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What's the point of hedging?

  • #121
  • Aug 21, 2010 9:28pm Aug 21, 2010 9:28pm
1. Which trader captures more pips?

Both capture the same, 200 pips.

2. Which trader pays more in spread costs (assuming both use the same fixed spread br0ker)?

Both pay the same spreads, 2 times.

3. Which trader pays more in swap, if 5pm EST occurs between B and C (assuming the br0ker makes money by paying the trader less swap on carry-trade-directional trades than he charges on opposite-direction trades)?

Trader X pays the difference between payment and earned interest.
Trader Y doesn't pay interest.

4. How does trader X benefit, profit-wise, from his hedge?

Trader X does not benefit from his hedge, he loses the swap difference.

In fact, if after closing his first buy, trader Y sells at B and close at C, he pays 1 more spread and the full swap cost, but he would make 20 pips more than trader X.
  • #122
  • Aug 21, 2010 9:39pm Aug 21, 2010 9:39pm
Quoting Trad3r
1. Which trader captures more pips?

Both capture the same, 200 pips.

2. Which trader pays more in spread costs (assuming both use the same fixed spread br0ker)?

Both pay the same spreads, 2 times.

3. Which trader pays more in swap, if 5pm EST occurs between B and C (assuming the br0ker makes money by paying the trader less swap on carry-trade-directional trades than he charges on opposite-direction trades)?

Trader X pays the difference between payment and earned interest.
Trader Y doesn't pay interest.

[b]4. How...
I will never understand Hedging by small retail traders because they can dispose off their holding at any time with minimal cost.

But I definitely understand purpose of hedging if one is holding capital assets that cannot be disposed off immediately or accounts receivable / payable or Loans Receivable / Payable or Inventories, etc. that cannot be liquidated in shortest possible time. The best way for the investors (or debtors) holding such assets or liabilities is to minimize (or eliminate) associated risk by hedging (entering into contra-deals).
The Thief of Wall Street
  • #123
  • Aug 21, 2010 11:21pm Aug 21, 2010 11:21pm
Quoting hanover
4. How does trader X benefit, profit-wise, from his hedge?
.
you are correct in that perfect scenario......

//----

as long as we're just making up scenario's, suppose both x and y traders placed their short at b in the exact steps you mentioned.....

then seconds later the price shot to the moon..... which trader gets the margin call......

now we can drag stoplosses into the picture, hopefully they were used, but stops are not guarenteed..... any number of common occurences could negatively impact trader y..... power outage, computer crash, internet down, on and on.....

bottom line is, yes of course in the utophian a-b-c-d trades, trader x might profit-wise fare less than trader y......

trader x might be some laidback lamo multiple timeframe ea tradin hayseed that will gladly forego a few pips for both peace of mind and less complex code.......

//---
//---

personally it is beyond me to begrudge either x or y for their methods...... keep an open mind......h
Attached Image
to trade and code, keep both simple... no call to impress....h
  • #124
  • Edited 12:36am Aug 22, 2010 12:14am | Edited 12:36am
Quoting hayseed
you are correct in that perfect scenario......

//----

as long as we're just making up scenario's, suppose both x and y traders placed their short at b in the exact steps you mentioned.....

then seconds later the price shot to the moon..... which trader gets the margin call......

now we can drag stoplosses into the picture, hopefully they were used, but stops are not guarenteed..... any number of common occurences could negatively impact trader y..... power outage, computer crash, internet down, on and on.....

bottom line is, yes of course...
First, hanover has not said that trader Y sells at B to close it at C, he has said that trader Y close his position at B and he won't open another buy position till C, so in this case trader Y take the money and he doesn't open another buy position cause price doesn't reach C, so trader X doesn't lose money.

But let's see what happens to trader Y: trader Y doesn't close his buy position, so he can win more with the subsequent rise of the price BUT he loses the same with the sell position that he has opened at B AND he paids twice the spread, so in your case trader Y doesn't win more than trader X, instead of this, he loses more because he paids 2 times the spread.

But there is more, much more... When you see such spike in real market is always because a new release, if there is a new release the broker ALWAYS wide his spread, so... Do you lose the same with your sell position that you win with your buy one? NO!, you lose more with the sell, and in real trading you have more chances to get a margin call if you are hedged that if you aren't.


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Hedging has no sense in forex, no sense man, it doesn't matter through what angle you look at it.

  • #125
  • Aug 22, 2010 2:15am Aug 22, 2010 2:15am
Good to see that this has provoked some interesting discussion.

The point is simply this: every same-pair hedge can be broken down to a net position (long, short or flat), and can therefore be replicated by a single position (or no position), at every point along the way. Whenever X alters his hedge, Y simply alters his net position to reflect the exact same exposure, and banks the same pips.

Of course I agree that hedging can be a tool of convenience, e.g. the short position from B to C affords X TP and SL orders (where the NFA rules don't apply) that give him a set-it-and-forget-it convenience that trader Y would need an EA to replicate. But, everything else being equal, there's no advantage P/L-wise in the hedge.

This is obvious when you see it, but if you read through the thread links I gave back in post #115, you'll find an amazing number of supposedly experienced traders who apparently think that hedging, by giving them the opportunity to close down both positions in profit, delivers an advantage that a non-hedge can't; and that the NFA's recent 'no hedging' rule can't possibly be worked around.
  • #126
  • Aug 22, 2010 2:16am Aug 22, 2010 2:16am
I made a video on one approach to hedging just the other day. One of the ways I trade. Check it out here
  • #127
  • Aug 22, 2010 2:26am Aug 22, 2010 2:26am
Quoting Ace284
I made a video on one approach to hedging just the other day. One of the ways I trade. Check it out here
Nice video IMO, and a very good explanation about the MM concepts involved.
  • #128
  • Aug 22, 2010 2:29am Aug 22, 2010 2:29am
Quoting hanover
Nice video IMO, and a very good explanation about the MM ideas involved.
Thanks! Means a lot coming from a senior contributor here at FF
  • #129
  • Aug 22, 2010 3:52am Aug 22, 2010 3:52am
Quoting Ace284
I made a video on one approach to hedging just the other day. One of the ways I trade. Check it out here
Sorry but I have to criticize your video, as you say if you weren't completely sure if the price was going up or down, why don't use a sell stop and a buy stop instead of hedging? You place a sell stop below the support and a buy stop above the trendline break. You pay only one time the spread and you win more because you have no other loser position.

But the most important is that it doesn't matter what order will hit because you will be in the right side of the market, you will be with the trend. I still not see any advantage in hedging sorry, it's completely absurd using it IMHO.
  • #130
  • Aug 22, 2010 7:11am Aug 22, 2010 7:11am
Quoting Trad3r
First, hanover has not said that trader Y sells at B to close it at C,
hey trad3r...... you are absolutely correct.... that was one of my 2 errors.....

//---
//---

mq5's single position scheme can be replicated in mq4...... and it's actually my preference now......

when thinking of only 1 or 2 positions on a single timeframe the hedging/opposing trades debate is of course a dead issue, at least in my mind....

when someone advances multiple ea's with hundreds or thousands of open trades across many timeframes which orders on 1 pair might effect not only each other but also the orders on other pairs, the required code gets a tad more indepth.....

desire for simplicty of code or perhaps my laziness had me placing opposing trades.... nfa has changed all that......

//---
//---

please keep in mind there are some people, at least 1, that routinely post their real account trades , sometimes numbering hundreds per timeframe per chart.....

if forced to close my short from the weekly chart that has been running for 3 months just because a long signal on the hour chart comes along, it skews my weekly results..... those results effect future trades.....


and there was far more to it than my simple example..... nfa has spoken......

//----

done here...... yall take care......h
to trade and code, keep both simple... no call to impress....h
  • #131
  • Aug 22, 2010 1:15pm Aug 22, 2010 1:15pm
Quoting Trad3r
Sorry but I have to criticize your video, as you say if you weren't completely sure if the price was going up or down, why don't use a sell stop and a buy stop instead of hedging? You place a sell stop below the support and a buy stop above the trendline break. You pay only one time the spread and you win more because you have no other loser position.

But the most important is that it doesn't matter what order will hit because you will be in the right side of the market, you will be with the trend. I still not see any advantage in hedging sorry,...
First I just want to say that I like the fact that you questioned my video. Should never take anyone words or insights at face value, especially when it comes to forex.

But sorry your wrong. Your looking at hedging in a one dimensional way. There are more factors to consider such as:

-where is the SL going to be
- wheres the take profit
-The fact that I saw the bullish pennant.
-Will the trend line be respected to the pip (its usually not so that has to be taken into account
- Look at the distance between my SL for the short trade and the take profit for the long trade

Okay, lets assume I did what you suggest. Place a sell order below the support and buy above the Trend line. Where would the SL orders be? (Look at charts Below) Risk to Reward is significantly lower.

* I risked 0.5% on each trade as I said in my video

If I had just placed a long position above the TL as you sugested I would have made less than my risk. (0.5*0.75 = +0.38%)

Instead I lost 0.5% on the short and made (0.5*5.8 = +2.9% on the long using the hedge)
Net Gain = 2.9% - 0.5% = +2.4%

Like I was saying, there are so many more factors to consider. Now that I have an added 2.4% on my account, the next trade I can risk another 0.5% and not worry about losing everything I made and end up in the negative.

Nothing is certain. I saw what I saw in the market and traded according to experience.

Listen, you might be wondering why I went through the trouble of making all these charts and long post. Quite frankly its because a year ago I had the exact same opinion as you and it took a while for it to sink in. And im making money with it just like the live example below. Chances are you won't change you mind about hedging because honestly I wouldn't have in the past.

Quoting Trad3r
But the most important is that it doesn't matter what order will hit because you will be in the right side of the market, you will be with the trend.
Hypothetically you'll be on the right side but that doesn't mean you'll be more profitable. Does your entry allow for maximum profit?..Just some things to think about it...
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  • #132
  • Aug 22, 2010 1:22pm Aug 22, 2010 1:22pm
This hedging argument never ceases to amaze me. As far as I'm concerned it seems like it accomplishes nothing but giving your broker a few more pips.
Look Sharp/Trade Tight
  • #133
  • Aug 22, 2010 5:03pm Aug 22, 2010 5:03pm
Quoting PayTheLimit
This hedging argument never ceases to amaze me. As far as I'm concerned it seems like it accomplishes nothing but giving your broker a few more pips.
I agree. but many people just don't "see"it. Eventually if they keep trading at one point they will have an aha moment.... and they will realize it.
REcently there was a buddy here had a "hedging strategy". He was amazed when he saw how simple trading gets when you just close your position insted of hedging it and open a clean position in the oposite direction with the diference between lot size of the "would be" two positions.

Experienced people in here tried to explain, some people just don't get it. But again most people lose money in forex anyway...
This discusion would be very constructive if anybody would just explain a "hedging strategy" right here on this thread and we will show it there is no "edge" in hedging, and ALL THE HEDGING can be replicate in a simple position long or short.
  • #134
  • Aug 22, 2010 5:26pm Aug 22, 2010 5:26pm
Quoting ms119
Sorry for my question but could you describe your example in more detail or with pictures? What is "spot forex"? Where do I get this Binary Option combo?
You can trade both Binaries and Spot forex via IG Markets. Spot forex is pretty much what most people here on FF trade....to give you the short and sweet answer.
Binary Options Trader
  • #135
  • Aug 22, 2010 8:44pm Aug 22, 2010 8:44pm
In reply to posts #131, 132, 133.

Let's clarify.

P/L is determined by how heavily my net position is long, short or flat, relative to the direction that the market is moving at that time. Where, and to what extent, I choose to adjust my net position is a strategy issue. In post #131, the positions of the entries and SLs relative to the trendlines and pennant are strategic considerations.

Orders (entry, SL, TP, etc) are merely vehicles to adjust net position. Whether I same-pair hedge, or achieve the identical net position by another means, is an operational issue, and in itself has no impact on P/L (from which standpoint posts #132 and #133 are perfectly valid, IMO).

Viewed in that way, a strategy can provide an edge, but a same-pair hedge can't. However, a hedge may be the most convenient means of placing the orders needed to implement a given strategy.

Trad3r, your answer (post #121) to the question I posed was 100% correct.

OK, I'm done here now.
  • #136
  • Aug 22, 2010 9:34pm Aug 22, 2010 9:34pm
The effectiveness of hedging can be seen in these trades ..
Attached File(s)
File Type: pdf HedgeSystem.pdf   57 KB | 785 downloads
  • #137
  • Aug 22, 2010 10:50pm Aug 22, 2010 10:50pm
Quoting hanover
In reply to posts #131, 132, 133.

Let's clarify.

P/L is determined by how heavily my net position is long, short or flat, relative to the direction that the market is moving at that time. Where, and to what extent, I choose to adjust my net position is a strategy issue. In post #131, the positions of the entries and SLs relative to the trendlines and pennant are strategic considerations.

Orders (entry, SL, TP, etc) are merely vehicles to adjust net position. Whether I same-pair hedge, or achieve the identical net position by another...
Your exactly right. I'm glad you highlighted the words "strategy" and "operational" to show the difference.

Quoting hanover
Viewed in that way, a strategy can provide an edge, but a same-pair hedge can't. However, a hedge may be the most convenient means of placing the orders needed to implement a given strategy.
Sums up the entire answer to the thread.
  • #138
  • Aug 23, 2010 10:58am Aug 23, 2010 10:58am
Dear Hanover,

In the diagram u gave above it is very clear that you can achieve the same result with a single position instead of two or more seperate trades at the same time (less spreads and swap).
But trading is not only about salvaging spreads.

Assuming the interval between the two long trades was enough for another 47 trades, you now have to remember where you exited the first trade, how many pip in profit or loss it was, where you intented the TP and SL etc. Then you have to compute these into all the trades going on at the same time to decide their new stop loss, tp etc.

To complicate futher, you had to temporarily close trade # 23 and take partial profit in trade #41 in other to exit a losing trade @ 2pm yesterday. What was that ticket # again?

Trade # 4 used Jacko method, while that nice pin bar is being played J16 style. Now you must exit trade #4 before u close the pin bar trade and compute all these to decide the new take profit for your second long trade. I have delibrately left out different lot sizes. All these are non issue with hedging enabled.

So now does Jacko's method work? You need atleast 4 different accounts to trade clearly. Talk about the NFA protecting retail traders from spreads!

King.
  • #139
  • Aug 23, 2010 1:36pm Aug 23, 2010 1:36pm
Quoting kingsurfer
But trading is not only about salvaging spreads.
For me, trading is about maximizing risk-adjusted net return.

Like I said in post #135, a hedge may be the most convenient means of placing the orders needed to implement a given strategy.

If a trader is willing to pay whatever additional costs might arise as a result of using the convenience of a same-pair hedge, then (assuming his br0ker is not NFA-regulated) that's his prerogative.
  • #140
  • Aug 25, 2010 3:37pm Aug 25, 2010 3:37pm
Hedging does not work...hedging cannot work...hedgers are retarded... I tried it and lost my house. But hedging buys you time. What time? Don't hedge.

Instead,
Take losses... Repeatedly... Remove the hedge and take the loss... Set a stop loss... Yes... the loss... losses...more loss... Don't fight it...Don't do anything other than taking a straight loss.... Enjoy the loss... welcome it... Love losses. Losses make your account grow!

Profit?
Don't take profits...Trail it... Take only half off...Average up...fight it.... Why are you taking profit?... I know someone who took profit and lost his account... Wait for it to retrace... better still hedge it!

Taking lossses consistently, regularly and at the earliest opportunity makes your account grow. But don't make the mistake of taking profits, hedge it instead.

But remember STOP LOSS IS THE BROKER'S BEST FRIEND.

Use your head.

More pips to you.

King.
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