summary of positions: none

me p&l:+350p (open:+0p; realized:+350p)

1. action: close 1 lot short +150p & close 1 lot short +150p

1. positions: none

1. summary of positions: none

========================================

We both get +350 pips

No kidding.

Sorry for my ignorance. I did thought of this method before.
Initially, i thought it sort of make the whole trade standstill.
I can wait for my price to come back to my correct direction.

But the question is what if the price oscillates around there.
Should i closed and open again. Wouldnt i be paying more spread.

Might as well closed it and consider a loss. Move on to another better trade. Just my thoughts

OK - I feel somewhat 'qualified' to answer this one. Let's not delve into the world of international commerce but focus on trading, as I think this is what the original question was referring to:

Holding a simultaneous BUY and SELL position on the one instrument is utter bollocks, under the majority of circumstances, and we already all know that.

However, holding a BUY position and a SELL position on 2 different instruments (ok, there are many, many scenarios to look at here but not now) can indeed be a very consistent, profitable and low risk way to trade. BUT like everything else in trading is achieved through months and years of hard work, and a knowledge of the markets that extends far beyond a paypal purchase for $149 or the sharing of a 'system' on this lovely website. We all like to talk about good trading being about simplicity (and with topics like basic price action this is indeed very true) but 'hedging' for profit brings with it a complexity that is best left alone by most would-be retail traders.

"Hedging" (if you want to call it that) for profit is indeed a valid trading strategy - and it is a really nice feeling not to care which way the market moves within a defined time period - but most retail traders would better spend their time forgeting about such methods and focussing on simple price action.

Thanks for contributing. What is the universe of instruments that you refer to? Is it just other spot currency pairs or something else? I'd be interested to hear what hedging you would do with other spot currency pairs as an alpha-generating strategy.

The one time I did put on a hedge was with one trade: I was in a position that went longer than I anticipated and I was heading into an economic release, so I determined what scenarios would do to certain currency pairs and hedged my trade with a contrarian position in another spot currency pair. The economic numbers came out against my trade but I landed safely due to my "hedge". In hindsight I should have just closed my original trade to begin with. Bonehead move but I lived and learned.

In another life.. I used to trade pairs and event-driven arbitrage that involved a lot of hedging with other equities. But I can't really see hedging one spot currency pair with another. Unless maybe I was in a EUR position, I could probably hedge with CHF due to their correlation... maybe? Please enlighten me if you care to!

so much back and forth in this thread. skimmed it for parts, but i have not noticed the following 2 brief points :

1. the point of hedging is, like most things in trading, to *drum roll*... confuse people more. mission accomplished!

2. the argument that hedging is the same as simply closing a position and then opening the opposite position to make gains in the new direction before again closing and opening into the original direction again is... not... the same as hedging in the manner most would likely be trying to implement it (i.e. for profit$)

a little thing called spread eats into your main 'trend' positions each time you keep swapping back and forth, whereas to hold a position in the main direction and hedge in the opposite for the expected temporary retraces does not continually have spread chew pieces off the trend direction position which only lost 1 x spread because you only opened it once.

You didn't read "EXACTLY" what I said I did. Sure it's a net exposure of zero but at the time I open the sell I have a profit of +25 on the buy side locked in.

So this is not to say that I would do it exactly this way but to show you I am not just merely opening a sell for the sake of having a hedge... are you serious? Expand your horizon a little the example is in micro form but the strategy is a macro strategy.

In this example I am locking in the profit of one of the trades. The same thing can be done if you have 10 or 15 trades open. Markets trend 10% of the time. What do they do the rest of the time? If you're looking for an edge what is the best way to find one?

Take the same example above and open a sell with a buy loss of -25 pips. That would change the equation completely. If you can't see the forest from the trees now you never will... accept the fact that you are blind and move on.

HedgingHog sums it up perfectly: "Hedging" (if you want to call it that) for profit is indeed a valid trading strategy - and it is a really nice feeling not to care which way the market moves within a defined time period - but most retail traders would better spend their time forgeting about such methods and focussing on simple price action.

Nice one quoting hedginghog completely out of context. Did you neglect to read the bit about what you are doing is 'utter bollocks'? Yes, he summed it up perfectly didn't he.