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Hedging vs Stop Loss

  • #61
  • May 30, 2014 12:40pm May 30, 2014 12:40pm
Quoting saneblane
{quote} I don't think you understand how it's done. Being flat is the whole point, when you are flat you have literally frozen the trade, and if you close both successfully you have saved the first trade. The reason why It's so tricky is that it takes time, and ties up resources and attention. But the method by itself can be used in some freak situations. And I am going to give you one right now, at the weekly low or high a hedge position would come back 80 percent of the times. being flat is the whole point, of coarse the cost of spread is costing...
No, I understand it fully. The point is that anyone who says there is a benefit is wrong. It's not a matter of opinion, it's a fact.

So rather than argue it, provide specific numbers for the trades and tell me where you entered exited and in what amounts and I can show you that hedging hasn't helped. Numbers please.
  • #62
  • May 30, 2014 12:46pm May 30, 2014 12:46pm
Quoting SupraSense
{quote} No, I understand it fully. The point is that anyone who says there is a benefit is wrong. It's not a matter of opinion, it's a fact. So rather than argue it, provide specific numbers for the trades and tell me where you entered exited and in what amounts and I can show you that hedging hasn't helped. Numbers please.

The last hedge I did I can't even remember, but I am telling you from knowledge what I did. The Market moved against me 10 pips going short and triggered the hedge, and it went down for about 50 pips, the next day buying came and the market went right back to the hedge I closed it at about 3 pips and passed the first long trade that was closed at about 2pips to. So instead of losing 10 pips I made about 4. It's not a matter of if it can be done, it's just common sense. The only reason I stopped doing it is because it tied up my attention for too long and I couldn't quantify if it was better in the long run, and I don't like things I can't count on. Thats all, can hedging save a trade? of coarse it can I don't think that should be a question. I can't do it now because US clients can't do it anymore, or I would have done one with a small lot to prove my point.
Being a trader is lonely, but being a great trader is lonelier still
  • #63
  • May 30, 2014 1:00pm May 30, 2014 1:00pm
Quoting saneblane
{quote} The last hedge I did I can't even remember, but I am telling you from knowledge what I did. The Market moved against me 10 pips going short and triggered the hedge, and it went down for about 50 pips, the next day buying came and the market went right back to the hedge I closed it at about 3 pips and passed the first long trade that was closed at about 2pips to. So instead of losing 10 pips I made about 4. It's not a matter of if it can be done, it's just common sense. The only reason I stopped doing it is because it tied up my attention...

The point Supra is making Saneblane is that you could have accomplished the same thing without hedging. You could have closed your long when it went down the 10 pips and been flat to the market as it continued its drop of 50. Then when the market recovered you could have reentered the long at whatever price you did in fact close your hedge. Now your long 1. Then you would close that the same place for your +4 pips.

This is the same old argument that keeps getting regurgitated.
Yes, mathematically you can work around the hedge. But there are strategies that logistically speaking are easier performed using a hedge. And it may well be worth the associated costs. Graeme's Equity Millipede thread comes to mind. Kind of difficult without hedging.

Not saying I endorse one or the other.

As Stewrigh alluded to, all can benefit from being less narrowminded and absolute.
  • #64
  • May 30, 2014 1:04pm May 30, 2014 1:04pm
Quoting spyderman
{quote} The point Supra is making Saneblane is that you could have accomplished the same thing without hedging. You could have closed your long when it went down the 10 pips and been flat to the market as it continued its drop of 50. Then when the market recovered you could have reentered the long at whatever price you did in fact close your hedge. Now your long 1. Then you would close that the same place for your +4 pips. This is the same old argument that keeps getting regurgitated. Yes, mathematically you can work around the hedge. But there...

I know fully well what he is saying, spydy I don't hedge I take my losses and move on. It's not a matter of if it can be done, because it can. The better question to ask is "is it more efficient to hedge or stoploss" and no hedging is less efficient than a stoploss. But if some one wants to hedge and they are getting good result then good for them. We are here to make money not to confirm to anything anyone else might believe.
Being a trader is lonely, but being a great trader is lonelier still
  • #65
  • May 30, 2014 1:10pm May 30, 2014 1:10pm
Quoting spyderman
As Stewrigh alluded to, all can benefit from being less narrowminded and absolute.
That would be fine and dandy if they were perfectly equivalent.

But they are not. You'll pay the rolls, and there is the risk that your hedged trades are blown out of the water if the spread increases for whatever reason. There were situations when the spread on EUR/JPY or other pairs increased to 50 pips or more. Now agreed, the probability is low, but you are taking risks for little benefit.

However the larger problem with hedging that I see is psychological. Let's face it, people hedge because they don't want to take losses. They want to be right 100% of the time. This can also be seen in the endless search for 90%+ probability systems, when it's a known fact that most real world profitable people and hedge funds have a win/loss ratio around 60%, and some even in the 40%.
  • #66
  • May 30, 2014 1:24pm May 30, 2014 1:24pm
People here are discussing an hedge position eg. ( 1 lot long eur/usd and 1 lot short eur/usd ) ... Flat ... the same as a stop-loss with an cost associated, depending on the duration of the trades.

An hedging strategy is not going flat on a pair... it's another thing... if you don't have a clue of what it is ... don't do it ...
Don't swim with the sharks ...
  • #67
  • May 30, 2014 1:27pm May 30, 2014 1:27pm
I made a short in the bottom of the market. I bought the same instrument some 20 pips higher. Market moved higher say about 100 pips. I moved my buy stop to 50 pips. I got profit from my Buy for the 50 pips. But again market moved higher. So I bought another Buy at say 75 pips higher from my Original Buy. So I lost another 25 pips in this plus transaction and swap. Its simple and profitable if you know exactly what you are doing. If you buy/sell the third then you need to close the other two hedged positions. The third should be preferably of a same lot size. And then what happens if the market goes against the third as well. Note: You should never touch only one of the hedged positions which actually destroyed my account.

There is another side of the coin when you hedge when you are profitable. Imagine this. You just have one big in profit Buy (just for example). Instead of covering this order in profit, you may open a short, so you lock your profit. Then if the market comes to near your Buy, you get out with a small profit. Say market continues to go down, now your the short you opened as a hedge comes into play and it gives you more profit plus (apart from your small Buy Profit). Then when you think that the market started to move up, you open a Buy. If the market goes down again, get out of the buy with a small loss. I think you get the ideal.
  • #68
  • May 30, 2014 1:35pm May 30, 2014 1:35pm
Quoting Adal
{quote} That would be fine and dandy if they were perfectly equivalent.

That was my point in mentioning the narrow mindedness and absoluteness. I don't think anyone can address or foresee every possible situation and/or scenario on why a trader may or may not hedge (defining such as taking an opposite position for the sake of this discussion).

I restate my earlier comment

"Yes, mathematically you can work around the hedge. But there are strategies that logistically speaking are easier performed using a hedge. And it may well be worth the associated costs. Graeme's Equity Millipede thread comes to mind. Kind of difficult without hedging"

If any of the hedge-haters could speak to that point I would be interested.
  • #69
  • May 30, 2014 1:43pm May 30, 2014 1:43pm
Quoting pannet1
I made a short in the bottom of the market. I bought the same instrument some 20 pips higher. Market moved higher say about 100 pips. I moved my buy stop to 50 pips. I got profit from my Buy for the 50 pips. But again market moved higher. So I bought another Buy at say 75 pips higher from my Original Buy. So I lost another 25 pips in this plus transaction and swap. Its simple and profitable if you know exactly what you are doing. If you buy/sell the third then you need to close the other two hedged positions. The third should be preferably of a...

So Pannett...if I read correctly you have the original short open at -120 pips. You have your 1st buy sitting at +100 with your stop locked at +50 pips. You bought a 2nd round at 75 pips higher then the 1st which would now be at +25. So assuming same lot sizes you would be sitting with a floating profit of +5 pips.

If I'm reading right you would accomplish this same situation with out hedging...
Close your short when market goes up the first 20 pips. When it moves the other 75 you enter long. Continues on to the 100 pip mark. You now have a floating profit on your long of +25 and you lost 20 on your short you closed. Same situation.

Maybe I'm reading your example wrong.
  • #70
  • May 30, 2014 1:46pm May 30, 2014 1:46pm
Logistically speaking yes, hedging in MT4 is simpler because MT4 is a POS platform with no real position management capabilities.

The proper solution is having an adequate Order Management System, then a trader wouldn't have to us such expensive crutches like hedging.
  • #71
  • May 30, 2014 1:55pm May 30, 2014 1:55pm
Quoting pannet1
There is another side of the coin when you hedge when you are profitable. Imagine this. You just have one big in profit Buy (just for example). Instead of covering this order in profit, you may open a short, so you lock your profit. Then if the market comes to near your Buy, you get out with a small profit. Say market continues to go down, now your the short you opened as a hedge comes into play and it gives you more profit plus (apart from your small Buy Profit). Then when you think that the market started to move up, you open a Buy. If the market...

Same situation here.

Buy in profit...+100. Open your short at this point. Market moves down 80 pips. You close your buy for a 20 pip profit. Short is now +80.
Market continues down...lets say 100 pips... Your short is now at +180. You think market will move up so you open a Buy but market turns again 5 pips. Close buy for -5 pips. Short is now at +185 pips. So you have 185 floating pips plus the 20 pips on the buy, minus the 5 pip loss for a net profit of 200 pips...if you close the short here.

Now...
Buy in profit...+100 pips. Close position. Market moves down 80 pips. Open a short trade.
Market continues down...lets say 100 pips... Your short is now at +100. You think market will move up so you close short for 100 pips. You're flat so last 5 pip move is irrelevant. Your profit is 100 pips from the 1st buy and 100 pips from the short. 200 pips profit without hedging.
  • #72
  • May 30, 2014 2:02pm May 30, 2014 2:02pm
Quoting Adal
Logistically speaking yes, hedging in MT4 is simpler because MT4 is a POS platform with no real position management capabilities. The proper solution is having an adequate Order Management System, then a trader wouldn't have to us such expensive crutches like hedging.


Adal...

You're missing my point. It's very easy to say and prove that hedging has no mathematical advantage. It's also easy to throw out phrases like "needing an adequate Order Management System" or "crutches like hedging".

But I've specifically brought up the Equity Millipede Strategy as embodied in Graeme's thread here: http://www.forexfactory.com/showthread.php?t=245149
How would you handle this strategy without hedging.
It's a long thread and I understand that if you are unfamiliar with it then you wouldn't be able to give an explanation on how to work around a hedge.
And that would prove the point I was trying to make, that a person can't categorically (at least with accuracy) state that this or that, can or can't work or be of benefit in every situation, unless he has knowledge of every situation.
Awfully hard to prove a negative.
  • #73
  • May 30, 2014 2:15pm May 30, 2014 2:15pm
I have seen several analyses of trading where you can get the equivalent of a hedged trade with out the hedge presumably with profit or less bother.

But I have not seen anyone do this with Correlated pairs where one hedges the other.

Can one of you clever math types do this?
  • #74
  • May 30, 2014 2:21pm May 30, 2014 2:21pm
I understand your point.

I think another analogy would be useful.

People are taught in high school classical mechanics, and that is useful for real life. But we all know that it's not really correct, and that there are more "correct" kinds of mechanics, starting from relativistic corrections to classical mechanics and ending with quantum mechanics.

This is what I'm trying to say. That it's ok to let beginners solve systems of equations using simple transformations instead of using matrices and determinants.

But when a beginner starts saying that their way is better, that classical mechanics are better, and in fact it can do things that you can't do with relativistic or quantum mechanics, then I think you would agree that that beginner is deeply confused.

It's ok to use hedging, but to say that it's superior to "flating", shows a kind of lack of awareness of "proper" methods.

It would be ok for them to say "I prefer hedging, it makes it easier for me to manage positions". But that's not what they are saying. They say "only using hedging it's possible to take these profits, with flating they are impossible". This is wrong.

Anyway, like all hedging threads, this discussion is kind of pointless.
  • #75
  • May 30, 2014 2:26pm May 30, 2014 2:26pm
Quoting Adal
I understand your point. I think another analogy would be useful. People are taught in high school classical mechanics, and that is useful for real life. But we all know that it's not really correct, and that there are more "correct" kinds of mechanics, starting from relativistic corrections to classical mechanics and ending with quantum mechanics. This is what I'm trying to say. That it's ok to let beginners solve systems of equations using simple transformations instead of using matrices and determinants. But when a beginner starts saying that...

Totally agree with you on both those scores. It can be beneficial for newer traders especially to do some reasoning on these topics, which ultimately I think these threads help accomplish but often they degenerate into a meaningless debate. Hope that hasn't happened here yet.
  • #76
  • May 30, 2014 2:40pm May 30, 2014 2:40pm
Quoting spyderman
{quote} So Pannett...if I read correctly you have the original short open at -120 pips. You have your 1st buy sitting at +100 with your stop locked at +50 pips. You bought a 2nd round at 75 pips higher then the 1st which would now be at +25. So assuming same lot sizes you would be sitting with a floating profit of +5 pips. If I'm reading right you would accomplish this same situation with out hedging... Close your short when market goes up the first 20 pips. When it moves the other 75 you enter long. Continues on to the 100 pip mark. You now have...
Nope.
1st Order Short - 1.0000
2nd Order Long - 1.0020
Closed - 1.0070
3rd Order Long - 1.0095
  • #77
  • May 30, 2014 2:53pm May 30, 2014 2:53pm
Quoting spyderman
{quote} Same situation here. Buy in profit...+100. Open your short at this point. Market moves down 80 pips. You close your buy for a 20 pip profit. Short is now +80. Market continues down...lets say 100 pips... Your short is now at +180. You think market will move up so you open a Buy but market turns again 5 pips. Close buy for -5 pips. Short is now at +185 pips. So you have 185 floating pips plus the 20 pips on the buy, minus the 5 pip loss for a net profit of 200 pips...if you close the short here. Now... Buy in profit...+100 pips. Close position....
Nice one spyderman,
just one thing. substitute the both above examples without changing the Buy and Sell. In hedge mode you are allowed to carry more than one trade at a time. In the normal mode. Try this trade game and then please reply.
  • #78
  • May 30, 2014 2:58pm May 30, 2014 2:58pm
Quoting pannet1
{quote} Nice one spyderman, just one thing. substitute the both above examples without changing the Buy and Sell. In hedge mode you are allowed to carry more than one trade at a time. In the normal mode. Try this trade game and then please reply.
Sigh....Where's Hanover when you need him...
I'll reply in detail later.
  • #79
  • May 30, 2014 3:01pm May 30, 2014 3:01pm
Quoting spyderman
{quote} Sigh....Where's Hanover when you need him... I'll reply in detail later.
Let me try .. for you.
  • #80
  • May 30, 2014 3:13pm May 30, 2014 3:13pm
Quoting pannet1
{quote} Nope. 1st Order Short - 1.0000 2nd Order Long - 1.0020 Closed - 1.0070 3rd Order Long - 1.0095

Oh okay, so you closed your first buy at 50 pips. I was confused cuz you said you moved your buy stop to 50 after market went north 100.
So you're plus 50 on the 1 long, minus 70 on the short and you're buying again at 1.0095. You're net -20 pips.
Now why is that simpler and more profitable then closing the short instead of buying the long. You'd still be net -20 pips.
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