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"Hedging" Revisited

  • #101
  • Nov 15, 2010 3:32am Nov 15, 2010 3:32am
Quoting baron193
IMHO, (and i have not read through all of this thread) what you are forgetting is that you still have to be a competent trader to use hedge techniques
This is because nedging in itself does not give *any* advantage. Any trader who is profitable while using nedging for closing or reversing his trades would make the same profit if he would close his trades the normal way.

And all traders who think their profitability originates from the nedging and who believe nedging is a strategy are really not knowing what they are doing. They are profitable without knowing the reason for it, this means they could also fail without ever knowing why.

Therefore threads like this and the ridiculous false claims from nedgers cannot be allowed to remain unanswered so the next newbie who comes along and reads this has a chance to make an informed decision and not fall into this trap.

Therefore once again: nedging cannot contribute to the profitability of the strategy, it is only an alternative way to execute the same orders in different and more expensive way. Nedging is never needed for any strategy to work and every strategy that is executed by using nedged orders can also be used without the usage of nedging and would give the exact same profit/loss/risk/drawdown, etc.
  • #102
  • Nov 15, 2010 12:44pm Nov 15, 2010 12:44pm
Quoting 7bit
This is because nedging in itself does not give *any* advantage. Any trader who is profitable while using nedging for closing or reversing his trades would make the same profit if he would close his trades the normal way.

And all traders who think their profitability originates from the nedging and who believe nedging is a strategy are really not knowing what they are doing. They are profitable without knowing the reason for it, this means they could also fail without ever knowing why.

Therefore threads like this and the ridiculous false claims...
You have not answered the question though you have just let everybody no the cons of nedging. Your glass is half full. Everybody understands those cons. While letting everybody no the cons of nedging you have naysayed the pros. There are multiple factors in trading besides mathmatical equasions. If you are purely a mathmatical trader it is you who is limited.
Closing a trade with a loss is not the same as opening a new trade to offset your position(mathmatically yes) mentally no and that is the difference. You can close a higher percentage of trades with nedging if probability is on your side because you have more than one chance to make a single trade with multiple offsetting positions a profitable one. More winning trades more drive to make more winning trades (confidence).
My trades are 100% profitable 65% of the time!
  • #103
  • Edited 1:15pm Nov 15, 2010 1:03pm | Edited 1:15pm
Quoting jimmyjames79
Closing a trade with a loss is not the same as opening a new trade to offset your position(mathmatically yes) mentally no and that is the difference.
If this makes a difference mentally then you are not ready for trading real money yet. If you KNOW that it makes no difference then it simply makes no difference! Neither mentally nor otherwise.

Hiding losses with mental tricks (tricking yourself into believing you did not make a loss while you really MADE a loss) is certainly not a recommended strategy. You might eventually get margin called suddenly "out of the blue" and wonder what has happened because you have perfected the lying to yourself to a degree where you completely lost all contact with reality.

A loss is a loss.

The account balance is MEANINGLESS, only the equity can tell you how much money you have left. Locking in a loss with a nedge is not going to make it disappear and the account equity will not change one single cent if you close the nedge.
  • #104
  • Nov 15, 2010 1:12pm Nov 15, 2010 1:12pm
The loss is real, whether you close it or offset it.
If your trading entries and position are determined by your P/L,
you might as well martingale.
  • #105
  • Nov 15, 2010 1:14pm Nov 15, 2010 1:14pm
It is typical of these generalizations, "hedging/nedging can not work" "averaging down can not work" etc etc...
Just because they haven't found a way of using these techniques does not mean someone else haven't.
I used to be part of a private chat where these ways where ridiculed, when i asked them to open a joint demo account for everyone to trade, it only lasted for a short time but guess who was the only profitable trader .
I'm sure I'm not the only one here using occasionally hedging, and I'm not prepared to share how, as I'm a selfish bastard
Biggest joker
  • #106
  • Nov 15, 2010 1:17pm Nov 15, 2010 1:17pm
Quoting 7bit
If this makes a difference mentally then you are not ready for trading real money yet. If you KNOW that it makes no difference then it simply makes no difference! Neither mentally nor otherwise.

Hiding losses with mental tricks (tricking yourself into believing you did not make a loss while you really MADE a loss) is certainly not a recommended strategy. You might eventually get margin called suddenly "out of the blue" and wonder what has happened because you have perfected the lying to yourself to a degree where you completely...
I understand what you are saying, that newbys try this to feel a sence of avoiding loss, and you would be right if that was the only (simplistic)way to employ hedging/nedging...but it's not.
Biggest joker
  • #107
  • Nov 15, 2010 1:21pm Nov 15, 2010 1:21pm
Quoting baron193
I'm sure I'm not the only one here using occasionally hedging
If you believe the nedging contributes to your profit then you are profitable without knowing why.
  • #108
  • Nov 15, 2010 1:24pm Nov 15, 2010 1:24pm
Quoting 7bit
If you believe the nedging contributes to your profit then you are profitable without knowing why.
LOL, don't spend your time worrying about me, boy.
Biggest joker
  • #109
  • Nov 15, 2010 1:37pm Nov 15, 2010 1:37pm
Quoting baron193
LOL, don't spend your time worrying about me, boy.
I'm worrying about all the innocent noobs who will read this thread, believe the nedgers and lose all their money.

And now I am waiting for the shift change because I cannot answer wrong postings and flawed thinking in this thread the whole night.
  • #110
  • Edited 2:53pm Nov 15, 2010 2:12pm | Edited 2:53pm
Quoting 7bit
I'm worrying about all the innocent noobs who will read this thread, believe the nedgers and lose all their money.

And now I am waiting for the shift change because I cannot answer wrong postings and flawed thinking in this thread the whole night.
It's you against the world. Just kidding. Sorry for calling you out personally that was not in good taste. And also to Craig on a previous post.

I actually have trade real money and have nedged now for 2 years in other markets.
Do you Know anything about options trading. ( strangle, straddle) these are all very highly used nedging techniques. And there is no argument that these hedging techniques don't work in the options market. I don't see any reason that these techniques cannot be employed in the forex market with the exception of arbitrage.
My trades are 100% profitable 65% of the time!
  • #111
  • Nov 15, 2010 3:24pm Nov 15, 2010 3:24pm
Quoting 7bit
The account balance is MEANINGLESS, only the equity can tell you how much money you have left. Locking in a loss with a nedge is not going to make it disappear and the account equity will not change one single cent if you close the nedge.

wow I finally found something I can agree with you on. But saying a loss is a loss is flawed... because the minute you open a trade it's usually a loss due to the spread.

If you hold onto a winner long enough it can become a loss.

So how do you decide if it's a loser or a winner?
  • #112
  • Nov 15, 2010 4:20pm Nov 15, 2010 4:20pm
Quoting pip_seeker
So how do you decide if it's a loser or a winner?
This is a question of the chosen (exit-)strategy. Whole books have been written about this topic. Simply locking in the loss to decide this later will not help. There will be a completely new situation when you finally find the time to care about your locked losses and you need a new entry signal and a new exit to re-enter the market and win back the losses anyways.

And closing one side of the nedge to re-enter the market is not cheaper (its more expensive) than being flat and entering with a completely fresh new trade.
  • #113
  • Nov 15, 2010 11:22pm Nov 15, 2010 11:22pm
Quoting 7bit
This is a question of the chosen (exit-)strategy. Whole books have been written about this topic. Simply locking in the loss to decide this later will not help. There will be a completely new situation when you finally find the time to care about your locked losses and you need a new entry signal and a new exit to re-enter the market and win back the losses anyways.
yes, understood... but how does this strategy make it any more or less risky than what is otherwise being discussed here? I've already warned about the inherrant danger in not knowing what you are doing and I keep doing so for obvious reasons. In a way I am kinda surprised by your answer because I was expecting a solid defined number.

If you don't have a solid defined number as a stop in your world of a one directional strategy how will you stick to it?

Quoting 7bit
And closing one side of the nedge to re-enter the market is not cheaper (its more expensive) than being flat and entering with a completely fresh new trade.
That depends on market action.... if you close one side in profit and the market falls or rises in the direction of your existing trades "equity" will rise thus negating any and all costs incurred including swap charges [if any] do that enough times and equity will rise and continue doing so if you manage the dynamic successfully. Easier said than done sometimes but I believe that is the case with any method whether it's one directional or not.

If you close the side in loss, you are thus banking the loss... for obvious reasons it's not necessarily this simple as you know just banking profits with an overwhelming floating loss serves no purpose... it inflates the "balance" but the equity is drained and a margin call ensues. The flip side of this is you take the loss and the market goes further the other way... so it's a double edged blade.

But I believe I have already demonstrated the fact that you can close one side and re-enter and it is typically more efficient than most of these so called "pro" traders I read about in magazines that have around a 50-60% win rate. The only reason they are profitable is because they trade setups that are geared for a 3:1 return or higher. But trying to find these setups is even more difficult than what I do or so I think.
  • #114
  • Nov 16, 2010 12:52am Nov 16, 2010 12:52am
if you have an edge... you don't need to hedge.

if you have to hedge... it means you don't have an edge.

if you don't have an edge, it doesn't matter how you hedge because you will still lose money.

a good deal of people who hedge to prevent losses fail to see that entering a hedge is easy. getting out of that hedge and reversing your losing position is not.

it was your lack of an edge that got you into the mess to begin with. hedging doesn't solve anything. it only prolongs the inevitable. if your edge is solid, you will always make money regardless if you hedge or not. if you don't have a good edge, you will lose money regardless if you hedge or not.

for example: if you are -50 pips now and you enter a hedge to prevent further losses, when will you lift the hedge? if you knew this answer in the first place, you woudn'lt need to be in a hedge. catch me??
  • #115
  • Nov 16, 2010 1:14am Nov 16, 2010 1:14am
Quoting jimmyjames79
Do you Know anything about options trading. ( strangle, straddle) these are all very highly used nedging techniques. And there is no argument that these hedging techniques don't work in the options market. I don't see any reason that these techniques cannot be employed in the forex market with the exception of arbitrage.
Sorry, I'm off the wagon, this is just so wrong.
Composite option strategies have nothing to do with same symbol hedging.
Let's take the simplest example, explain how you would replicate a strangle in the spot market?
The breaking of a wave cannot explain the whole sea.
  • #116
  • Nov 16, 2010 2:36am Nov 16, 2010 2:36am
Quoting thelws
if you have an edge... you don't need to hedge.

if you have to hedge... it means you don't have an edge.

if you don't have an edge, it doesn't matter how you hedge because you will still lose money.

a good deal of people who hedge to prevent losses fail to see that entering a hedge is easy. getting out of that hedge and reversing your losing position is not.

it was your lack of an edge that got you into the mess to begin with. hedging doesn't solve anything. it only prolongs the inevitable. if your edge is solid, you will always make money...
In forex, every trade goes into profit or loss sooner or later. Given enough time it may go into loss, come back to profit, go to loss, return to...
One certainty about price is that it will go up and it will come down. When, for how long, and upto what point we cannot tell. What the hedger does is cut the trade only during the profit phase. In a large majority of the time he survives long enough to cut the other one also in profit.
Occasinally some trades run away and this is where preparation ,study and astute research pays off. Most pull it off.Its not a trade for the faint hearted, careless nor uneducated. (But then, neither is one directional trading.)

Do me a favour and look at your chart. Price is always going up and down.
I think we should spend more of our time discussing options for these rare but potentially damaging run away trades. That hedging works, or that it is more profitable and easier than unidirectional trade strategies is a foregone conclusion.

King.
  • #117
  • Nov 16, 2010 5:04am Nov 16, 2010 5:04am
Quoting pip_seeker
That depends on market action.... if you close one side in profit
No, no no, no! There must be a flaw in your thinking. I don't know what it is, I cannot look into your brain, I can only tell you that your conclusions are wrong. It depends on nothing, there is an equality sign in the equation.

It does not depend on whether one or the other or both sides of the nedge is in loss or in profit, closing one side of the nedge (no matter which one) is the same as buying or selling after having been flat. There is no difference, except during the time you were nedged you were paying swap for nothing and were exposed to the risk of ugly spread spikes that could have blown your entire account.
  • #118
  • Nov 16, 2010 5:06am Nov 16, 2010 5:06am
Quoting thelws
for example: if you are -50 pips now and you enter a hedge to prevent further losses, when will you lift the hedge? if you knew this answer in the first place, you woudn'lt need to be in a hedge. catch me??
I know the answer as demonstrated in the top of page 3 and the results pic I posted a bit later. It was what the OP stumbled upon as well which started this thread in the first place.

I catch you, but you don't catch me that's the difference. The point is I don't care which direction the market goes. I hope it goes the way in which I am "unhedged" but if not I make plans for when it does....

In your world of one directional trading your stop maybe 30pips one day, 50 pips the next, 100 pips a few days later... because each and everytime you get stopped the market then changes and goes your way for hundreds of pips. By the time you get to your 100pip stop level your system doesn't work anymore because the RR is not great enough to over-come your losses.

BTW, we lift the hedge when one side is in profit.... banking a loss is rarely a good idea, but sometimes you have to take a few losses just as anyone else. You can decide how much or how little to unhedge and how much profit you need on one side to pay for swap charges and still close it profitably.

As you can imagine IMHO, there is no right or wrong answer on "when" to unhedge a position. It greatly depends on market conditions.
  • #119
  • Nov 16, 2010 5:21am Nov 16, 2010 5:21am
Quoting pip_seeker
In your world of one directional trading
There is only one directional trading. There is no such thing as bidirectional trading. It does not exist!

if you are long 1 lot and then open an additional short 0.8 lot this is equivalent to doing a partial close of 0.8 lot, leaving only 0.2 lot long on the table.

The whole concept of not "banking the loss" is totally flawed. You have no choice, if there was a loss then there is a loss! You can't undo it or make it smaller or less severe by "not banking" it and locking it into a nedge instead. It won't leave your account this way. It will show up on the account equity no matter whether you "bank" it on the balance or "bank" it in a nedge. The Account equity is always the sum of both, so there can't be any difference.

You can close the losing trade and write down the amount of lost dollars on a piece of paper, this has the same effect. But it also won't help you. You have to wait for the next signal and do another trade. And the best thing to do is burn this piece of paper and don't let it influence your thinking.
  • #120
  • Nov 16, 2010 5:27am Nov 16, 2010 5:27am
Quoting 7bit
No, no no, no! There must be a flaw in your thinking. I don't know what it is, I cannot look into your brain, I can only tell you that your conclusions are wrong. It depends on nothing, there is an equality sign in the equation.
ok my conclusions must be wrong and my thinking is severely flawed because even tho my 1546 trade example is here for you to see and your counter to this 1546 trade example is not here so your thinking must be right? Gotchya. You are now the one who can claim everything just because you say it so must mean it is?

I invite you to read your own quote from page 2.

Quoting 7bit
....since you seem to have already reached the highest level of enlightenment and can disprove or otherwise get rid of any annoying mathematical fact by the mere act of simply claiming it wrong.
I await your 1546 trade recreation with anticipation.
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