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"Hedging" Revisited

  • #41
  • Edited 10:22am Nov 12, 2010 9:50am | Edited 10:22am
Quoting whatfx
ok. would very much like to know how you get along and your final 'system' for hedge trading.

at present i believe there is no benefit on hedging and it can be very dangerous indeed. the only benefit i can think of is the psychological advantage one might get from it .
OK...so clearly I should not use the word "hedge". All this juvenile chatter reminds me of the crap that Merlin started when I asked a simple questions about Nial Fuller and pin bars. ENOUGH! Amazing how childish people get with a single word.

Lets call it "opposing positions trading" shall we? So here are my criteria based on 3 years of data that I have collected so far. This is designed and meant to be traded on day candles. I have NOT tested it on any higher or lower time frames...you all are welcomed to test on your own if you like. Perhaps you will even contact me and we can compare results.

Signals used:
Bullish:

  1. Piercing Line
  2. Bullish Engulfing Bar
  3. Hammer
  4. Bullish Harami (with following close above real body of Harami)

Bearish:

  1. Dark Cloud
  2. Bearish Engulfing Bar
  3. Shooting Star
  4. Bearish Harami (with following close below real body of harami)

If I see any of the above signals I will enter a long on the bullish or short on the bearish if it meet these validation criteria:
Longs:

  1. The last short was confirmed (ie market closed below the low of the signals)
  2. There at least 3 lower lows since the last CONFIRMED short signal
    -----2 lower lows are acceptable during a strong bullish trend.

Short:

  1. Last long signal was confirmed (ie market closed above the high of the signal)
  2. There are at least 3 higher highs since the last long signal
    -----2 higher highs are acceptable during a strong bearish trend.


Exit:

  1. 3 closed candles after any signal that fails to confirm (sideways market)
  2. close below low of long signals or above high of short signals
  3. Longs: con confirmation of short signal
  4. Shorts: on confirmation of long signal


Scale out: Only if price is 127% of risk (measured in pips) on close of opposing signal. Otherwise hold or exit as above.

As I've previously stated, I enter "opposing trades" based on the signal with NO directional bias. I have often seen that the market will trend, give and opposing signal, then continue in the original direction. The above method has me scaling out to lock in profit at the opposing signal (just in case the market turns around), then if the market continues I close the opposing trade and continue with the reduced original trade.

Again the numbers I have from the back testing are pretty impressive no matter what the chatter or presumed math says. I am still forward testing this and invite any who wish to join me. The more validation the better.

  • #42
  • Nov 12, 2010 9:56am Nov 12, 2010 9:56am
Yeah! Random, gambling, jump, margincall, lose, suck, lick and now ... HEDGING

Quoting gspajon
Amazing how childish people get with a single word.
forget about tomorrow, just steal away into the night
  • #43
  • Nov 12, 2010 10:00am Nov 12, 2010 10:00am
As a casual observer of the thread...
3 years of data, with trade entries on daily candles...
you can't have had that many trades to examine.

I realize you do have to start somewhere,
and the backtesting must be somewhat difficult.
  • #44
  • Nov 12, 2010 10:01am Nov 12, 2010 10:01am
Quoting 7bit
Why? This is the whole point of this discussion: it can be replicated EXACTLY. Not almost, not somehow similar, it can be replicated absolute EXACTLY!

Merlin is not in danger of losing the 100k and Hanover is not in danger of having to leave the forum. They are basing their bets on undoubtedly proven math. Unless the universe changes and math and logic have no meaning anymore they simply CANNOT lose.

Why is this so difficult to accept for some people?

you are incorrect......h
to trade and code, keep both simple... no call to impress....h
  • #45
  • Nov 12, 2010 10:05am Nov 12, 2010 10:05am
Quoting pip_seeker
I already posted the scenario at the top of page three. It is up to you to recreate it...

This isn't about making someone leave FF. Hell I could leave any time...
Bugger. I spend way too much time on forums like this one, and I was looking for an inducement to leave. LOL.

Anyway, thanks for your reply. It appears that I've misunderstood your intentions completely, and I apologize. I agree 200% with your comment about being constructive and not tearing others down.

Given the way that you've interpreted my post, this will probably seem awfully strange, but I don't really care whether I'm right or wrong. Like everybody else, I'm simply in pursuit of truth and profit, FX-wise. Heck, I didn't invent math, and ultimately math is the infallible arbiter on all things MM. For better or worse, I try to break things down to their first principles, in the hope of understanding WHY they work as they do.

Nobody's saying that hedged trading can't be profitable, only that it's possible to replicate every hedged scenario without the hedge. Maybe that's being overly pedantic, and anyway, I'm starting to repeat what I said back in post #4.

I can't find a specific scenario that you've posted, hence I'll use the original poster's:

"Example trade: long on (pick your pair) on a daily price action signal, hammer or piercing line. Hold trade until an opposing price action signal, say a dark cloud or shooting star."
I would likewise enter long, at the same point. We are both long 1 lot, and collecting the same pips.

"At the opposing signal close 1/2 the long and enter a short."
Instead of closing 1/2 the long and entering a short, I would simply close the entire long position, and open 1/2 lot short. Both the hedged and non-hedged positions are now net short 0.5 lots, and will make the same P/L (if we ignore costs), whatever path price happens to take.

"If the short signal confirms close out the rest of the long and hold the short until the next opposing (this time long) signal"
At this point I simply enter a further 0.5 lots short. Now my holding is 1 full lot short, just the same as the original poster's.

Hence both ways capture the same pips, and in that sense will work equally well. That's all that I was trying to say. Since the hedged scenario can be exactly replicated, the strategy itself must lie outside of the hedge. 7bit explained it more clearly than I did.

If you're happy with the hedged approach, well, of course that's fine. If we ignore any costs (swap + spread), both approaches will bank the same P/L.

Now I'll go and stick my head in a cold bathtub, which will hopefully ease the swelling. Again, I apologize. And I wish you every continued success with your trading.
  • #46
  • Nov 12, 2010 10:12am Nov 12, 2010 10:12am
Quoting Intu
As a casual observer of the thread...
3 years of data, with trade entries on daily candles...
you can't have had that many trades to examine.

I realize you do have to start somewhere,
and the backtesting must be somewhat difficult.
More than you might think actually. I was surprised myself:
Pairs tested = EUR/USD & GBP/USD
2008 = 98 total trades 62 winers, 36 losers, (63.27% win rate)
2009 = 95 total trades 63 winers, 32 losers, (66.32% win rate)
2010 = 99 total trades 54 winers, 44 losers, (55.10% win rate) - to date there are four outstanding trades:
Short: EUR/USD entered 11-5-10 at 1.4038
GBP/USD entered 11-6-10 at 1.6138
Long: GBP/USD entered 11-10-10 at 1.6125

Yesterday i closed a long for a 0.84% loss But the current open short position on the EUR/USD is more than enough to cover that loss.
  • #47
  • Nov 12, 2010 10:30am Nov 12, 2010 10:30am
Quoting gspajon
Pairs tested = EUR/USD & GBP/USD
2008 = 98 total trades 62 winers, 36 losers, (63.27% win rate)
2009 = 95 total trades 63 winers, 32 losers, (66.32% win rate)
2010 = 99 total trades 54 winers, 44 losers, (55.10% win rate)
  • #48
  • Nov 12, 2010 10:56am Nov 12, 2010 10:56am
Quoting hayseed
you are incorrect......h
With respect, H, I think you're missing something obvious.

If I'm hedged X lots long, and Y lots short, simultaneously in the same pair, then how is that different to simply being either X–Y lots long (if X>Y), Y–X lots short (if X<Y), or out of the market altogether, if X=Y. What other possibilities are there?

When the hedged trader adds or subtracts positions, what is to stop a non-hedged trader from replicating this, by merely adjusting his net position accordingly, at exactly the same points along the way?

What hedged position(s) can't be replicated in this manner?

Being out of the market is better than being hedged, if your br0ker charges more swap than he pays.

Hedging offers convenience, in that it's generally easier to get one's head around the notion of the separate trades, and of course (in MT4) each trade can have its own SL and TP. But you and I are both programmers: we could easily write a script or EA to automate all of this, if we didn't want to babysit the open trades.

With the NFA's decision to ban hedging (in the same pair), this was a massively controversial issue, and a few months back there were a number of threads on the topic (e.g. here here here here here). Merlin, smittens4212, pipmutt, Craig, 7bit and I (and others) did our best trying to explain how replication offered a workable solution to the NFA restrictions, but it became massively frustrating repeating the same explanation over and over to folk who somehow just couldn't see it. I guess that same frustration spills over every time I see a thread on this topic, hence my inappropriate reply to pip_seeker

If only I had the self-control to stay well away from these hedging threads! OK then, I promise that this is my absolute last post on this topic...... but then as Mark Twain said "It's easy to quit smoking. I've done it a hundred times".
  • #49
  • Nov 12, 2010 11:15am Nov 12, 2010 11:15am
Quoting hanover
Bugger. I spend way too much time on forums like this one, and I was looking for an inducement to leave. LOL..
yeah you would never get off that easy with me.... hehehe.


Quoting hanover
Anyway, thanks for your reply. It appears that I've misunderstood your intentions completely, and I apologize. I agree 200% with your comment about being constructive and not tearing others down.

Given the way that you've interpreted my post, this will probably seem awfully strange, but I don't really care whether I'm right or wrong. Like everybody else, I'm simply in pursuit of truth and profit, FX-wise.
Well that's what everyone should be here to do as well but unfortunately we live in an imperfect world where everyone is hung up on themselves. My whole point is how are new things discovered?

Sure in the hell not by having a piss poor negative attitude. You have a choice... in 1yr, 2yrs, 5yrs you may look back upon this day with regret.

If you continue to think in terms of math in terms of the consensus... keep thinking that way... because we need a good 80% to disagree with us to remain profitable.

If Edison would have said crymany this is just too hard... we'd be all scratching ourselves in the dark.

Quoting hanover
Nobody's saying that hedged trading can't be profitable, only that it's possible to replicate every hedged scenario without the hedge. Maybe that's being overly pedantic, and anyway, I'm starting to repeat what I said back in post #4.
I simply disagree with it. What I posted in this thread has everything you need more or less to get a good general idea of what I did. If you are not willing to put away in a box and seal it what you currently think you know to be correct you will never see it.

With that said I won't just disperse 5+ yrs and thousands of man hours I spent working on what I thought at the time would never work myself... but I did it just for the hell of it. If you apply yourself you may just learn something new.



Quoting hanover
If you're happy with the hedged approach, well, of course that's fine. If we ignore any costs (swap + spread), both approaches will bank the same P/L.

Now I'll go and stick my head in a cold bathtub, which will hopefully ease the swelling. Again, I apologize. And I wish you every continued success with your trading.
Well there's really no need for appologies but I accept it all the same. I currently don't use a hedged approach. I was forced a while back to drop it as well as run with FIFO accounting methods courtessy of the NFA. So I developed a different approach.

Just like in cat skinning... there is more than 1 way.

[No cats were actually skinned in the making of this post. ]
  • #50
  • Nov 12, 2010 12:03pm Nov 12, 2010 12:03pm
Quoting pip_seeker
To shed more light on what I said about mass destruction to your account is you still have to have timing down. Because at some point you will need to close one side of the hedge. If the pair continues in the direction of the trades you closed out the hedge didn't do you any good.

So with that said you can't just blindly trade the market. Equity && Margin become your biggest sight glass as to how well or poorly you are doing.

There is nothing wrong with it, there are advantages to it provided you know and understand what you are doing... like...

Ok, pip_seeker got it right .. hedge trading is safer for the trader......
  • #51
  • Nov 12, 2010 12:09pm Nov 12, 2010 12:09pm
Quoting hanover
With respect, H, I think you're missing something obvious.

hey hanover..... the obvious i see and agree 100% with.... both you and merlin are 100% correct in the obvious math..... again, i agree with you both.....

it's the term 'exactly' that will cause the not so obvious problems in real life trading..... similar to something looking exactly mathmatically perfect in the labratory yet not quite so well in the field.....

one of the reasons i used to have so many live ibfx accounts was to field test things like this in real live trading...... field testing has a peculiar way of wrecking perfect lab math........

//---

people have likened a pure hedged postion to be flat or out of the market.... this is incorrect.... if you have hedged positions you are very much still in the market..... it is very possible to be fully hedged and receive a margin call or worse..... all the while being fully hedged.....

//---
//---

What hedged position(s) can't be replicated in this manner?

if someone were to open a no-swap type account and short the audjpy and open a ibfx account and buy the audjpy they would be effectively purely hedged while accurring interest from ibfx.....

close both trades when the ibfx trade is -100.00.... 2 trades and 2 trades only.....

//---

and of course i might be missing something obvious, but how do you replicate that exactly.....h
to trade and code, keep both simple... no call to impress....h
  • #52
  • Nov 12, 2010 1:23pm Nov 12, 2010 1:23pm
Quoting Mordumdive
Ok, pip_seeker got it right .. hedge trading is safer for the trader......
No.

It does not add any safety nor does it in any other way influence the profit, the loss or the risk.

Please see the links to the other threads and postings mentioned near the beginning of this thread where this has been discussed and explained in every detail.
  • #53
  • Nov 12, 2010 1:26pm Nov 12, 2010 1:26pm
Quoting hayseed
you are incorrect......h
Which part of what I said is incorrect and why?
  • #54
  • Nov 12, 2010 2:06pm Nov 12, 2010 2:06pm
Quoting gspajon
OK...so clearly I should not use the word "hedge".

.........

Again the numbers I have from the back testing are pretty impressive no matter what the chatter or presumed math says. I am still forward testing this and invite any who wish to join me. The more validation the better.
The terminology is not the issue, at least not for me.

Anyway, I've made the points that I wanted to about the math that underlies hedging. I don't want to hijack your thread any further, so I'll simply move on.

It doesn't surprise me that you're getting positive test results from D1 candle patterns. Out of all of the patterns and techniques that I've tested myself, one of the most reliable setups involves an outside or engulfing body candle that points to trend resumption, following a pullback, on higher TF charts.

Good luck with your forward testing. The candle patterns will either validate your theory, or not, irrespective of any MM.

@hayseed, @pip_seeker: Thanks for your replies. Points taken. Like I said, I'm moving on.
  • #55
  • Nov 12, 2010 5:11pm Nov 12, 2010 5:11pm
Consider this well known scenario in forex:

Market closed on Monday at 1.41000. Price reached 1.44000 at close of Thursday. Retraced to 1.42000 by close of Friday. Familiar?

Mathematically it should close on Friday at 1.45000. Not so, 7bit? Hanover?
But this is Forex u would say!

That's why the score in forex remains Hedging 1 : Maths 0.

Infact 2:0 by my signature.

King.
  • #56
  • Nov 12, 2010 9:58pm Nov 12, 2010 9:58pm
Quoting kingsurfer
Consider this well known scenario in forex:

Market closed on Monday at 1.41000. Price reached 1.44000 at close of Thursday. Retraced to 1.42000 by close of Friday. Familiar?

Mathematically it should close on Friday at 1.45000. Not so, 7bit? Hanover?
But this is Forex u would say!

That's why the score in forex remains Hedging 1 : Maths 0.

Infact 2:0 by my signature.

King.
You, sir, have won the thread. A gold star for you!
  • #57
  • Nov 12, 2010 11:35pm Nov 12, 2010 11:35pm
Quoting kingsurfer
Consider this well known scenario in forex:

Market closed on Monday at 1.41000. Price reached 1.44000 at close of Thursday. Retraced to 1.42000 by close of Friday. Familiar?

Mathematically it should close on Friday at 1.45000. Not so, 7bit? Hanover?
But this is Forex u would say!

That's why the score in forex remains Hedging 1 : Maths 0.

Infact 2:0 by my signature.

King.

Man oh man... I wish I could have found the words to say that a couple of pages ago.... absolutely brilliant way of putting it.

That was something I forgot to say... is that just because the "bar" is one size doesn't mean it only traveled the distance a single time. It could have gone up, back down and back up again.

If you close the floating loss as the maths suggest there is no guarantee that you wouldn't just open another floating loss. This is where the maths lose out. Well hopefully a few of them will finally get it after this.

Very good way of putting it KS!
  • #58
  • Nov 13, 2010 3:09am Nov 13, 2010 3:09am
Quoting pip_seeker
Man oh man... I wish I could have found the words to say that a couple of pages ago.... absolutely brilliant way of putting it.

That was something I forgot to say... is that just because the "bar" is one size doesn't mean it only traveled the distance a single time. It could have gone up, back down and back up again.

If you close the floating loss as the maths suggest there is no guarantee that you wouldn't just open another floating loss. This is where the maths lose out. Well hopefully a few of them will finally get it after this.

Very...
Tell me what happens when you look at the hourly charts, or even better, the tick charts. Does math cease to function there as well? Maybe you shouldn't trust this "math" fellow when he tells you to close out that floating loss? Seems like a shady character. Please go on, your theories are intriguing to me.
  • #59
  • Nov 13, 2010 5:38am Nov 13, 2010 5:38am
Quoting kingsurfer
Consider this well known scenario in forex:

Market closed on Monday at 1.41000. Price reached 1.44000 at close of Thursday. Retraced to 1.42000 by close of Friday. Familiar?
What has this to do with "hedging"? either you want to be long during all this time then you have a long or you want to be short then you have a short or you dont want to be in the market then you close your trade.

being 1 lot long and 1 lot short at the same time is equal to close it entirely. There is not the slightest difference, not one single cent, except the swap which you pay with the "hedge" and not pay if you just close the trade.
  • #60
  • Nov 13, 2010 5:48am Nov 13, 2010 5:48am
Quoting 7bit
being 1 lot long and 1 lot short at the same time is equal to close it entirely. There is not the slightest difference, not one single cent, except the swap which you pay with the "hedge" and not pay if you just close the trade.
That's a very limited way of looking at it. Here is a better strategy, which I've incorporated here.
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