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Hedging vs Stop Loss

  • #1
  • First Post: May 29, 2014 4:11am May 29, 2014 4:11am
Hi guys,

I have something in mind about hedging a position versus setting a stop loss for it.

Say for example I open a long position for GBPUSD and it goes against me. Now, instead of setting a stop loss and having the trade hit that SL, I open a short position when it reaches the price point where I would have set a SL.

The net loss will always be equal to that and when I open other trades and cover that net loss I'll simply close the position and be done with it.

Psychologically speaking, I think hedging the position is a better thing to do.

What do you guys think?
  • #2
  • May 29, 2014 4:48am May 29, 2014 4:48am
Unfortunately, not all brokers accept Hedging. And I don't see how opening an opposite position is going to help you. You will be in the balance. What I mean is that when you open two opposite position for same pair, is same as not opening a position at all because it will be flat.
  • #3
  • May 29, 2014 5:31am May 29, 2014 5:31am
it is difficult to manage a same currency hedge: a matter of correct timing; when the pair starts coming back into profit for the first, you need to close the second. When you do, you remove the hedge.

The most telling thing to watch is your margin percentage: You margin will only support so many active trades: You have doubled the number of trades you need for each currency pair.

Have you thought of using different correlated pairs? Say you watch the gbp/usd. You could also watch the gbp/aud. when the time is right.I buy the one. When the time is right I sell the other . Right now, the gbp/usd is stagnant to slowly losing, but the the GBP/AUD is dropping quickly, so that my profits from it far outweigh the losses from the first. Not only will the turnaround of the GBP still bring me profit, about 20% of the time, both pairs are moving into profit at the same time! That is impossible with the same pair hedging.. You have wider play in the market, the advantage of hedging (usually), and the possibility of having both sides of the hedge make you money at the same time.

Treat each pair independently as though the other did not exist. Enter when you think you will profit, one at a time. The hedging will occur without you even thinking about it!

for the same number of trades, the same room in your margin, you are covering twice as many pairs of currency.
  • #4
  • May 29, 2014 5:47am May 29, 2014 5:47am
Hedging is a fast way to lose your money. All you need is an entry and an exit. If your trade hits stop this means that it was a bad entry, nothing more.
  • #5
  • May 29, 2014 6:02am May 29, 2014 6:02am
Anyone who says either way will fail is wrong. Both approaches can be highly profitable.
tradewith60
  • #6
  • May 29, 2014 6:16am May 29, 2014 6:16am
I don't use SL orders from at least 3yrs - and never will.

Stop Loss is the way to drain your account into the sink of losers, get drowned into revenge trading and start to buildup conspiracy theories that "brokers have huge organized alliance to get my 200 dollars of my account...mimimimimimimi" - get real....

I always do low-leveraged (account margin heavily calculated and considered) progressive hedging if the trade goes against me.

I do not use USA-regulated shitty brokers that do not allow hedging. Such brokers have been regulated to do FIFO and no-hedging with the explanation (quoted from FCA): "to protect the interests of the small customers". Exactly the opposite is the end effect (very deliberate lobbying actions that benefit brokers and institutional players) - by forcing you to close your "first enter" trades (at profit or loss) and no hedging is totally screw your chance for even 5% of success. The biggest FX losers I know are the ones that always "read the chart" and "have skill edge". The profitable players focus 90% of their attention on the risk/money management - this is where the hedging is a wonderful tool.

Consider using progressive hedging with 10-15% hedges from the main position size at regular intervals (pips distance) in the opposite of your profitable direction - it would dampen significantly the eventual loss - and if the trade returns to profitable zone - hedges would only drain a bit of your eventual profit (no harm done - profit is still profit). Works wonderful on daily time-frames with the "cable" FX pair (personally tested). Never had more than 0.25-0.50% loss on a trade.

Hedges are even more effective if the price moves widely more into the loss zone of your main trade - more progressive counter-orders would kick-in and you cover your wrong entry with minimal loss (when you decide - avoid setting hard SL at broker's account).

Just use your head and avoid "mantras" like "hedging is dangerous" (nobody really explains why....ever).

Happy trading!
  • #7
  • May 29, 2014 6:21am May 29, 2014 6:21am
There is a good strategy which I follow for years. You can see this strategy into my open trades on my real account. Good luck Gabriel Urse
GRU Capital
  • #8
  • May 29, 2014 6:23am May 29, 2014 6:23am
As with most questions it depends!! It depends on whether you are a scalper, daytrader, swinger or position trader. It depends if you have one position or multiple positions, it depends how sure you are of you entries and levels, it depends whether you are allowed to by law... it depends...

If the question is "Is hedging a better alternative for a stop-loss for a single trade", I would say "invariably no" - the chances are you will lose at least a few pips in spread and swaps.

BUT, if you are building positions in the long term trend, then taking opposing positions to your main trades on short/medium term pullbacks can be extremely profitable. And if the long term trend changes, then you are building in profitable positions from the start of a new trend that will compensate for the trades that are reducing in size.
  • #9
  • May 29, 2014 6:28am May 29, 2014 6:28am
Quoting michaelpelly
Consider using progressive hedging with 10-15% hedges from the main position size at regular intervals (pips distance) in the opposite of your profitable direction - it would dampen significantly the eventual loss - and if the trade returns to profitable zone - hedges would only drain a bit of your eventual profit (no harm done - profit is still profit). !
Hm sounds nice in theory but I disagree...

When do you close the hedge?
How many times do you open and close new hedges (from draw down to break even) before accepting you're on the wrong side?
How much do the small multiple hedge losses on your winning trade add up to?

I think it's a fine idea and thanks for sharing, but whatever way you cut it.. A hedge is just a new trade in the opposite direction. The good thing about a SL is that at least in this hole, you "stop" digging, pardon the pun.

You need to consider the worst case scenario.
like totally failure brah
  • #10
  • May 29, 2014 6:57am May 29, 2014 6:57am
Quoting michaelpelly
I don't use SL orders from at least 3yrs - and never will. Stop Loss is the way to drain your account into the sink of losers, get drowned into revenge trading and start to buildup conspiracy theories that "brokers have huge organized alliance to get my 200 dollars of my account...mimimimimimimi" - get real.... I always do low-leveraged (account margin heavily calculated and considered) progressive hedging if the trade goes against me. I do not use USA-regulated shitty brokers that do not allow hedging. Such brokers have been regulated to do FIFO...
Micheal Pelley has been around a long time: you should listen to what he says, ( and what I say) and make up your own mind.

It's your money: your choice: your fault if you lose it all. That simply does not have to happen.


"The profitable players focus 90% of their attention on the risk/money management "

Here is where you no doubt will get readers who ask, "But - How do you calculate risk /reward, without fixed stoploss and Take profit levels?"
Answer : That is not risk/money management. As soon as you enter into a trade, you realize, (if you look) that all that stuff is out the window.

Some People confuse this type of trading with the "Martingale method" a system of gambling mathematically proven to lose you all your money in the long run.

Money management involves the studied knowledge of the groups of trades you have open with the goal of maximizing the profit therefrom, and taking into careful account the margin you have in terms of number of trades, you have left.
The idea is not to lose in the next trading session all the money you made in this one:
Money management involves managing all of your trades in a systematic way with an eye to long term profit.
  • #11
  • May 29, 2014 7:01am May 29, 2014 7:01am
Quoting Rap Skallion
{quote} Micheal Pelley has blah blah blah blah blah vblahofit.
tshh. You're ruining it
like totally failure brah
  • #12
  • May 29, 2014 7:05am May 29, 2014 7:05am
Quoting simonb
{quote} tshh. You're ruining it
I do not use stop loss for years and it is much better, but this depends about your balance and money management, namely the risk you choose to have in trading.
GRU Capital
  • #13
  • May 29, 2014 7:12am May 29, 2014 7:12am
Quoting PureProfit
{quote} I do not use stop loss for years and it is much better, but this depends about your balance and money management, namely the risk you choose to have in trading.
agree ..
like totally failure brah
  • #14
  • May 29, 2014 7:16am May 29, 2014 7:16am
Forget about hedging, you will only got stuck between open positions and only paying for the spread. It's a "paper tiger" trading.
SL usage is inevitable, but use it wisely. This means that you have to do wave, news, S/R, volume and candle analysis to build the vision and intuition for entering the trade and where to put the SL.
  • #15
  • May 29, 2014 7:22am May 29, 2014 7:22am
i do this all the time, and my equity curve is heading up since i've stopped using stop loss. nobody knows where the market is going, so every time you open a trade it might go either way. after a significant down move i enter long, after a significant move up i enter short. i mostly trade EURGBP because this pair is almost always contained in a range and it gives me plenty of entry and exit point. if a trade gets to far in loss i will open another trade in the same direction at the next level, wait for this pair of trade to center and close the pair near to break-even. i don't think this would work if you are very short term trader and like to have your trades closed by the end of the day tough. trades might last for weeks at a time.
  • #16
  • May 29, 2014 7:39am May 29, 2014 7:39am
Quoting simonb
{quote} Hm sounds nice in theory but I disagree... When do you close the hedge? How many times do you open and close new hedges (from draw down to break even) before accepting you're on the wrong side? How much do the small multiple hedge losses on your winning trade add up to? I think it's a fine idea and thanks for sharing, but whatever way you cut it.. A hedge is just a new trade in the opposite direction. The good thing about a SL is that at least in this hole, you "stop" digging, pardon the pun. You need to consider the worst case scenario....
Well, it was just roughly sketched - all the questions you rose are valid - and need to be taken into consideration. Usually this involves some good Excel utilities to calculate scenarios, choose the FX pairs (I really recommend GBP/USD), have some internal "guts" how to manage the hedges - I'm not saying it can be learned in a month - but with practice - the tendency to survive and actually start profiting from FX would start to gain momentum. In my view it is always better spend a bit more time to learn it properly, than to have endless "chart watching" days and sleepless nights ('cause of the 5 bad trades you got last 2 weeks in a row).

Hedging is basically calculations and planning - nothing more...stripped from emotions and the "taste of big winning trades" - just an endless digging of dirt to regularly picking up the golden nuggets inside.
  • #17
  • May 29, 2014 8:36am May 29, 2014 8:36am
Quoting michaelpelly
{quote} Well, it was just roughly sketched - all the questions you rose are valid - and need to be taken into consideration. Usually this involves some good Excel utilities to calculate scenarios, choose the FX pairs (I really recommend GBP/USD), have some internal "guts" how to manage the hedges - I'm not saying it can be learned in a month - but with practice - the tendency to survive and actually start profiting from FX would start to gain momentum. In my view it is always better spend a bit more time to learn it properly, than to have endless...
fair enough, the only reason I attacked your logic was because the way you wrote in your initial post made it sound like hedging was the only way to be profitable or something. This is simply not true, I do fine with my fixed stops and have no issues in taking losses. You may have planted a seed for me though as something new to start thinking about, where previously I would dismiss the idea without too much thought.. so ty for that.
like totally failure brah
  • #18
  • May 29, 2014 9:27am May 29, 2014 9:27am
Quoting simonb
{quote} fair enough, the only reason I attacked your logic was because the way you wrote in your initial post made it sound like hedging was the only way to be profitable or something. This is simply not true, I do fine with my fixed stops and have no issues in taking losses. You may have planted a seed for me though as something new to start thinking about, where previously I would dismiss the idea without too much thought.. so ty for that.
I got it .

With a little remark - "...it is the only thing that works for me..." - if someone has its own profitable formula - respect!

P.S. I do also take occasional losses - but pretty dampened by the hedging. Losses are the cost of doing business.
  • #19
  • May 29, 2014 11:54am May 29, 2014 11:54am
Quoting tubular2000
... if a trade gets to far in loss i will open another trade in the same direction at the next level, wait for this pair of trade to center and close the pair near to break-even...
This I have done often. Low leverage is a must-have to make this work. However I am back with a broker who allows same instrument hedging so that I can manage the psychology better.
Carbon-Dioxide: the gas of life! https://youtu.be/ttJBdr6eBuo
  • #20
  • May 29, 2014 12:04pm May 29, 2014 12:04pm
When I started looking into this I looked at a chart of EU and noticed that price today is exactly where it was in 1991.

So if you had bought or sold in 1991 you would come out BE(less carry of course).

So if you were flat same result.

But.....what if you just kept opening trades in both directions - say every day or week and kept closing those in profit and re-opening and just let the losers run til they go into profit or BE.

Just a thought and I haven't tried it 'YET' LOL>
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