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What's the point of hedging?

  • #141
  • Aug 25, 2010 6:52pm Aug 25, 2010 6:52pm
Quoting kingsurfer
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!
I like your thinking, you got it...
  • #142
  • Nov 4, 2011 12:19am Nov 4, 2011 12:19am
Hi there. Its been a long time ago since you posted your comment. Have you found the answer yet? The main thing with hedging is that you should see it as insurance. Lets say you look at the eurusd, so you took a long position with tp 50 pips, sl is @ 20pips. When stop loss is hit, you loose your position. When on the other hand you go short @ 20pips, insread of stop loss the position still stays open. When the markets correct itself, you can sell the short and make profit, and close the open long at either a profit, or as close as possible to the entry.

So, instead of losing, hedging gives you the opportunity to not loose a position and at the same time make a profit.

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,...
--We are products of our own decisions--
  • #143
  • Nov 6, 2011 1:36am Nov 6, 2011 1:36am
Quoting Jpklouw
Hi there. Its been a long time ago since you posted your comment. Have you found the answer yet? The main thing with hedging is that you should see it as insurance. Lets say you look at the eurusd, so you took a long position with tp 50 pips, sl is @ 20pips. When stop loss is hit, you loose your position. When on the other hand you go short @ 20pips, insread of stop loss the position still stays open. When the markets correct itself, you can sell the short and make profit, and close the open long at either a profit, or as close as possible to the...
"When the markets correct itself, you can sell the short and make profit, and close the open long at either a profit, or as close as possible to the entry."

With respect, there is a flaw in your argument. After the first trade, we are both down 20 pips and effectively flat (you are "hedged" while I am out of the market). So while you later close out your respective hedges (at either profit or loss), I simply replicate this by opening and closing other positions, and end up banking exactly the same number of pips. Hence there is no strategic benefit in "hedging". This point has been made repeatedly in this and other threads.

BTW, "lose" is the opposite of win, "loose" is the opposite of tight.
  • #144
  • Nov 6, 2011 1:45am Nov 6, 2011 1:45am
Just jumping in late to this discussion... but I can think of three times a hedge can be useful.

The first is daily open strategy. Open two positions in opposite directions, each with a SL of 100 and a TP of 20.

The end result will be by the end of the day you have either lost 80 pips or made 40. Not great RR unless you look at the daily chart of the EU and notice that most days will have a 20 pip shadow. Your success rate greater than 2:1 so you will end up being moderately profitable if you ran the strategy over a year. It also works on the GBP/USD.

The second useful hedge is on news trading. Open two positions, each with SL of 20 and TP of 40. Odds are better than even you will make 20 pips. However, I have not back tested this... there definitely is a chance you might hit both SL before you hit one TP.

The third is when you have a longer term position open, but you see a shorter term opportunity in the opposite direction. You don't close your existing position... you just open one in the opposite direction. This will actually give you a net savings as well... you only open two positions instead of three.

EDIT: Seems David has beaten me to the punch... there are other ways to implement the above strategies without a hedge, although arguably the third will give you an edge as you will save a spread...and a slightly cheaper way to do something qualifies as an edge, doesn't it?
Kill the ego, or it will kill the mission.
  • #145
  • Nov 6, 2011 2:06am Nov 6, 2011 2:06am
please explain how you save on the spread? i'm only a nubcake and it does not compute.
Congratulations ScalaFX for coming out of the closet!
  • #146
  • Nov 6, 2011 2:30am Nov 6, 2011 2:30am
Quoting nubcake
please explain how you save on the spread? i'm only a nubcake and it does not compute.
No hedge

Open long... close long
Open short... close short
Open long...

With hedge

Open long....
Open short... close short

Does that make sense?
Kill the ego, or it will kill the mission.
  • #147
  • Nov 6, 2011 2:50am Nov 6, 2011 2:50am
Quoting AaronWard
No hedge

Open long... close long
Open short... close short
Open long...

With hedge

Open long....
Open short... close short

Does that make sense?
Rofl. Pls give actual numbers proving a nedge saves spread. You disappointment me
Congratulations ScalaFX for coming out of the closet!
  • #148
  • Nov 6, 2011 2:59am Nov 6, 2011 2:59am
Quoting nubcake
Rofl. Pls give actual numbers proving a nedge saves spread. You disappointment me
Nubs,

Not sure what is confusing about that.

If I have a long term position in EU but I wish to counter trend trade a short term short trade I could open a short and then close it when I got my profit. 2 positions...

Or I could close my long term long... open a short term short....close my short term short and then reopen my "long term" long. 3 positions...

Hedge --Opening 2 positions at 1 pip = 2 pips.
No Hedge -- Opening 3 positions at 1 pip = 3 pips.
3-2=1

So you save 1 pip because you open one less position with your hedge.
Kill the ego, or it will kill the mission.
  • #149
  • Nov 6, 2011 3:02am Nov 6, 2011 3:02am
Quoting AaronWard
No hedge

Open long... close long
Open short... close short
Open long...

With hedge

Open long....
Open short... close short

Does that make sense?
Sorry to say Aaron, it does not make sense. You would make more in the non-hedge example you provided because you catch the long, short and then long move without a hedged position going into drawdown. You might pay an extra spread, but your profit should be greater than the additional spread. What you meant to say was this...

Open long... close long
let price retrace... then open long again

With hedge

Open long....
Open short... close short

The costs of spread is the same (twice). Conclusion: hedging is unneccesary.
  • #150
  • Nov 6, 2011 3:05am Nov 6, 2011 3:05am
Quoting AaronWard
Just jumping in late to this discussion... but I can think of three times a hedge can be useful.

The first is daily open strategy. Open two positions in opposite directions, each with a SL of 100 and a TP of 20.

The end result will be by the end of the day you have either lost 80 pips or made 40. Not great RR unless you look at the daily chart of the EU and notice that most days will have a 20 pip shadow. Your success rate greater than 2:1 so you will end up being moderately profitable if you ran the strategy over a year. It also works...
Aaron,

The overriding premise is that you can only ever be net long, net short or net flat at any point. Whether you "hedge" (and I use the term loosely, because this is not really what hedging is) or simply use a single position makes no difference, either strategically or mathematically. Operationally, hedging can be more convenient, because you can attach a SL and/or TP to each position, reducing babysitting time. But you will pay more swap if hedged at 5pm New York EST; and possibly more spread also, in the situation described by Merlin here.

Some of your ideas (e.g. the news trade) involve a straddle rather than a "hedge", i.e. having two simultaneous pending orders in opposite directions, on a OCO (one order cancels the other) basis. Since both orders can never be open simultaneously, that is different to being both long and short in the same pair, which is what is being debated in this thread.

I don't see why you need to open three positions in your third scenario. I managed to achieve it with two here.
[EDIT] I just noticed that, while I was composing this post, 2+2=4ex made exactly the same point.

Many folk mistakenly believe that "hedging" gives them more options (as in Jpklouw's post), but the fact that you can only ever be net long, short or flat at any given point means that any "hedge" can always be replicated by a single position. There is no strategic advantage; it is an illusion.

David
  • #151
  • Nov 6, 2011 3:09am Nov 6, 2011 3:09am
Ok guys, I think you got me.
Kill the ego, or it will kill the mission.
  • #152
  • Nov 6, 2011 4:13am Nov 6, 2011 4:13am
Quoting hanover
Aaron,

The overriding premise is that you can only ever be net long, net short or net flat at any point. Whether you "hedge" (and I use the term loosely, because this is not really what hedging is) or simply use a single position makes no difference, either strategically or mathematically. Operationally, hedging can be more convenient, because you can attach a SL and/or TP to each position, reducing babysitting time. But you will pay more swap if hedged at 5pm New York EST; and possibly more spread also, in the situation described by...
Dang looks like the SL crew has stepped in. LOL I dont know if anyone has made this point but I have used a hedge only 5 or 6 times live in my 5+ years of trading. And by hedging I mean taking the opposite direction with the same lot size on the same pair. Each time I used it it was for a time out. In other words I wanted to freeze time until I could get back to a market I liked. It is not part of any trading plan or formula it was just a particular need at the moment that allows you too walk away and come back when you are refreshed, not tired, different market conditions, different frame of mind, etc. That is what I have used it for and each time I got out of it what I wanted. So to me that is not an illusion, it is a breather, a freezing of time. That is the one advantage I see of using it.
  • #153
  • Nov 6, 2011 4:37am Nov 6, 2011 4:37am
Quoting nanningbob
Yeah I increased my account 6.5% the last two weeks also, to go along with my 30% over the last 3 months to go with .............. oh yeah I remember making money is not the name of the game, following the brown shirt rules is the only thing that matters. LOL you are a trip.
bob, the concept of increasing your account 6.5% the last two weeks while trading without a stop loss and employing averaging down says alot. Any experienced trader will tell you that you are playing with fire. Trading like that might get you nice returns for a little while until one day you lose it all. Your style is a recipe for disaster.

By the way, you never answered the question asked in the sl thread... do you include floating loss when you post your gains?
  • #154
  • Nov 6, 2011 4:49am Nov 6, 2011 4:49am
As you all know, the market can only be played when its most predictable..if you try and trade when the market is in the random mode you are at a great disadvantage..Hedging allows you a chance to wait for that moment when the market is more predictable..placing single (unhedged) trades is a very bad idea because you are trading in market randomness..and that's most of the time..so just placing the same trades as hedged trades is a bad idea..its just simple logic..the hedged trade can wait till the randomness is more predictable.
entry - 1.29250 s/l 200 pips
  • #155
  • Nov 6, 2011 1:46pm Nov 6, 2011 1:46pm
I found this in another post:

"Profit is determined by the magnitude of which you're net long when price is rising, and net short when it's falling. Hedging, scaling in/out, OCOs, TPs, SLs, entries are effectively nothing more than adjustments to your overall net position. How accurately you make these adjustments relative to market reversals determines your P/L, and is therefore a strategy issue. But how you go about placing the orders is ultimately nothing more than an operational issue.

Hence a strategy can provide an edge, but a same-pair hedge can't. However, assuming you're willing to pay any extra costs that might be involved, a hedge may be the most convenient means of placing the orders needed to implement a given strategy."

That pretty much sums up my view. It is based on simple math and logic; people either see it for what it is, or they don't. You guys can continue the debate til doomsday if you like, but I'm outta here before the beagle team arrives.
  • #156
  • Nov 6, 2011 8:18pm Nov 6, 2011 8:18pm
Quoting bluesteele
HAHAHA I know Nubs I've had a look. Nice chart eh! I like the one above it as well. Literally the blind following the blind.

Beagle team landed. Just waiting for JBS to drop by the kennel.
people might think i follow bob's every move or read every one of his posts and troll him all day long and whatever else.... but the truth is a barely give him a thought and barely bother reading anything he has. sometimes i see things popup in the active threads list and that's how i find my way into different things which includes his nonsense.

so, with that said, i never even saw that other chart until you pointed it out to me. wow.......

anyone wanting to follow bob down the garden path with his 'hedging' and no stops and all the rest that he makes-up to sound good to fools, good luck to you. you will absolutely need it. if you had half a brain you would see that bob is just making shit up as he goes along and making excuses and reasoning that defies logic and reality. churning churning churning.
Congratulations ScalaFX for coming out of the closet!
  • #157
  • Nov 6, 2011 11:41pm Nov 6, 2011 11:41pm
Quoting nanningbob
Dang looks like the SL crew has stepped in. LOL I dont know if anyone has made this point but I have used a hedge only 5 or 6 times live in my 5+ years of trading. And by hedging I mean taking the opposite direction with the same lot size on the same pair. Each time I used it it was for a time out. In other words I wanted to freeze time until I could get back to a market I liked. It is not part of any trading plan or formula it was just a particular need at the moment that allows you too walk away and come back when you are refreshed, not tired,...
Hey bob..like your methods..takes balls to figure out what you have..stick with it, it works..I'll give you a tip that will blow you away..have to wait till I can instant message you. Keep on keeping on..these guys must not be profitable..I've found that profitable traders are not rude but they actually try to help people..Not sure why these people are workin you over but just laff it off..they probably just like to tease..soon as they get profitable their personalities will change from the success.
entry - 1.29250 s/l 200 pips
  • #158
  • Nov 7, 2011 12:19am Nov 7, 2011 12:19am
Quoting 2+2=4ex
Beagles! Attack! LOL
Surely management doesn't allow attacks on members..its not good for business..but I guess anything's possible. I thought rudeness wasn't allowed..hopefully the moderators that are watching my posts will keep an eye on those that get pleasure out of attacking people.
entry - 1.29250 s/l 200 pips
  • #159
  • Nov 7, 2011 12:32am Nov 7, 2011 12:32am
Quoting 2+2=4ex
Oh oh... Beagles! Attack! LOL
why? it's always the fresh members with under 10 posts who follow bob and praise him, and in this case have the extra special consideration of having a secret just for him.

so much of a secret that it had to be announced that there was a secret just to make sure everyone knew there was a secret to be kept secret. genius. totally genius.
Congratulations ScalaFX for coming out of the closet!
  • #160
  • Nov 7, 2011 1:23am Nov 7, 2011 1:23am
Quoting normfx
Hey bob..like your methods..takes balls to figure out what you have..stick with it, it works..I'll give you a tip that will blow you away..have to wait till I can instant message you. Keep on keeping on..these guys must not be profitable..I've found that profitable traders are not rude but they actually try to help people..Not sure why these people are workin you over but just laff it off..they probably just like to tease..soon as they get profitable their personalities will change from the success.
Actually people who think outside the box or think 3 dimensionally are always mocked and made fun of. It goes with the territory because you dont follow the crowd and the crowd simply cannot comprehend why something that isnt 2 dimensional works. One of the reasons I have a thread in which I posted every trade I took over a period of a year and posted each trade before I took it was to prove that it works. The Beagles are all beside themselves in their dire desperation to find fault with something that works. They dont comprehend it, they dont understand it, and all their arguments are straw men arguments. They cant comprehend it working because they cant go beyond the linear thinking process of their little 1 and 2 dimensional world. 3 dimensional thinking involves thinking and 2 dimensional thinkers can never get it. So they use mockery, ridicule, and just plain dishonesty to make their point. However, anyone who can think in a 3 dimensional manner can see right through them and it doesnt bother them. The more they post, the more of a group of fools they make of themselves. They can not concept outside of 2 dimensions and can only think in a straight line. There is no up or down, sideways or any other direction or form of thought process. Just give them their little brown shirts, a fuehrer to follow, a couple of slogans and that is all they can do. It is sad that they show up and have ruined another thread. Too bad for them. Kinda of pathetic actually.
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