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Hedging vs Stop Loss

  • #21
  • Edited 1:53pm May 29, 2014 12:54pm | Edited 1:53pm
Quoting 60minuteman
Anyone who says either way will fail is wrong. Both approaches can be highly profitable.

it's true but one way is more complicated than the other and takes more skill.
Being a trader is lonely, but being a great trader is lonelier still
  • #22
  • May 29, 2014 1:42pm May 29, 2014 1:42pm
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).
Aside from broker position sizing restraints and any psychological benefits, since you're leaving the hedge on as the trade goes into profit, how is this any better than progressively closing 10-15% of your position at the same regular intervals? If you are closing the hedge before the trade goes into profit successfully then it makes sense to hedge in this manner but, if you're closing the hedge at profit, aren't you effectively just paying the spread on the 10-15% position you've taken in order to hedge in comparison to just closing part of your position? Talking about same asset hedges.

I'm all for doing what works for you. I'm just curious if this is something you've accepted as an aspect of your trading style or there's another reason.
  • #23
  • May 29, 2014 2:35pm May 29, 2014 2:35pm
Quoting Good Lookin
{quote} Aside from broker position sizing restraints and any psychological benefits, since you're leaving the hedge on as the trade goes into profit, how is this any better than progressively closing 10-15% of your position at the same regular intervals? If you are closing the hedge before the trade goes into profit successfully then it makes sense to hedge in this manner but, if you're closing the hedge at profit, aren't you effectively just paying the spread on the 10-15% position you've taken in order to hedge in comparison to just closing part...

It's an advance thing to do and shouldn't be tried by someone who doesn't know what they are doing. To pull it off successfully you have to be able to know when the market has gone against you, by using whatever method you use. What the Hedge does is that it freezes the trade in suspended animation and gives you a second chance to correct it, almost like a do over. I did it before but the amount of maneuvering required to do it, and attention that could be focused on other things, it's just better to take the loss and move on in my view. But some people seem to use it just fine.
Being a trader is lonely, but being a great trader is lonelier still
  • #24
  • May 29, 2014 3:05pm May 29, 2014 3:05pm
In terms of your account, freezing the trade by taking an opposite position like this is worse than just closing the trade. Not much worse, because you are flat and your account won't be affected any further by the movements, but at some point rather than close the initial trade, you will have to close two trades, the initial one and the one you opened to freeze it. That's added cost, so you're paying extra spread and commission for no gain.

Now if it helps you psychologically, then fine, that's another matter. Just be aware there is no non-psychological benefit. None. Let it sink in for a while. Long and short the same instrument in the same size is flat, and there is nothing else to it. Frankly I find it amazing that years later people still discuss this as if there is some merit.

If you need help understanding why, then this thread might be a good place to start.

http://www.forexfactory.com/showthre...t=68598&page=2
  • #25
  • May 29, 2014 3:09pm May 29, 2014 3:09pm
Quoting saneblane
{quote} It's an advance thing to do and shouldn't be tried by someone who doesn't know what they are doing. To pull it off successfully you have to be able to know when the market has gone against you, by using whatever method you use. What the Hedge does is that it freezes the trade in suspended animation and gives you a second chance to correct it, almost like a do over. I did it before but the amount of maneuvering required to do it, and attention that could be focused on other things, it's just better to take the loss and move on in my view....
If this is something that can be done then by all means, if the pay off exceeds the cost by an acceptable amount, go for it. But i'm particularly curious about those trades that do not have their hedges closed early as described by michaelpelly. Specifically when he spoke of opening a hedge while the position is in loss then closing the hedge at the same time as you take profit on the original position once it has turned around. In this case, i see the hedge as an unesseccary benefit to the broker in the form of "bonus" spread. Maybe i'm wrong?
  • #26
  • May 29, 2014 3:31pm May 29, 2014 3:31pm
Quoting Good Lookin
{quote} If this is something that can be done then by all means, if the pay off exceeds the cost by an acceptable amount, go for it. But i'm particularly curious about those trades that do not have their hedges closed early as described by michaelpelly. Specifically when he spoke of opening a hedge while the position is in loss then closing the hedge at the same time as you take profit on the original position once it has turned around. In this case, i see the hedge as an unesseccary benefit to the broker in the form of "bonus" spread. Maybe i'm...

Like I said it's tricky, heck you can even end up and lose both trades. Getting out of 2 positions is harder than getting out of one. In my trading style If it doesn't move my way in 2 candles I close the trade so It never fit for me. But some people trade different styles and It might work for them and you may see it as a waste and I think I came to that same conclusion but it seem to work for them, so to each his own.
Being a trader is lonely, but being a great trader is lonelier still
  • #27
  • May 29, 2014 4:20pm May 29, 2014 4:20pm
I tried it for a while ( same pair hedging) back when it was legal in the states, and it did seem to prolong my ability to survive, but that was it for me.

Simple fixed stop loss: tried that for a couple of years, and lost steadily on that.

I do co- related pairs but trade them as though they were alone, each on its own merits, with the effect that they often hedge each other but that is a side effect.

i am perfectly willing to let trades abide in loss, until I see that they are clogging my margin with useless fat and my indicators show they have no chance of coming into profit in the near future. Then I clean some out as cheaply as possible.

Of course this is a mere indication of my actual plans, The are three tiers of conditions which are usually met before I enter a trade. There are two different ways I book profit from a trade.

I trade six different currencies with 19 windows open at any one time ( but I act only on the three or four most promising at the time):
I have 31 trades open at present: I closed 45 trades today in profit, one for a loss of 4 pips. Today was better than normal but far from my best.

It's more like herding sheep for me than calculating what could be the Next Big Move.

My money management scheme is double tiered.

yet I do almost no calculations

Sometimes I just say "Oh what the hell", and enter.

My system is very forgiving of me that way.

Now I am not selling anything here: if you see a post from Rap Skallion asking for money it is fraudulent.

Just trying to show you that there are different perspectives and entirely different styles on things.
  • #28
  • May 29, 2014 4:28pm May 29, 2014 4:28pm
Seriously, people are still discussing this?!

Start from a flat position and tell me a sequence of trades that ends up flat, and I bet I can do just as well, and probably better without using hedging.

How can this still be discussed 8 years after it was proven right here that this sort of hedging offers NO advantage?
  • #29
  • May 29, 2014 4:29pm May 29, 2014 4:29pm
Quoting saneblane
{quote} it's true but one way is more complicated than the other and takes more skill.
not true, the are a million ways to trade, to presume one way is superior shows a lack of understanding. YOU might find one way easier, but you can not make that assumption for everyone.
tradewith60
  • #30
  • May 29, 2014 4:38pm May 29, 2014 4:38pm
Quoting Good Lookin
{quote} Aside from broker position sizing restraints and any psychological benefits, since you're leaving the hedge on as the trade goes into profit, how is this any better than progressively closing 10-15% of your position at the same regular intervals? If you are closing the hedge before the trade goes into profit successfully then it makes sense to hedge in this manner but, if you're closing the hedge at profit, aren't you effectively just paying the spread on the 10-15% position you've taken in order to hedge in comparison to just closing part...
Those are valid questions, though.

And hedging doesn't exclude "maneuvering" and decision making as well.

Well - with trades one enters - there are basically 3 outcomes:
(especially the entries I prefer - reversals after steady movement in one direction on daily chart frames)

1) Your trade is going directly to profit zone and it is up to you to decide when to close it (guts and some prudence required).
* here you can still use some hedging on pullbacks to minimize the profit lost due to improper timing of closing;

2) Your trade sinks a bit (reversal is a bit "off" of your projection) - but then at some point returns into profit zone.
* here a bit of hedging gives you time to evaluate the market movement and try to figure out if the reversal is going to happen soon anyway or not. Once you see the price change direction towards profit - you could close some of the still profitable hedging positions along with the negative (if any). It is always about projection, speculation and chance calculation - nothing is mechanical here. You still need some edge to do it - but as the automotive ABS system - gives you a time to react and figure out the trade in the new market conditions.

3) Your trade is completely botched and you totally misplaced it - the price would move deep into negative zone (happened with the Yen shorts in end of 2012/2103).
* here you can completely "bail-out" your negative trade by building small opposite hedges until it comes to 0 loss (or if the movement is strong - even to some profit - so instead of lemon - you got lemonade ).

Hedging is not only psychological tool - it is a maneuverability tool, so you can steer the risk/money management. It is not some magic that would make you have no losses - it is just a way to control and fine tune those losses and get the best out of the market situation. At what degree though still depends on your analytical/speculation skills and market conditions.

But yet, psychological reasons also matters - if you feel less stressed of a negative trade - it gives you the clear head to assess the situation better. It definitely helps to remove the "revenge" trades to minimum.

Hedging is not "complex" or "difficult" at all - anyone can do it with Excel spreadsheet, calculator and hand-drawn chart on a sheet of paper.

As I said above - hedging is not a chase for the "big yearly busting win trade" - it is a way to buildup account size in planned and calculated manner - exactly what the "hedge" funds are doing .
  • #31
  • May 29, 2014 4:46pm May 29, 2014 4:46pm
Quoting michaelpelly
{quote} Those are valid questions, though. And hedging doesn't exclude "maneuvering" and decision making as well. Well - with trades one enters - there are basically 3 outcomes: (especially the entries I prefer - reversals after steady movement in one direction on daily chart frames) 1) Your trade is going directly to profit zone and it is up to you to decide when to close it (guts and some prudence required). * here you can still use some hedging on pullbacks to minimize the profit lost due to improper timing of closing; 2) Your trade sinks a bit...

Michael and I have differing styles primarily because he likes to trade reversals ( completely valid) and I like to trade breakouts.

Good on you Michael , your posts always make interesting reading!
  • #32
  • May 29, 2014 4:47pm May 29, 2014 4:47pm
Quoting EveningStar
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...
B.t.w. - today or tomorrow would be a good exercise for a long (buy) entry on cable (1at 1.6715-20) with some hedge buildup bellow 1.6690.

You could try it in demo account.

I give sometimes such entry ideas on some "FX-always-loser dis-believer" friends - see their emotions when finally the trade makes them profit on their demo accounts. It makes them feel a bit more confident in FX . And the amazing part is - no matter if the trade has gone negative and they only exercise hedging - it is still fun for them .
  • #33
  • May 29, 2014 4:53pm May 29, 2014 4:53pm
Quoting Rap Skallion
{quote} Michael and I have differing styles primarily because he likes to trade reversals ( completely valid) and I like to trade breakouts. Good on you Michael , your posts always make interesting reading!
Thanks, man!

P.S. Indeed - style does matter for what tooling you use. I indeed love to trade reversals on day-trades - mainly because I lack too much time to spend on the chart - since 18 months I trade mainly from my smartphone (no tech indicators, no complexity - pure candle-stick charts to monitor the price dynamics). Simplicity pays off guys .
  • #34
  • May 29, 2014 5:30pm May 29, 2014 5:30pm
I think a pseudo hedge would be better. For example, any EURxxx, GBPxxx, against any xxxjpy pair is a pseudo hegde. Try that.
If you are good at something, never do it for free--Joker
  • #35
  • May 29, 2014 5:50pm May 29, 2014 5:50pm
Quoting 60minuteman
{quote} not true, the are a million ways to trade, to presume one way is superior shows a lack of understanding. YOU might find one way easier, but you can not make that assumption for everyone.
I am not making an assumption at all, I am just saying that two position are harder to get out than one That is not an assumption it's fact. And some trading styles are superior to others that's not an assumption either. I never presume that anything was superior if I wanted to do that there are others way that I can accomplish that, like showing winning trades and my account gains, but what good would that do for me?. Calm down man and take it easy.
Being a trader is lonely, but being a great trader is lonelier still
  • #36
  • May 29, 2014 6:24pm May 29, 2014 6:24pm
Quoting SupraSense
In terms of your account, freezing the trade by taking an opposite position like this is worse than just closing the trade. Not much worse, because you are flat and your account won't be affected any further by the movements,
//-----

hey supra..... you can be fully hedged, ie 2 lots long the usdchf and 2 lots short usdchf, and it will still be possible for price movement to result in a margin call...... being fully hedged is no guarantee against it.....

the only thing you can say for sure is, your are 2 lots long and 2 lots short the same pair...... you are still very much at the markets mercy.......

i run ea's that constantly measure the maximum and minimum negative impact of fully hedged positions on every pair.....h

//-----

http://www.forexfactory.com/showthre...ge#post4170672

//-----

unless the opposing trades are part of a valid trading system with known goals, it might be better to close the trade rather than hedge the trade.....h
to trade and code, keep both simple... no call to impress....h
  • #37
  • May 29, 2014 6:47pm May 29, 2014 6:47pm
I checked the refereed link - and it basically implies that "spreads can widen" and account could get "margin called" - can't see this happening with 50k account by trading with position of 0.5 standard lot ($5 per pip with GBP/USD, on USD-based account) - a Third World War should happen on the old continent so the cable could sink so wildly to bust such leveraging...

Over-leveraging has nothing to do with hedging and it is another issue.

The other issue - high maintenance costs only affects if keeping opened positions exceeds 3 months. Yet one of the positions always compensates a bit. And especially when borrowing costs are below 0.5% on most majors - this shouldn't be considerable drawback.

If one wants to do long-term trades - I would advise only longs on depressed currencies with 1:1 leverage - change the account's currency at attractive levels - no borrowing costs, even get some % from the deposit. if I've got a 500 000k account - I would had bought cable last summer at 1.4850 - selling 3 weeks ago on 1.6950 - 14%+ net profit with zero risk (about 70 000 dollars).
  • #38
  • May 29, 2014 7:19pm May 29, 2014 7:19pm
Quoting michaelpelly
50k account by trading with position of 0.5 standard lot ($5 per pip with GBP/USD, on USD-based account)
//---

sadly few ff members have such an account...... and if they did, how few would trade only 0.5 lots......

to each his own..... take from the link what you will.....h
to trade and code, keep both simple... no call to impress....h
  • #39
  • May 29, 2014 8:39pm May 29, 2014 8:39pm
Quoting saneblane
{quote} I am not making an assumption at all, I am just saying that two position are harder to get out than one That is not an assumption it's fact. And some trading styles are superior to others that's not an assumption either. I never presume that anything was superior if I wanted to do that there are others way that I can accomplish that, like showing winning trades and my account gains, but what good would that do for me?. Calm down man and take it easy.
so the fact has some proof to back it up? why do you think an entry is hard to get out of? that's what trading is, you take an entry and you exit... if you think 2 entries are hard how will you cope with years of entries?

Which trading styles are superior? you have facts to prove this also?

You trading results could be good and bad for a multitude of reasons, but feel free to post them, of course you would need trading results for the other approach also to disprove that....

You need to be much more open minded to be successful as a trader...

you take it easy too
tradewith60
  • #40
  • May 29, 2014 8:43pm May 29, 2014 8:43pm
Quoting 60minuteman
{quote} so the fact has some proof to back it up? why do you think an entry is hard to get out of? that's what trading is, you take an entry and you exit... if you think 2 entries are hard how will you cope with years of entries? Which trading styles are superior? you have facts to prove this also? You trading results could be good and bad for a multitude of reasons, but feel free to post them, of course you would need trading results for the other approach also to disprove that.... You need to be much more open minded to be successful as a trader......
Lol I guess that's a very diplomatic answer I have no rebuttal.

I don't agree with all you say, but ama leave it there.
Being a trader is lonely, but being a great trader is lonelier still
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