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Hedging vs Stop Loss

  • #81
  • May 30, 2014 3:14pm May 30, 2014 3:14pm
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.

Have no idea what you're talking about here.
They buys and sells are from your example...
  • #82
  • May 30, 2014 3:16pm May 30, 2014 3:16pm
Quoting Rap Skallion
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?
He he he ... take a look at this ... ( of course I'm not showing everything, this is a demo of a work in progress )
6 days ... 2 eas (long eur/usd and long usd/chf 98% correlated pairs in hedging strategy) closed with 1.154% profit

1.154% profit when the 4 active trades are closed ...

Attached Image (click to enlarge)
Click to Enlarge Name: Rep01a.jpg Size: 102 KB

Attached Image (click to enlarge)
Click to Enlarge Name: Rep01b.jpg Size: 102 KB
Don't swim with the sharks ...
  • #83
  • May 30, 2014 3:23pm May 30, 2014 3:23pm
Quoting spyderman
{quote} Have no idea what you're talking about here. They buys and sells are from your example...
oK mate. got it.
the important thing is when hedged, you lock in your profit and put a small profit for both trades and sleep well. So you never worry about where the market goes, theoretically speaking. Concentrate on widening the gap of your two hedge trades. that's the locked profit. Imagine, you just need one profit trade in each instrument .. theoretically.
  • #84
  • May 30, 2014 5:05pm May 30, 2014 5:05pm
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...

Yes you're exactly right. If someone was saying, 'I know that hedging doesn't help at all, but for some reason it makes me feel better' then ok. But when someone says that hedging has a benefit, they are just wrong. It's not that I think they're wrong, it's not that I'm being close-minded, it's that you who think it's a benefit are being close-minded. Because you're not opening up your mind to the truth. You're arguing the equivalent of 1-1 is not equal to 0. And 2-2 is not the same as 1-1. This is how obvious it is to those of us who know. Now imagine a child arguing with you and saying that no 3-3 is not the same as 2-2. This is how I feel when people continue to argue for hedging rather than just do the numbers and realise they're wrong.

Pannet gives some trades:
1st Order Short - 1.0000
2nd Order Long - 1.0020
Closed - 1.0070
3rd Order Long - 1.0095

the net from that is that the 1st short lost 70 (-70 -commission), the 2nd order which was long gained 50 (+50-commission). So the net profit is -20 - 2 amounts of commission. So -20 -2*comm

Now without hedging:
short at 1.0000, stopped out at 1.0020. Net profit is -20 pips, with one lot of commission, so -20-1*comm

Now in each case I can again take that 3rd order so it wasn't relevant, but clearly in the second case I have less commission. So you would have wasted money by hedging. Not only is it not better, but it's costing you money! Why pay extra money for no gain? Are you mad?


So just to be clear, this 'hedging' is NEVER better than just trading normally, but in some cases is actually worse. Now you can give any example of trades you want and I can do the same and the bottom line is that with hedging you will end up with either the exact same result to your PnL, or you will end up worse because you'll have paid more commissions. Plus you'll lose out more on rollover and some even claim you'll pay margin just for being flat?!

Rap Skallion mentioned hedging using another currency that's correlated. I wouldn't call that hedging, because hedging should be reducing the risk, but that's not necessarily the case in trading another currency. Risk may be increased. Either way, that's two different trades and not what is being talked about here.
  • #85
  • Edited 6:06pm May 30, 2014 5:46pm | Edited 6:06pm
Quoting lcast
{quote} He he he ... take a look at this ... ( of course I'm not showing everything, this is a demo of a work in progress ) 6 days ... 2 eas (long eur/usd and long usd/chf 98% correlated pairs in hedging strategy) closed with 1.154% profit 1.154% profit when the 4 active trades are closed ... {image} {image}
Bingo!

Now this is not a true hedge, someone pointed out because it is not of the same currency.
It is only a 98% true hedge.

That's pretty much a hedge to me, compared to Fixed stop loss.

I'm willing to bet one acknowledgement no one out there can match these results with a "True" single pair hedge.

Somebody prove me wrong: I will be grateful to be steered out of an erroneous path.

Most of the people posting here do not believe that the "True" hedge is the best way to go, do they?

They just despise fixed stop loss so much they are willing to look at other alternatives.

Let's open up the horizon a little: How many pairs can be shown not to be correlated to at least one other pair?

What percentage of pairs that start with xxx/111 are negatively correlated with 333/xxx? to a high degree?

A little more: How many triplets show high correlation, amounting to almost direct dependency?

Do you know of any other market where this degree of inter dependency exists?

Is that not something worth taking note of? (That last question was rhetorical).

I'll stop here now, but there is more. Much more...
  • #86
  • May 30, 2014 6:22pm May 30, 2014 6:22pm
Trading xxx/111 and 333/xxx together is the same as trading just 111/333 (or 333/111). The math says so. But of course, some people here believe that math somehow doesn't apply to forex, that forex transcended basic math
  • #87
  • May 30, 2014 6:27pm May 30, 2014 6:27pm
Quoting SupraSense
{quote} Yes you're exactly right. If someone was saying, 'I know that hedging doesn't help at all, but for some reason it makes me feel better' then ok. But when someone says that hedging has a benefit, they are just wrong. It's not that I think they're wrong, it's not that I'm being close-minded, it's that you who think it's a benefit are being close-minded. Because you're not opening up your mind to the truth. You're arguing the equivalent of 1-1 is not equal to 0. And 2-2 is not the same as 1-1. This is how obvious it is to those of us who know....
what exactly is 'normal trading' - there is no right or wrong here - you either make profit or you do not.
tradewith60
  • #88
  • May 30, 2014 6:36pm May 30, 2014 6:36pm
Quoting 60minuteman
{quote} what exactly is 'normal trading' - there is no right or wrong here - you either make profit or you do not.
By the term Normal trading I mean trading without this silly 'hedging' idea. Not talking about style of trading, because that's independent of discussion.

There is a right and a wrong in some things. This is one of them.

Flat is 0 position
Long 1, short 1 same instrument is position 1-1=0= flat
Long 2, short 2 same instrument is position 2-2=0=flat. Do you get it yet?

If you're arguing with any of this, then you don't understand that 1-1=0 If you want to say there is no right or wrong to that simple mathematics then there is no hope for you.
  • #89
  • May 30, 2014 6:42pm May 30, 2014 6:42pm
Quoting Adal
Trading xxx/111 and 333/xxx together is the same as trading just 111/333 (or 333/111). The math says so. But of course, some people here believe that math somehow doesn't apply to forex, that forex transcended basic math
Oh you can't say that. There's no right or wrong you know. Maths isn't right, it's just one way of looking at things

Feels like it's a bit of a waste discussing anything advanced if these sort of basics aren't even grasped.
  • #90
  • May 30, 2014 7:03pm May 30, 2014 7:03pm
Quoting Rap Skallion
I'm willing to bet one acknowledgement no one out there can match these results with a "True" single pair hedge. Somebody prove me wrong:
Most of the people posting here do not believe that the "True" hedge is the best way to go,
Let's open up the horizon a little: How many pairs can be shown not to be correlated to at least one other pair?
//-----

hey rap..... correlation between pairs changes day to day and even hour to hour...... this would include the eur/usd vs usd/chf also.....

our accounts would be the best proof if our beliefs were correct or not..... if after thousands of live trades we maintain or improve our profit factor and expected payoff, odds are our beliefs are correct.....

if, on the other hand, our accounts are negative or all over the board, it might imply our beliefs need to be 'educated' as someone so aptly said earlier.....
//-----

there might be a point where a trader begins trading all pairs on many timeframes..... here of course, the signals on different timeframes often as not conflict, so we are left with the choice of which signal do i take.... the buy or the sell.... both signals are valid..... prior to the no-hedge rule, we could take both..... it was simple.....

now days we have separate accounts.... it's a small matter......h
to trade and code, keep both simple... no call to impress....h
  • #91
  • May 30, 2014 7:53pm May 30, 2014 7:53pm
Quoting SupraSense
{quote} Oh you can't say that. There's no right or wrong you know. Maths isn't right, it's just one way of looking at things Feels like it's a bit of a waste discussing anything advanced if these sort of basics aren't even grasped.

Supra...
As you can see from my posts above I've argued the same point as you on the mathematics of hedging. In fact in post #80 I ran the same math. And I agree that there is no mathematical advantage or benefit to hedging.

However what I can't understand is why some have to look at a trader who may hedge for a particular reason as being somehow mentally deficient.
And use such phraseology as "NEVER" beneficial. That may be true from a mathematical perspective but that is not the only reason behind implementing a given
tool. Again, I point to the Equity Millipede thread (surely you've all stumbled across this thread). It seems none of the most vocal in the "hedgers are idiots and can't be reasoned with" camp want to address the possibility that there may be other reasons to hedge or how you might implement this type of trading strategy without hedging.

No benefit can come from calling out someone and saying there is no hope for them when you are not willing to answer the question raised. Now you all may be 100% right and have a remarkable way of efficiently trading a strategy like the Equity Millipede without hedging, and I for one, as well as the thousands who have viewed the 325 pages of that thread, would no doubt be extremely thankful.
  • #92
  • May 30, 2014 8:12pm May 30, 2014 8:12pm
Quoting stewrigh
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>
You just proved one of the major tenets of Forex. Prices stay in a range (it has too or a nations economy would go bust) and if you play the range you can eventually have a permanent DD and 100% profitability after that. You set a buy and sell pending trade every 100 pips and every time the market moves a 100 pips you make a profit. The up and down movement will become more profitable than the combined DD. You need some funds and trade small but it would work. You also would be making profit along the way as you eventually reached the all time high and all time low. In other words your account balance will go up faster than the accumulated DD. I have demo tested this using a 1000 dollars and using one penny trades. You have plenty of money to do this and the account will build. Its the perfect hedging plan.

You also need to trade with a very low or no leverage so your account doesnt get eaten up with swap costs. So this would only work under very certain conditions.
  • #93
  • May 30, 2014 8:17pm May 30, 2014 8:17pm
Quoting spyderman
{quote}Now you all may be 100% right and have a remarkable way of efficiently trading a strategy like the Equity Millipede without hedging, and I for one, as well as the thousands who have viewed the 325 pages of that thread, would no doubt be extremely thankful.
From my understanding the millipede method is about opening many small trades in the direction of a big trend that you are expecting to begin, until a few of them catch on and grow legs. And what do you hedge? The small countertrends that develop from time to time?

Please describe the way hedging is very useful, and what's the problem with going flat instead of hedging.

It might be hard to apply that strategy without hedging because of the order management issues that MT4 is having. But this is a problem with MT4. But hey, if it works for you and others, ok.
  • #94
  • May 30, 2014 8:46pm May 30, 2014 8:46pm
Quoting Adal
{quote} From my understanding the millipede method is about opening many small trades in the direction of a big trend that you are expecting to begin, until a few of them catch on and grow legs. And what do you hedge? The small countertrends that develop from time to time? Please describe the way hedging is very useful, and what's the problem with going flat instead of hedging. It might be hard to apply that strategy without hedging because of the order management issues that MT4 is having. But this is a problem with MT4. But hey, if it works for...

Thanks for the response Adal. Hard to describe briefly as you can imagine but I'll try.

Basically yes, you're taking trades in the direction of what may well be (hopefully) a long trend. Moved to BE as soon as practical. Method of entry is irrelevant to the system as it's more of a trade management philosophy. If you start getting entry signals against that trend those are taken as well (enter the hedge). The hopefully many long entries may be have some in the 100's of pips by this point. Many more may have died at BE or small loss. In any case, let's suppose that you continue entering shorts (and moving to BE) as price retraces 30% of the original uptrend. Obviously many longs would close at BE. Now price heads north again. This back and forth may go on for months/even years?
At selected times, perhaps because of shifting market sentiments, "diversification" takes place where some shorts and longs are closed (typically those closer to current price, leaving the further positions open). At first it may sound counterproductive to be losing all those positions but reading Graeme's comments gives a compelling argument. For example open up a weekly chart on Eur/Aud going back to 2008. Imagine having many short positions sitting at 6000 pips and longs sitting at 3000.

Now, back to the topic of hedging, mathematically, I'm sure you could replicate these many seesaw like trades without hedging, but the logistics of tracking that action would be nearly impossible in my opinion. Imagine having longs open at 500, 400, 300, 200 & 100 pips respectively at 1 lot each. Then you get short entries so you close all those and take start taking shorts, but then market turns again and you need to go long. How do you replicate those long positions you had that were closed.

True you can and will start taking longs again and you banked that profit when you closed, but you have lost those positions that could one day have turned into 1000's of pips each.

Sorry about the length of post but the strategy is quite involved. I doubt I've done it justice.
  • #95
  • May 30, 2014 8:55pm May 30, 2014 8:55pm
Sometimes I have to laugh. This is trading we are talking about here, this is not math class, a traders mental state can be a major part of his down fall, when it comes to math I am strict as they come, heck my entire trading style is all math, I don't use any of the common method that I see traders use on FF, I don't even use a chart. But I am never going to down play the human element of trading. If hedging gives someone the mental clarity to trade better then good for them. I can assure you there is someone in the world right now who hedges and is making a tonne of money. Trading is about making money, and sometimes you have to pay 1, to gain 2, don't ever under estimate the human element of trading.
Being a trader is lonely, but being a great trader is lonelier still
  • #96
  • May 30, 2014 9:20pm May 30, 2014 9:20pm
Quoting spyderman
How do you replicate those long positions you had that were closed. True you can and will start taking longs again and you banked that profit when you closed, but you have lost those positions that could one day have turned into 1000's of pips each. Sorry about the length of post but the strategy is quite involved. I doubt I've done it justice.
I have done similar trades without using hedging. The key is thinking in total position size, instead of individual trades.

Your case:
1 OPEN LONG at 1.3000
1 OPEN LONG at 1.3100
1 OPEN LONG at 1.3200
1 OPEN LONG at 1.3300
1 OPEN LONG at 1.3400
1 OPEN HEDGE SHORT at 1.3400
1 OPEN HEDGE SHORT at 1.3400
1 OPEN HEDGE SHORT at 1.3400
price goes to 1.3200
1 CLOSE HEDGE SHORT 1.3200
1 CLOSE HEDGE SHORT 1.3200
1 CLOSE HEDGE SHORT 1.3200
price goes back to 1.34

Without hedging
1 OPEN LONG at 1.3000 (position size 1)
1 OPEN LONG at 1.3100 (position size 2)
1 OPEN LONG at 1.3200 (position size 3)
1 OPEN LONG at 1.3300 (position size 4)
1 OPEN LONG at 1.3400 (position size 5)
1 CLOSE LONG at 1.3000 (position size 4)
1 CLOSE LONG at 1.3100 (position size 3)
1 CLOSE LONG at 1.3200 (position size 2)
price goes to 1.3200
1 OPEN LONG at 1.3200 (position size 3)
1 OPEN LONG at 1.3200 (position size 4)
1 OPEN LONG at 1.3200 (position size 5)
price goes back to 1.34

Do the math, and you'll see that at the end you'll have the exact equity (in both hedging/no-hedging modes).

But you would have a different order distribution:

BALANCE: 200 + 200 + 200 = +600 (the 3 hedges)
1 LONG at 1.3000 (floating +400)
1 LONG at 1.3100 (floating +300)
1 LONG at 1.3200 (floating +200)
1 LONG at 1.3300 (floating +100)
1 LONG at 1.3400 (floating +0)
======
EQUITY: 600 + 400 + 300 + 200 + 100 = +1600

versus:

BALANCE: 400 + 300 + 200 = +900 (the 3 closed longs)
1 LONG at 1.3300 (floating +100)
1 LONG at 1.3400 (floating +0)
1 LONG at 1.3200 (floating +200)
1 LONG at 1.3200 (floating +200)
1 LONG at 1.3200 (floating +200)
======
EQUITY: 900 + 100 + 0 + 200 + 200 + 200 = +1600

So yes, won't have the original longs open, but you will have the same equity in the account and the same position size (5 longs).

As you can see, but not hedging in this case you convert some floating profit (the 1000 of pips that one day those positions will turn into) into actual booked profit. So you don't lose those 1000 of pips, you just book them early. But yes, you won't be able to feel good about closing a 1000+ pip position.

But if it's worth for you to pay extra rolls and spreads, for having the original longs open, go for it.
  • #97
  • May 30, 2014 9:26pm May 30, 2014 9:26pm
Quoting Adal
{quote} I have done similar trades without using hedging. The key is thinking in total position size, instead of individual trades. Your case: 1 OPEN LONG at 1.3000 1 OPEN LONG at 1.3100 1 OPEN LONG at 1.3200 1 OPEN LONG at 1.3300 1 OPEN LONG at 1.3400 1 OPEN HEDGE SHORT at 1.3400 1 OPEN HEDGE SHORT at 1.3400 1 OPEN HEDGE SHORT at 1.3400 price goes to 1.3200 1 CLOSE HEDGE SHORT 1.3200 1 CLOSE HEDGE SHORT 1.3200 1 CLOSE HEDGE SHORT 1.3200 price goes back to 1.34 Without hedging 1 OPEN LONG at 1.3000 (position size 1) 1 OPEN LONG at 1.3100 (position...
Adal that's a good result, but there is one thing that cannot be coded and that is human behavior. A person may trade very differently using hedging vs stoploss, and we are human after all, so when the math is done, a traders finger is still left to click the buy or sell trigger button. And I am one who believes 100 percent that a stoploss is better, but I would say that it is 100 percent better for me and how I trade. Humans are very fickle creatures.
Being a trader is lonely, but being a great trader is lonelier still
  • #98
  • May 30, 2014 9:32pm May 30, 2014 9:32pm
Quoting saneblane
{quote} Adal that's a good result, but there is one thing that cannot be coded and that is human behavior. A person may trade very differently using hedging vs stoploss, and we are human after all, so when the math is done, a traders finger is still left to click the buy or sell trigger button. And I am one who believes 100 percent that a stoploss is better, but I would say that it is 100 percent better for me and how I trade. Humans are very fickle creatures.
I understand that. Spyderman was asking how you can replicate the milipede method without hedging. I showed him how. Maybe he already knew that. I can see why having equally spaced longs at round numbers can be easier to handle mentally than random amounts at random prices (but which are equivalent mathematically).

I'm not doing this to convert hedgers. I'm doing it for those that want to listen to the other side, and maybe stop hedging, but who can't figure it out how to replicate their strategy without hedging. I once was in that camp, and I had to figure it out myself because those who I asked didn't showed me how.
  • #99
  • May 30, 2014 9:37pm May 30, 2014 9:37pm
Quoting Adal
{quote} I understand that. Spyderman was asking how you can replicate the milipede method without hedging. I showed him how. Maybe he already knew that. I can see why having equally spaced longs at round numbers can be easier to handle mentally than random amounts at random prices (but which are equivalent mathematically). I'm not doing this to convert hedgers. I'm doing it for those that want to listen to the other side, and maybe stop hedging, but who can't figure it out how to replicate their strategy without hedging. I once was in that camp,...

I checked out the milipede and it is something else, and it's things like that coupled with my own unorthodox way of trading that opened my eyes to the idea that there are more than one ways to skin a cat. anyway may the pip be with you.
Being a trader is lonely, but being a great trader is lonelier still
  • #100
  • May 30, 2014 11:05pm May 30, 2014 11:05pm
The two parts of the hedging argument that the single one in/one out trader cannot replicate are:
1. There is no risk since the account is hedged so you cannot lose your account where as the single one in/one out can lose his account.
2. There is no thinking, no study of the charts. You are only trading price action and you dont care which direction it goes because you will profit no matter what price action does. All you have to do is cover your permanent DD.

In reality I live in the USA and cant hedge here but I am thinking of setting up my foreign account and hedge trade the eur/chf to show with live trades whether it can or cannot be done. The currency I will choose will be the eur/chf because it ranges within a 500 pip range and will cover its DD within a matter of months. I will then reenter ever spot at 50 or 25 pip profit which will give me 20 or 40 open positions in both directions when the DD is covered. At that point every trade will be 100% profit with no risk until the SNB changes its policy. I think I can do this with less than a 1000 dollars, probably 500 and we can stop arguing and see if it works. Since I am fully hedged on every trade I have no risk of losing my account. If my profits grow bigger than my DD and cover my swap and spread costs this should be a piece of cake. I will see if I can get someone to update my EAs to work with the 6.xxx update of MT4. Sometime next week I will open a thread just for this experiment and we can see what happens. Either it will be profitable or I will lose my 500 bucks to a bunch of hedged positions which will take me time to trade out of but I know I can do that. How about that. A live account trading a hedging strategy. If it works I know for a fact that Merlin will not pay out.
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