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What's the point of hedging?

  • #61
  • Feb 2, 2010 5:02am Feb 2, 2010 5:02am
Quoting birdt
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.
yes of course. I tend to focus on the positive. Whether I took it out of context or not it fit the parameters of what I was trying to say or was that over your head? Sorry 'bout that.
  • #62
  • Feb 2, 2010 5:18am Feb 2, 2010 5:18am
Quoting pip_seeker
I don't understand something. So because of this it's a waste of money.
No disrespect intended, but it seems that you're trapped in a mindset that somehow views hedging (in the same pair) as a trading strategy, but overlooks the underlying math.

Be willing to clear your mind of those preconceptions, and think beyond them, just for a moment.

If you have (for example) 3 lots open in long positions, and 2 lots in short positions, that's exactly the same as simply having 1 lot long, because the P/L of the other 2 longs and the 2 shorts will cancel each other. True or false?

Now it doesn't matter whether the market rises (for example) 25 pips, or falls 25 pips, the net P/L is the same in both cases. (3 x 25) – (2 x 25) = (1 x 25). OK so far?

The same can be said of any hedged position. It can always be replicated by a single net position. Think up any combination you like. For example, the net effect of 6 lots long and 2 lots short is 4 lots long; the net effect of 70 lots long and 100 lots short is 30 lots short.

Now here's the key. If, as you add or subtract positions from your hedge, I (at exactly the same time) adjust my single position so that it always reflects the net effect of your hedge, we'll both capture exactly the same pips, no matter how price moves. Ric3bowl's example in post #53 illustrates how; both approaches net exactly 350 pips.

Everybody profits by being net long when price is rising, and net short when it's falling – it doesn't matter whether this is the result of a single order, or a hedge. It's always the net position – not the hedge itself – that determines the bottom line.

The only difference is that the hedged trader generally closes positions to leave himself net long or short, and then opens positions to return to the neutrality of the hedge. While the 'conventional' trader does the reverse: opening positions to leave himself net long or short, and closing them to return to neutrality. It all achieves the same result.

Work through any example you like, with an open mind. By trying your hardest to disprove this, you'll eventually see the light. There is no real room for debate; the math represents an absolute truth.
  • #63
  • Feb 2, 2010 5:44am Feb 2, 2010 5:44am
Quoting hanover
No disrespect intended, but it seems that you're trapped in a mindset that somehow views hedging (in the same pair) as a trading strategy, but overlooks the underlying math.

Be willing to clear your mind of those preconceptions, and think beyond them, just for a moment..
Think beyond my preconceptions? Is this my strategy or yours?

Quote
If you have (for example) 3 lots open in long positions, and 2 lots in short positions, that's exactly the same as simply having 1 lot long, because the P/L of the other 2 longs and the 2 shorts will cancel each other. True or false?

True, but you miss the point of not caring which direction the pair goes. If you close one side out you care a heckuva lot more which direction it's going no?

Quote
Now it doesn't matter whether the market rises (for example) 25 pips, or falls 25 pips, the net P/L is the same in both cases. (3 x 25) – (2 x 25) = (1 x 25). OK so far?

It depends.
1. what is your original equity from opening the positions?
2. Are you net positive or net short? (profit or loss)
3. Are any trades net positive?
4. What is price action telling you?

If we are net long and price rises we can do a couple of things...

1. if the buys are in profit they could be closed.
2. if the buys are a loss a buy could be added to lock in the gain.
3. or overall net gain we could close all positions / start over.
[FIFO will kill this just as much or more than no hedge.]

Quote
The same can be said of any hedged position. It can always be replicated by a single net position. Think up any combination you like. For example, the net effect of 6 lots long and 2 lots short is 4 lots long; the net effect of 70 lots long and 100 lots short is 30 lots short.

yes of course, the thing you're not taking into account is taking profits during range times which is 90% of market movement. This is what it was designed for.

If you went to the casino and knew that black would come up 9 times out of 10 on the roulette wheel, would you continue to place your money on red?

How big of an edge does the BJ dealer have over you by taking his cards last?
  • #64
  • Feb 2, 2010 7:04am Feb 2, 2010 7:04am
Quoting pip_seeker
the thing you're not taking into account is taking profits during range times which is 90% of market movement. This is what it was designed for.
lol, you've simply got to admire the innocence, wide-eyed wonderment, and naivety behind this thinking! 'Nedging', the Holy Grail of forex trading!

During 'range times' wouldn't it be simpler and more productive to buy at the bottom of the range and sell at the top? And in a trending market you would hardly want to be long and short at the same time!

You may want to rethink your 'design'
  • #65
  • Feb 2, 2010 11:00am Feb 2, 2010 11:00am
Quoting pip_seeker
Think beyond my preconceptions? Is this my strategy or yours?......
I give up.

Good luck.
  • #66
  • Feb 2, 2010 12:57pm Feb 2, 2010 12:57pm
Quoting pip_seeker
"There seems to be some perverse human characteristic that likes to make easy things difficult." ~Warren Buffet
Well said, based on your ramblings I would not have thought you had such a grasp of your personality.

I went thru the trouble to explain my understanding of hedging and all you perceive is an insult.
What a putz.
  • #67
  • Edited 1:43pm Feb 2, 2010 1:29pm | Edited 1:43pm
Quoting pip_seeker
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.
Well I hope to learn something from you so... can you tell me why you wouldn't simply just close your 1 lot long to "lock in your profits" instead of opening a 1 lot sell in the same spot currency pair to do the same?

You say this nedging strategy is designed for range-bound price movements but, you still have to pick the tops and bottoms to unwind parts of your "nedges", which, as you know, can be fully replicated by single direction orders. You are always net long or net short in order to make your money in a range. And you must still pick a spot that depends on where you think price direction is heading.. to unwind or open nedges to manipulate your net exposure to take advantage of the price direction in a range... like if you're at the top of a range, you'll adjust your nedges to make you net short in order to capture the price movement. again.. all of which is replicated by being un-nedged. Am I interpreting the exection incorrectly here?

Btw, your strategy as presented does not resemble a market neutral strategy if that's what you're implying that it is. In the trading scenarios you gave us, you certainly cared which direction the market was going and made sure to be on the right side of the mkt direction by virtue of adjusting your nedges to manipulate your net exposure at the right moments.
  • #68
  • Feb 2, 2010 6:53pm Feb 2, 2010 6:53pm
Nedging? Nedging? Now I have heard it all. This place has some real classics here.
  • #69
  • Feb 2, 2010 8:50pm Feb 2, 2010 8:50pm
Quoting zarraman
Nedging? Nedging? Now I have heard it all. This place has some real classics here.
Origin: http://www.forexfactory.com/showpost...2&postcount=76
  • #70
  • Feb 3, 2010 8:23am Feb 3, 2010 8:23am
Quoting ric3bowl
Well I hope to learn something from you so... can you tell me why you wouldn't simply just close your 1 lot long to "lock in your profits" instead of opening a 1 lot sell in the same spot currency pair to do the same?
I said it already.

It depends.
1. what is your original equity from opening the positions?
2. Are you net positive or net short? (profit or loss)
3. Are any trades net positive?
4. What is price action telling you?

If we are net long and price rises we can do a couple of things...

1. if the buys are in profit they could be closed.
2. if the buys are a loss a buy could be added to lock in the gain.
3. or overall net gain we could close all positions / start over.
[FIFO will kill this just as much or more than no hedge.]

This is not an excercise to give you the whole strategy. You have minds of your own.

It doesn't hurt me in the least if this strategy is not for you. There are risks in any strategy. This one is no different.

I am not looking for a following or even to be cast as "great" among the people of this board. I could care less and I could disappear at any time. My record of posting here should speak as a testement to that.

The only point I make is that it is possible. The only reason I said it was impossible a fraction ago was to get the naysayers to buzz off. If you add or take away anything from what I said you are creating something different.

This is an exercise in thought. Don't expect me to do all the thinking or divulge the whole strategy.

The ones who use their own minds will get a better understanding of it provided they can read and follow the basic principles I set forth in the thread.

The ones who don't or refuse to use their own minds for their own lack of understanding... what can I say? I have nothing for you.

Either you believe or you don't believe. It doesn't make any difference to me.

If I attacked you or what seemed like an attack. I am sorry it was not my intention. If you look back thru all the posts here you will see that I am attacked by 99% of the people viewing this thread that post.

Put yourself in my position for a moment. Would you continue or just leave?

Surely some arrows flying back an forth are likely to go astray. I'm human just as much as any of you are. It pisses me off when people refuse to think for themselves or to not read the basic principles. They try to rob me of my own thinking.
  • #71
  • Feb 3, 2010 10:52am Feb 3, 2010 10:52am
So what I gather from your strategy is... you will hold on to unrealized losses for the chance of them becoming gains and booking the gains.. since as you say "forex markets are range-bound 90% of the time".

I don't think people are trying to rob you of your own thinking... but I think a lot are skeptical (including me) regarding the economic benefits of nedging. I think there are psychological benefits though..
  • #72
  • Feb 3, 2010 11:36am Feb 3, 2010 11:36am
Quoting pip_seeker
If I attacked you or what seemed like an attack. I am sorry it was not my intention. If you look back thru all the posts here you will see that I am attacked by 99% of the people viewing this thread that post.
........
It pisses me off when people refuse to think for themselves or to not read the basic principles. They try to rob me of my own thinking.
I want to apologize to you before I leave the thread. I wasn't attempting to attack you, criticize your strategy, or rob you of your own thinking.

All I was saying is that it's possible to employ exactly the same strategy as yours, and capture exactly the same pips, without hedging. My previous post #62 (and also those of ric3bowl) explains how to do this.
  • #73
  • Feb 3, 2010 12:00pm Feb 3, 2010 12:00pm
Quoting ric3bowl
I think there are psychological benefits though..
I agree, but that's the only benefit.

But is it really a benefit or just a crutch of false security? How many of us have said in the past when we were less experienced 'the market has to reverse soon!' while we held onto a losing trade hoping it would eventually come right. 9 out of 10 times it might but as everyone knows it's the 10th time, when it doesn't reverse/retrace, which causes the damage.

It's a shame pip_seeker feels he's being attacked, I'm sure that's not anyone's intention except his own (calling people ignorant and a dunce hardly promotes reasoned debate!).

If an idea has merit then it will stand up under scrutiny, most sensible people welcome challenging and skeptical comments and observations which test their theory.
  • #74
  • Feb 4, 2010 9:11pm Feb 4, 2010 9:11pm
IMO (and i'm sure many of you will disagree with me) hedging is useful for position/trend traders. For short term traders it is rather pointless. Until the new rule i would offset a profitable position with an equal size opposite order. When the retracement fizzled and i saw a clear sign of the trend kicking back in i'd dump my hedge (IN PROFIT) and let my trend trade ride to a new high. So, it's not entirely useless if you're exiting your "hedge" in profit. If you turn out to be wrong and the trend breaks down on you, you're still going to walk away a winner, that is if you're skilled at managing your stops.
  • #75
  • Feb 5, 2010 4:38am Feb 5, 2010 4:38am
i hedge gold via aud/usd shorts.... i didnt realize all along all i had to do was buy and sell gold at the same time -_-.....
  • #76
  • Feb 5, 2010 10:16am Feb 5, 2010 10:16am
The point of hedging........
Maybe,.... the hunt for illusionary rainbow!??
Attached Image
  • #77
  • Feb 9, 2010 6:07pm Feb 9, 2010 6:07pm
Quoting BobbyBob
Oh thanks for that link.. So its just some convoluted term that people throw around to make themselves sound smart when in actual fact its pointless.

Exactly...
  • #78
  • Feb 9, 2010 7:46pm Feb 9, 2010 7:46pm
hahaha! My god! Some people are so...naive? thick headed? stubborn?

I remember the first and last time I hedged a few years back. I think I was in the 'hedged' position for about 5 minutes before I thought to myself that this 'hedging' idea was just f*$%@ing stupid. As someone pointed out, you essentially are just closing your position the moment you hedge, and in effect is is pretty much a zero sum game: lose one pip on the long but gain it on the short = net 0

Learned that lesson quickly.

Eventually when I came back home to my lovely country, I got my younger bro into trading. He thought hedging was a good idea and over the course of a year plus I kept trying to explain to him the absolute uselessness of this (in terms of same currency pair). Some exasperating arguments!

I kind of wonder if pip seeker is him trying to reargue his point that hedging makes sense...? I am sure it isn't my bro though as I think he was bright enough to figure it out eventually (haven't heard a peep about hedging since), not saying you aren't bright pip seeker. Remember, I am talking about my brother here.

Anyway, I am with those of you that look at hedging a pointless endeavour.

Thanks for sharing as it was interesting to read everyone's views. and some just tickled me pink! hahaha
  • #79
  • Edited 5:14am Feb 10, 2010 4:55am | Edited 5:14am
Yes, "hedging" the same instrument against itself is utterly useless but please don't write off the entire concept of hedging on this basis.

Hedging (of different instruments) can be a very intelligent and prudent way to mitigate risks under some circumstances, and moreover can also be a very profitable, low risk activity for those traders who are prepared to work hard and long enough to understand the interactions and dependencies of varying instruments and derivates products.

However I am yet to see a consistently proftable hedging method that is confined to two or more spot currencies.... it aint that simple, I'm afraid (and I suspect therefore unlikely to appeal to the majority of readers of these forums who are after the 5 minute solution to becoming a good trader - or "system hoppers" as they are referred to - as opposed to the more realistic 5 year solution)
  • #80
  • Feb 10, 2010 7:06am Feb 10, 2010 7:06am
Quoting BobbyBob
I have been reading numerous posts and article on this topic lately trying to understand the true benefits of hedging, but i still don't get it and see it as a pointless exercise.

Here what i have gathered and understood so far:

1) Hedging reduces risk.
Typical example given: You think EUR/USD will go up, so you long 50 Lots, Short 30 Lots to "hedge position" and if your wrong you will have lost less.

****My understanding - Why not just go Long 20 Lots since the net position is +20, yes you lose less, but you also gain less if it goes up,...
Well, i am new, but just want to share my opinion about hedging too.
I think 'hedging' is really works, but only if you already had a really good based of technical analysis of supports & resistances ( which are the reversal points of the price that will come back to that points again ). So it's like you need to mastering the swing trading system first. Other than that 'hedging' system can help to save your double margin requirements for your double ( or multiple ) Orders.
That's my opinion. Please correct me if i'm wrong.
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