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Hedging

  • #1
  • First Post: Sep 4, 2004 7:29am Sep 4, 2004 7:29am
Can someone out there please explain a simple system for hedging.Anyone out there use hedging instead of stops?
  • #2
  • Sep 8, 2004 8:42pm Sep 8, 2004 8:42pm
hedging is a whole other animal, and most likely not applicable to you. if you are trading Cash Forex with a broker like Forex.com, FXCM etc., you have no reason to hedge. you could hedge instead of using a stoploss, but what is the use of that?

hedging is when you try to profit from the basis change between the cash and futures market. a currency hedge could entail buying EURUSD in the spot market, and at the same time selling a December Euro Futures contract. you would profit from the change in basis:

cash market price - futures market price = basis
Relax and be happy.
  • #3
  • Sep 9, 2004 12:03pm Sep 9, 2004 12:03pm
Merlin,

If hedging is of no use in the cash spot forex market, why do brokers like FX Solutions and CMS have it as a feature on their platforms?
  • #4
  • Sep 9, 2004 1:30pm Sep 9, 2004 1:30pm
Quoting vdeluca
Merlin,

If hedging is of no use in the cash spot forex market, why do brokers like FX Solutions and CMS have it as a feature on their platforms?
Could it be for fund managers that don't want to show many losses to their customers at the end of each month? Instead of closing a position at a loss, you could hedge it, win from the hedge, and hopefully, when the pair turns around, win from the original trade too.
  • #5
  • Sep 9, 2004 2:00pm Sep 9, 2004 2:00pm
Quoting vdeluca
Merlin,

If hedging is of no use in the cash spot forex market, why do brokers like FX Solutions and CMS have it as a feature on their platforms?
thats a great question. maybe they know something we dont...
Relax and be happy.
  • #6
  • Sep 9, 2004 2:06pm Sep 9, 2004 2:06pm
i was thinking about it, and the only way to hedge in the cash market is to buy either an option or a futures contract in conjuntion with your cash market trade. ie i could buy EUR/USD and also buy a Euro Futures put option. maybe brokers like CMS have the hedge feature for options traders, not the cash market traders.
Relax and be happy.
  • #7
  • Sep 9, 2004 2:57pm Sep 9, 2004 2:57pm
Quoting merlin
i was thinking about it, and the only way to hedge in the cash market is to buy either an option or a futures contract in conjuntion with your cash market trade. ie i could buy EUR/USD and also buy a Euro Futures put option. maybe brokers like CMS have the hedge feature for options traders, not the cash market traders.
No, the "hedge" feature on FX Solutions and CMS allows you to have two opposite positions open in the same currency pair instrument at the same time, i.e. you can be both long and short EUR/USD, with separate stops and limits attached to each position. So, what could this be useful for that a regular stop-and-reverse could not accomplish
  • #8
  • Sep 9, 2004 6:37pm Sep 9, 2004 6:37pm
Quoting vdeluca
So, what could this be useful for that a regular stop-and-reverse could not accomplish
somebody please call them and ask what the heck this for!
Relax and be happy.
  • #9
  • Sep 10, 2004 3:12am Sep 10, 2004 3:12am
OK ... I have been thinking : say you go long on eurusd.youset a stop loss at x. however instead of a stop loss you have a sell order.The market continuse to go against you and your sell order is triggered .Now you have two open positions in the same pair. your 2nd position is protecting your first , it does not matter how far your first position tanks because the 2nd position makes up for it.Eventually it must turn around.Once the market goes above x you could exit the 2nd position.

Needs more thought about parameters etc .

Is this feesable ?
  • #10
  • Sep 10, 2004 6:31am Sep 10, 2004 6:31am
It is feasible... but why not just exit the long position and reenter it when the price goes above x? It's exactly the same.

I still think hedging makes sense from a "marketing" point of view.


Bonete

Quoting pips
OK ... I have been thinking : say you go long on eurusd.youset a stop loss at x. however instead of a stop loss you have a sell order.The market continuse to go against you and your sell order is triggered .Now you have two open positions in the same pair. your 2nd position is protecting your first , it does not matter how far your first position tanks because the 2nd position makes up for it.Eventually it must turn around.Once the market goes above x you could exit the 2nd position.

Needs more thought about parameters etc .

Is this feesable ?
  • #11
  • Sep 18, 2004 3:47pm Sep 18, 2004 3:47pm
Quoting vdeluca
No, the "hedge" feature on FX Solutions and CMS allows you to have two opposite positions open in the same currency pair instrument at the same time, i.e. you can be both long and short EUR/USD, with separate stops and limits attached to each position. So, what could this be useful for that a regular stop-and-reverse could not accomplish
VD
I am with FX Solutions and am afraid I use the hedging capabilty on the platform just about on a steady basis. Unlike an automated system I work the markets and like to pick tops and bottoms (all the bad things you are not supposed to do). Stop and reverse allows you to take losses up and down at random and may or may not be profitable. I do not use STOPS. Dirty words in my vocab. Another bad habit as will everyone attest to. To each his own.
Trying some standard stops etc. for trading after being somewhat successful over 3 months from mid April my account went into the red by about $250.00 on Fri 13th Aug/04. Since that time I went back to what works for me. Tops and bottoms with Elliott Wave and Candle reversal patterns. As of close Friday Sep 17th I have brought the account back 33% on the equity side (that is in hand cash) and the balance is at +92% but I have to work it out of the market. For Sept I have 73 closed trades (5 losses) which is 93% money for slick. I still have 28 open trades. These are all moderate trades using only less than 25% margin of my account at any given time.
While hedged your money is free to go ahead and trade and add to your equity. At obvious turns in market pull all the opposite side and let the market run back to you. Work it up or down in waves. For me it works because I work the markets. I have learned and applied.
What do the brokers know? They get an absolute bucket full of commisions whlel you are making money. Any broker who does not offer the service is losing big time. That is why you are seeing more and more offering direct hedging. I am not uncertain that FXCM has that ability now. CMS with VT platform has it. Oanda has it. And there are more.
It is a bitch to be on the fence and you have to be available to work the computer whenever. I enjoy work, it is a challenge and fun besides. There is no doubt in my mind that I will be able to make my living soon from my initial $5,000 account. I just don't have the 6 figures to bury for a 40% return like the best trading systems out there.
Have fun and give er a go. It may or may not be for you.

slick 60
  • #12
  • Sep 19, 2004 9:57am Sep 19, 2004 9:57am
Quoting vdeluca
Merlin,

If hedging is of no use in the cash spot forex market, why do brokers like FX Solutions and CMS have it as a feature on their platforms?
Hedging is very usable on some occasions :

1) if you use both long term and short term positions.
e.g you buy eur/usd for a position trade.
Meanwhile you sell eur/usd on intraday basis during retracements, to book in some extra profits.

2) in order to protect your position from a margin call.
e.g you sell eur/usd when daily & weekly & monthly technical indicators are heavily overbought. But you don't know exactly when the eur/usd will drop. It can be now, or it can move up to several hundreds of pips before it finally drops. So you can buy the eur/usd at a certain level to protect your short position, until the eur/usd drops back.
That's a technique that i-knowindices uses a lot.
  • #13
  • Sep 19, 2004 1:08pm Sep 19, 2004 1:08pm
So if applied correctly , hedging has the ability to greatly reduce losses .
Instead of a stop loss , hedge the position .Obviously this will not work as well in a trending market or if the prices are at historically high or low levels.Avoid placing the order around pivots.Perhaps place them just beyond support/resistance levels.After all you want the pair to come around sooner rather than later.

This really appeals to me.I HATE LOSSES!There will be times when a stop loss will be inevitable , but if you are able to sit at your computer and monitor the situation ,with some patience and no doubt practice , losses could and should be greatly reduced.

I shall put this to the test on a demo.I;ll let you all know.
  • #14
  • Sep 20, 2004 6:55pm Sep 20, 2004 6:55pm
Quoting pips
I HATE LOSSES!
my friend, this is the statement of a hedger, not a speculator.
Relax and be happy.
  • #15
  • Sep 20, 2004 11:35pm Sep 20, 2004 11:35pm
I may well get converted yet!
  • #16
  • Sep 21, 2004 8:54am Sep 21, 2004 8:54am
Quoting slick 60
VD
Stop and reverse allows you to take losses up and down at random and may or may not be profitable. I do not use STOPS. While hedged your money is free to go ahead and trade and add to your equity. At obvious turns in market pull all the opposite side and let the market run back to you. Work it up or down in waves. For me it works because I work the markets. slick 60
Slick, your post left me confused -- exactly how are you using the hedge function that is any different from a stop-and-reverse? When you "pull all the opposite side," is not this the same as reversing your position?
Example:
EURUSD is at 1.2100/1.2103. With the hedge, I would go long @1.2103 and short @1.2100. If the price declines to 1.2050, I close the long position and keep the short open; if price advances to 1.2150, close the short and keep the long open. At this time, I am down by the 3 pip spread.

Without using the hedge, I would place entry stop orders @1.2150 and 1.2050, with "if done" contingent stops at the same prices. The non-executed order together with the activated contingent order then performs the role of a stop-and-reverse. At the time of execution, again, I am down by only the 3 pip spread.

So, I ask again, what does the hedge allow you to accomplish that you could not do otherwise using conventional entry and stop loss orders?
  • #17
  • Sep 22, 2004 8:10am Sep 22, 2004 8:10am
Quoting vdeluca
Slick, your post left me confused -- exactly how are you using the hedge function that is any different from a stop-and-reverse? When you "pull all the opposite side," is not this the same as reversing your position?
Example:
EURUSD is at 1.2100/1.2103. With the hedge, I would go long @1.2103 and short @1.2100. If the price declines to 1.2050, I close the long position and keep the short open; if price advances to 1.2150, close the short and keep the long open. At this time, I am down by the 3 pip spread.

Without using the hedge, I would place entry stop orders @1.2150 and 1.2050, with "if done" contingent stops at the same prices. The non-executed order together with the activated contingent order then performs the role of a stop-and-reverse. At the time of execution, again, I am down by only the 3 pip spread.

So, I ask again, what does the hedge allow you to accomplish that you could not do otherwise using conventional entry and stop loss orders?

VD
I do not go long and short the same pair at the same time as you illustrated above. I attempt to get on the right side of the market and do not use stops. I wish I could hit the turns a little better (working on it) but when the market goes against me I decide where to put the hedge on in place of a stop. 20-40 pips, where ever. Now I am holding a losing position and a winning position no matter which way the market moves. I will remove one side at the next turn taking profits (may just be a swing trade in a big up or down move) and let the losing position become less. If the move is short term I will hedge again and continue building equity and a larger balance. At some point I will totally work the losing position back to a winner or pull the plug when I have had enough. Depends on life getting in the road of trading if I decide to fold. That explains my post of 73 closed trades this month with only 5 losses. I decided to take the loss because I was going away, working my business or whatever.
I posted 93% wins which is correct (but figures can be misleading). Dollars for and against were
73 trades; 68 winners and 5 losers. Gains in dollars $1,888.29, losses $179.58.
That still has a 90% end for slick.
It is a lot of work and you have to be in front of the computer a lot and enjoy it. The thing is, I decided to take the loss not letting the bandits run my STOPS. Still cannot get used to giving the team that has the ball my playbook. They have to score! Just does not sit well with me.
Hope this helps.

slick

PS - please note this is on a small account and we are still in the deep learning mode and most of these trades are very conservative small lots. Soon will be kicking some big time A--! What the heck, Merlin said I could say ASS!
  • #18
  • Sep 22, 2004 11:14am Sep 22, 2004 11:14am
Quoting slick 60
What the heck, Merlin said I could say ASS!
slick, buddy, youve earned the right to say just about anything you want
Relax and be happy.
  • #19
  • Sep 22, 2004 11:47am Sep 22, 2004 11:47am
Slick, thank you for walking me through, I apologize for being so dense. Your system sounds great -- unfortunately I cannot yet quit my day job to use it.
  • #20
  • Sep 22, 2004 12:33pm Sep 22, 2004 12:33pm
Quoting slick 60
VD
I do not go long and short the same pair at the same time as you illustrated above. I attempt to get on the right side of the market and do not use stops. I wish I could hit the turns a little better (working on it) but when the market goes against me I decide where to put the hedge on in place of a stop. 20-40 pips, where ever. Now I am holding a losing position and a winning position no matter which way the market moves. I will remove one side at the next turn taking profits (may just be a swing trade in a big up or down move) and let the losing position become less. If the move is short term I will hedge again and continue building equity and a larger balance. At some point I will totally work the losing position back to a winner or pull the plug when I have had enough. Depends on life getting in the road of trading if I decide to fold. That explains my post of 73 closed trades this month with only 5 losses. I decided to take the loss because I was going away, working my business or whatever.
I posted 93% wins which is correct (but figures can be misleading). Dollars for and against were
73 trades; 68 winners and 5 losers. Gains in dollars $1,888.29, losses $179.58.
That still has a 90% end for slick.
It is a lot of work and you have to be in front of the computer a lot and enjoy it. The thing is, I decided to take the loss not letting the bandits run my STOPS. Still cannot get used to giving the team that has the ball my playbook. They have to score! Just does not sit well with me.
Hope this helps.
slick
PS - please note this is on a small account and we are still in the deep learning mode and most of these trades are very conservative small lots. Soon will be kicking some big time A--! What the heck, Merlin said I could say ASS!
Not quite understand what you are doing---

1. -- You open a trade that you think is going north (trade A) and if it does, just go with it no stops?

2. There are no stops but another ORDER (Trade B)20-40 (whatever) pips for short.

3. Trade A goes south , you pick up a short position on that currency with Trade B and it off it goes south for its run.

3. Trade A is at this point is losing but it stays open (you have a long Trade A and short Trade B going on as per #3).

4. At some point you take profit on the southern Trade B (it gets closed out, you have a method of exiting, trailing stop or whatever).

5. The bad northern Trade A is still there and so you wait for the market to turn north (In the meantime you probably opened up ANOTHER Trade C with waiting Trade D hedge.)

6. At some point the market heads north and the gainer is enough to give sufficient profit from the difference between Trade A and already closed Trade B. You now close out Trade A.

Is this it?
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