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"Hedging" Revisited

  • #61
  • Nov 13, 2010 7:35am Nov 13, 2010 7:35am
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.
this is absolutely incorrect......



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//---

Quoting kingsurfer
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..
hey king.... am i missing something here...... why should the close on friday be 1.45000 ..... and what math would suggest it should......h
to trade and code, keep both simple... no call to impress....h
  • #62
  • Nov 13, 2010 9:41am Nov 13, 2010 9:41am
Quoting hayseed
this is absolutely incorrect......
No, its absolutely correct.

You cannot just claim something that goes against all commonly agreed knowledge and against proven math without actually telling what it is and why. We are not discussing a religion here (or are we?), it has all to do with numbers and everything can be replicated with a simple pocket calculator. If you think the math is wrong you should be able to tell me what exactly it is that is incorrect.

You don't even need to bring a formal proof, all you would have to do is to bring only one contradicting example, this would be proof enough.

If I were you (with such a strong conviction in your belief) I would put some effort into trying to bring this proof because Merlin has awarded 100k$ to the first person who would bring such an example. So far nobody has been able to do this. (because it simply can't be done)
  • #63
  • Nov 13, 2010 10:09am Nov 13, 2010 10:09am
Quoting ecTrade
That's a very limited way of looking at it. Here is a better strategy, which I've incorporated here.
Where in this thread is the example hidden that there exists a real number x that would solve

x - x ≠ 0

because this is the essence of what the "hedgers" are claiming (but obviously without ever being able to bring only one example that would solve the above inequation).
  • #64
  • Nov 13, 2010 11:04am Nov 13, 2010 11:04am
Quoting usw
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.

Well it's not that math doesn't function IMHO... it's just that the maths are trying to compute it while looking at a static market.

The market is not static and because it's not is what makes the "hedge" profitable.

But when I say "hedge" in this sense it's a loose definition thereof, because typically you look at what price does and then you react to it, just like you would in the game of chess. We are not talking 1 trade vs 1 trade here, because the market has a good amount of "play" in it-- it would be pointless to think of it that way.

If you knew the market was range bound irregardless of how big that range is... sometimes a range maybe 30 pips, sometimes it might be 100's of pips. Sometimes these ranges expand outwards. The common demoninator is they come back to the center or very close to it 100% of the time. [ODDS PLAYING puts the advantage in your favor.]

If you somehow winded up with sells on the outer upward edges of the 100-300 pip range and buys on the bottom edges of the range and PRICE moved to the center of the range in which it does sooner or later 100% of the time... this is the time when you would want to close because it's the creme de le creme part for this example. [The maths will be confused by this but that's ok... they are blind anyway. In order to find new things / new ways you have to look for them. Making excuses hasn't ever given you any advantage at all.]

The problem is you normally have sells on the lower edge of the range OR Buys on the upper edge of the range. So the question is how do you change the dynamic to represent what I said above?

To think of it another way... if you have sells on the lower edge of the range [floating loss] and the price is going up. The last thing you would want to do is buy on the outer edge of the range... because we already know the market will travel toward the center of the range sooner or later.

If you enter some buys going down this locks in equity gain. If price goes back up the buys you just placed are now on the upper edge... close them out in profit. Market falls... you buy again.

Every time the market does that it builds equity to get out of the [floating loss] It's typically a slow process but greatly depends on the market dynamic how big and how fast the range is etc.

I have had rocket rides with it as well as white knuckle rides... this is no "kiddie ride". There are risks and they are very real. If you are just joing this thread read the whole thing... your financial health depends on it.

If you don't understand it... by now you "should" see very clearly why you don't.

"Markets were designed to keep traders humble. If you are not then you have the problem--- not the Market or anyone else." ~pip_seeker
  • #65
  • Nov 13, 2010 11:19am Nov 13, 2010 11:19am
Hi, my name is Craig, and I'm a Rageaholic.
This thread, however, is helping me overcome my addiction, if I can sit though a thread as brutally retarded as this one without replying on the main point, I know I'm on the road to recovery.
The breaking of a wave cannot explain the whole sea.
  • #66
  • Nov 13, 2010 11:25am Nov 13, 2010 11:25am
Quoting pip_seeker
If you don't understand it... by now you "should" see very clearly why you don't.
I see very clearly that you still could not come up with a concrete sequence of trades that can not be 100% replicated on any NFA broker without "hedging" with the same trading decisions made at the same times and with the exact same (or even better¹) outcome (profit/loss/risk/drawdown, tick by tick, second by second, cent by cent).

All I am asking for is only one example. (I know that it is difficult for you to find one because it is impossible).

_______
¹) better because you might even save some swap.


.
  • #67
  • Nov 13, 2010 11:27am Nov 13, 2010 11:27am
hey 7bit.....

being 1 lot long and 1 lot short at the same time is equal to close it entirely...

if you have 1 lot long and 1 lot short you are in the market so there is 'market' risk....

if you close it entirely you are out of the market so there is no 'market' risk....

the two scenario's are not equal.....

//---

i'm not entirely sure of merlin's challenge.... are you guaranteeing the 100k...... in any event, i offered an idea in a post above that fullfills the requirements...... it is fully hedged with 2 flat to flat trades and to my mind can not be translated to single direction with exactly the same results.....

i could be wrong and for sure don't need the 100k......

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//---

you might be missing my concern...... the basic math is correct and i agree fully with..... let me say it again, the basic math is correct and i agree fully with.....

it's the terms like 'exactly' or 'equal' that bring my concern....... try to implement it into live trading and the tiny cracks brought on by the market will show..... requotes, bid/ask bounces, liquidity at price, latency and a host of other such quirks......

this can only, only, be seen running in 2 live accounts side by side, one with hedged trades and one with 'translated trades'...... the results will not match exactly given enough trades.....

there is no true way to prove other than live trading..... hedging is not allowed in the states so that door is closed.....

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if i find the time i'll signup with ibfx australia and run a few things in a couple side by side demos..... demo's are poor proof however.....h
to trade and code, keep both simple... no call to impress....h
  • #68
  • Nov 13, 2010 11:43am Nov 13, 2010 11:43am
Quoting 7bit
I see very clearly that you still could not come up with a concrete sequence of trades that can not be 100% replicated on any NFA broker without "hedging" with the same trading decisions made at the same times and with the exact same (or even better¹) outcome (profit/loss/risk/drawdown, tick by tick, second by second, cent by cent).

All I am asking for is only one example. (I know that it is difficult for you to find one because it is impossible)....

I thought you weren't going to address me anymore?

I gave you the proof at the top of page 3 as far as you being able to equally duplicate it with as much as it made or more is beside the point.

I suppose I could ask you to provide me proof of the same time period for which those trades were submitted... but I believe the point is moot because I don't think at this point we are talking about the same thing.

I am talking about a group of trades not just 1 to 1, 2 to 2 or even 5 for 5 for that matter.

Until you're willing to do what I ask you will never understand and that's ok the FX market is plenty big for the both of us.

I'm sure you got better things to do than beat yourself up over this.
  • #69
  • Nov 13, 2010 12:21pm Nov 13, 2010 12:21pm
Quoting pip_seeker
I suppose I could ask you to provide me proof
The proof has been provided already. Its common knowledge and easy to understand, no sane person would ever doubt it. Read the thread again, there are many links that explain it in great depth.

YOU are the one who is claiming something of the caliber of 1+1=3, so YOU are obviously the one who has to bring some proof to support such a bizarre claim.
  • #70
  • Nov 13, 2010 3:14pm Nov 13, 2010 3:14pm
Quoting 7bit
Where in this thread is the example hidden that there exists a real number x that would solve

x - x ≠ 0

because this is the essence of what the "hedgers" are claiming (but obviously without ever being able to bring only one example that would solve the above inequation).
If you are trading in one direction, and the price begins to swing in the opposite direction, rather than know with absolute certainty which way it's going to go, you can open a hedge for so many pips and, when it closes out, you've just lowered the threshold of the previous trade to that level, to where once the price begins to reverse, if it begins where you close the hedge, you are immediately in profit. Or, if not, and the price continues to drop, you have still lowered the threshold by the amount it dropped while maintaining the hedge. So, you are basically in a better position regardless.

Albeit no, if you are trading a hedge 1 on 1 or, "as is," it won't work unless it entails some sort of exit strategy.
  • #71
  • Edited 3:30pm Nov 13, 2010 3:19pm | Edited 3:30pm
Quoting ecTrade
If you are trading in one direction, and the price begins to swing in the opposite direction, rather than know with absolute certainty which way it's going to go, you can open a hedge for so many pips and, when it closes out, you've just lowered the threshold of the previous trade to that level, to where once the price begins to reverse, if it begins where you close the hedge, you are immediately in profit. Or, if not, and the price continues to drop, you have still lowered the threshold by the amount it dropped while maintaining the hedge. So,...
You are missing the point, hedging is taking the opposite trade, which in effect is closing your original trade with the added cost of the spread and the added execution risk. Closing your original trade and entering a new trade in the right direction will always be more profitable then hedging the orignal trade with the added benefit to being able to reenter in the direction of the first trade at a better price then hedging would ever give you. Hedging can never outperform single trades in the same direction purely because of spread and execution risk.

Hedging a long trade with a short trade is just selling the opposite, which is nothing else then closing the original trade with added spread.

Hedging the same currency pair is just misinformed and desperate hope that price returns, that is not a strategy, that is madness.

Hedging is one of those things invented by retail brokers so they can take you for double the spread.

Do I care? I couldn't care less if you want to donate unnecessary capital to your broker. Keep doing it, it makes my broker better capitalised and gives them more funds to take the opposite to my non hedged single direction trades.

Hedging a 5 lot long trade with 5 lot short trade can never outperform a single 5 lot short. You are breaking even on your hedged trade while I am raking it in and I will have a better price to reenter long with 5 lots while you are still at BE. You are sitting at zero with your hedged trade while a trader that knows what he is doing and keeping to single direction trades is making money on both.

Hedging shows that you don't know what you are doing and you don't know where price is going, you might as well remain flat at least you don't have to pay double the spread for your indecision.
  • #72
  • Edited 3:39pm Nov 13, 2010 3:30pm | Edited 3:39pm
Quoting Craig
Hi, my name is Craig, and I'm a Rageaholic.
This thread, however, is helping me overcome my addiction, if I can sit though a thread as brutally retarded as this one without replying on the main
point, I know I'm on the road to recovery.
HAHAHA, wonderful Craig. That takes some serious restraint on your part.

I on the other hand am committed to this retarded thread, sadly.

Quoting 7bit
We are not discussing a religion here (or are we?)
You hit the nail on the head.
I am going to take a (futile) shot at it.

Per ecTrade's strategy:
Quoting ecTrade
That's a very limited way of looking at it. Here is a better strategy, which I've incorporated here.
"my hedging system that I've used very successfully until now works as follows:
Depending on your risk management you start hedging at a level you choose.
I.e. if you choose to start at the 4th level (0.8) and you are in a buy trade then you would hedge by selling half your amount (0.4).
If your original trade (buy) continues to run against you and reaches the next level (0.16) then you cash in you hedging trade (sell 0.4) and start
immediately to hedge half the next level (sell 0.8).
This way you increase your balance every time you cash in your hedge until your original trade comes back and you are in profit.
Of course when it comes back it has to run a few pips more than before to be really profitable because you also have to consider the hedge that goes
against you."

Who can tell me what the difference would be if he instead:
Bought 0.8, sold 0.4, and sold then sold 0.4 more. Then finally when the market moves in your direction again, buy 0.8.

First, the "hedging" example.
Buy 0.8 at 1.3050. Market goes against 10 pips to 3040. Floating loss of $80.
Leave long open. Open "hedge" by selling 0.4 at 3040.
Market falls another 10 pips to 3030. First order's floating loss:$160, floating profit:$40. Net -$120.
"then you cash in you hedging trade (sell 0.4) and start
immediately to hedge half the next level (sell 0.8)"
Market falls another 10 pips. Floating profit: $80, floating loss:$240, realized gain: $40. Net:-$120
Now you determine the market has bottomed at 3020. You realize the gain on your latest short for $80 dollars.
Market rallies to 1.3060 and your floating loss turns to a $80 profit and you square out. You realized 2 $80 dollar gains and 1 $40.
Net change in equity: $200 ($80 + $80 + $40)

Now intrabook netting, i.e. FIFO:
Buy 0.8 at 1.3050. Market falls 10 pips. Floating loss of $80
Sell half of open position, now you are net long 0.4. Market falls 10 more pips, floating loss of $120.
You square out at 3030: realized loss of $120.
You determine the market has now bottomed at 3020. Buy 0.8 at 3020.
Market rallies to 1.3060, and you close out your position. Realized gain of 40 pips:$320
Net change in equity: $200 ($320 - $120)

But what do the maths know anyway.
  • #73
  • Nov 13, 2010 3:53pm Nov 13, 2010 3:53pm
Hopefully this will illustrate why closing one trade when "hedged" doesn't work. Refer to the attached screen shot. During this huge run, I had a trade on that scaled out close to what turned out to be only the 1st 1/3 of the run. The remaining portion went the distance. While there were several "hedges" at short signals, none worked out and the losses sustained were small (< 1%) while the long made a whoping 12+%.

By entering a short (ie neutral in the market) I was able to allow the long to continue while still locking in profits by scaling out. If I can done what 7 bit suggests and closed out the trade it would've made maybe 2.5% and since there was no resuming long price action signal I would've missed out on that huge run. This single long made enough profit to wipe out several losses or trasaction costs. Whats more it wasn't the only one this year.

This is why simply closing the trade doesn't make sense to me. Mathematically speaking or not, holding the opposing position until the signal either confirms or fails, is WAY more profitable than exiting one position and opening another.

At the point of each short entry there was ABSOLUTELY no way to know at the time if the short would fail or confirm. THUS I hold both positions. "Hedged" or not it makes more sense than the math you guys keep bringing up.
Attached Image (click to enlarge)
Click to Enlarge Name: hedge example.gif Size: 32 KB
  • #74
  • Nov 13, 2010 4:00pm Nov 13, 2010 4:00pm
Quoting gspajon
Mathematically speaking or not...
I think I'm going to join Craig and try to abstain from rageahol.
It was a futile attempt indeed.
Gspajon, please work out what the difference would be if you simply used the net position as in my example above.
  • #75
  • Nov 13, 2010 4:04pm Nov 13, 2010 4:04pm
Quoting cloggie
You are missing the point, hedging is taking the opposite trade, which in effect is closing your original trade with the added cost of the spread and the added execution risk. Closing your original trade and entering a new trade in the right direction will always be more profitable then hedging the orignal trade with the added benefit to being able to reenter in the direction of the first trade at a better price then hedging would ever give you. Hedging can never outperform single trades in the same direction purely because of spread and execution...
The price fluctuates up and down all the time. So, if you open a hedge in the opposite direction and it closes out and the price swings back up, you are that much further ahead. Also, if you opt to close the first trade and open one in the opposite direction, you still have to pay for the spread. So there's no way of getting around that.

Or, if you are that certain the price has reversed and started a major trend (that's a big "if"), it would be best to close out the current trade and open one in the opposite direction, and there's no point in opening a hedge. In which case it's a matter of discretion.
  • #76
  • Nov 13, 2010 4:14pm Nov 13, 2010 4:14pm
Quoting gspajon
Hopefully this will illustrate why closing one trade when "hedged" doesn't work. Refer to the attached screen shot.
I doubt it... I mean how many examples and in depth explanation do we need when all they do is run back to the calculator to figure their static example on a dynamic price chart?

I give them a statment that is time stamped that they could plot out on a chart to see what I did that fully represents that it is possible. "But no we want you to do it... we expect handouts we are lazy mathematicians.

Meanwhile there excuse is " we have already proven it our way... there is only one way to trade the forex market ... case closed."

So another example.... wait for it.... wait for it... wait for it....

The excuse is coming.....

ps. To the maths --- not once did I ever say there isn't another way to do something that is the only reason I am interested in discussing this. But the topic of the thread is "hedge-revisted"... so lets please stay on topic. If you are unwilling to do what I ask... best of luck to you.
  • #77
  • Nov 13, 2010 4:33pm Nov 13, 2010 4:33pm
Quoting pip_seeker
ps. To the maths --- not once did I ever say there isn't another way to do something that is the only reason I am interested in discussing this. But the topic of the thread is "hedge-revisted"... so lets please stay on topic. If you are unwilling to do what I ask... best of luck to you.
Then don't say math somehow doesn't apply in this case. If you read my example, the net change is the same. So it's not that your method doesn't work, it's just pointless. And as has been pointed out, wasteful, in that you pay extra spread and swap costs. A br0ker trick that the regulatory agencies put a stop to.
  • #78
  • Nov 13, 2010 5:02pm Nov 13, 2010 5:02pm
OK...I give up. I think I'll join Craig as well. I asked a simple question at the beginning of this thread. Is there some reason NOT to trade in this fashion.

Other than incurring minor transaction costs...which are clearly paid for in the method, I have not been convinced NOT to trade this way.

I continue backtesting and forward testing on the demo account. I'm currently working on year 2007, which is proceding similarly to 2008-currrent. The results are a reasonable win rate of about 60% with an overall ROI of close to 90-100+%.

Controversial or not, I've chosen my course of action...I hope you guys will resolve you differences.

For my way of thinking the math is usefull but only in its proper place. The market is NOT made of calculators, it is made of people. With few exceptions, most of those people do NOT think or trade in terms of math accuracy or formulas. They trade with their emotions and thus do not and will never consistently react in the way the math forumlas say they should. If that were the case we'd all be rich...the math guys first of course.

Thank you to all who have provided your input. I'm sorry this discussion digressed into such an obviously emotional discussion.

PS I wonder if there was a math forumla that could've predicted that?
  • #79
  • Nov 13, 2010 5:06pm Nov 13, 2010 5:06pm
Quoting gspajon
OK...I give up....

Order yourself the book "futures, options and swaps" by Kolb and Overdahl. It is very technical guide to the futures market, but it very eloquently details what hedging is and how to hedge in your trading, same currency hedging is quickly and efficiently discounted.

But eh, don't let the professionals get in the way of a good retail myth, what do they know.
  • #80
  • Nov 13, 2010 5:14pm Nov 13, 2010 5:14pm
Quoting gspajon
For my way of thinking the math is usefull but only in its proper place.
The only problem is that this is EXACTLY where math is useful. In calculating profit and loss. Yes, you're right though, the only reason not to trade that way is the extra transaction costs. If you're happy with that, then the thread has served its purpose.
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