Hedging vs Stop Loss | Page 6 | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

Mathematical hedging strategy without a stop loss 22 replies

Stop Loss vs. Hidden Stop Loss 26 replies

Who is best ? stop loss or trailing stop 46 replies

EA questions: Hedging, Closing Orders at 00:00GMT, Moving Stop Loss 1 reply

Stop Loss and Trailing Stop 0 replies

Attachments: Hedging vs Stop Loss
Exit Attachments

Hedging vs Stop Loss

  • #101
  • May 31, 2014 1:03am May 31, 2014 1:03am
I prefer hedging a big loss until you can slowly reduce the loss it has become. Otherwise cutting a large loss can make too big of a dent in your account which may take forever to recover.
  • #102
  • May 31, 2014 1:50am May 31, 2014 1:50am
Quoting davidson333
I prefer hedging a big loss until you can slowly reduce the loss it has become. Otherwise cutting a large loss can make too big of a dent in your account which may take forever to recover.
I think hedging is misunderstood a little. Its not hedging that one needs to shrink a loss, ...................only a Genie.

https://encrypted-tbn2.gstatic.com/i...ZGFmYECVCKEdmH
The Thief of Wall Street
  • #103
  • May 31, 2014 2:10am May 31, 2014 2:10am
Depends on the pair traded. Hedging good when the loss had not went wide. Can manage both positions when the buy and sell positions have less pips/price difference.
  • #104
  • May 31, 2014 2:10am May 31, 2014 2:10am
from Hayseed:
hey rap..... correlation between pairs changes day to day and even hour to hour...... this would include the eur/usd vs usd/chf also.....

That is correct. So does market price... And a correlation that is poor today can be real good tomorrow.
Some correlations are strictly happenstance. But others will change less, because they are based on the pair structures:

eur/gbp will always have a negative correlation to gbp/usd simply because to buy both you have to buy the gbp in one and sell it in the other. How much will vary, but it will still be there:

eur/usd and eur/aud will tend to have a positive correlation almost always because you are buying the euro in both cases. (look at today's traces)


xxxchf traces today were eurxxx traces upside down, but note the similarity between the eur/xxx traces when chf leads the pair combination. (chf/jpy and eur/jpy are almost identical. Happentstance? or is there a relationship between the euro and the swiss franc?

Between the Canadian and U.S dollars There definitely is. The U.S. is the main customer of Canada, so good news for the USD is usually better news for Canada. Good news for the usd more often drives the pair down instead of up.

These patterns are there in spite of the noise obscuring them.

Now don't buy the one just because you bought the other, or sell the one just because you bought the other. Trade each on its own merits.

Just recognize that when you do do so, a natural sort of hedging occurs. The result is, by watching the direction in which you tend to trade pairs, you can build a considerable amount of natural hedging between them, and by keeping your trade size small enough, most days you can go without closing trades in loss. There are people here who have traded for years who have not closed a losing trade in years. (They are better traders than I , so far).



The key is your margin. no matter what its size, it has only so much room for trades of a certain size. At what percentage margin do you feel uncomfortable adding trades? That should be where you are paying attention to closing losers, before they push you over the edge. remember that when your margin equals your equity your broker will close trades for you. You should avoid that.

The other thing is that, as your equity grows, The percentage of margin at which you "feel uncomfortable" should grow too. That will help you avoid losing back everything you have gained in the first place. You can still increase the amount you trade, just not equal to the amount your equity has increased.

Usually the currency in a pair that does the moving is one the open markets are most concerned with: The other pair moves more often when the market concerned with it is open, yes? The interesting cases are where both currencies have theirmarkets open to them.

Shouldn't your trading take these feature of the market into account?
  • #105
  • May 31, 2014 2:26am May 31, 2014 2:26am
Quoting Rap Skallion
from Hayseed: hey rap..... correlation between pairs changes day to day and even hour to hour...... this would include the eur/usd vs usd/chf also..... That is correct. So does market price... And a correlation that is poor today can be real good tomorrow. Some correlations are strictly happenstance. But others will change less, because they are based on the pair structures: eur/gbp will always have a negative correlation to gbp/usd simply because to buy both you have to buy the gbp in one and sell it in the other. How much will vary, but it will...
Very good post.

I read it twice, but still not sure if it also addresses hedging using two pairs with positive correlation. I think hedging a losing position with another pair that has positive correlation to the original pair has advantage over using a pair that has negative correlation to the original pair. The main factors to watch for is 1) the difference in the speed with which they move in different sessions, 2) the difference in the distance they normally cover (or atr), and 3) the level of existing distortion (imbalance) in the correlation.

The question I have is: How Carrying Cost (interest/swap) affects those who do not close a losing position for a long time?
The Thief of Wall Street
  • #106
  • May 31, 2014 2:40am May 31, 2014 2:40am
Quoting Chicky
{quote} Very good post. I read it twice, but still not sure if it also addresses hedging using two pairs with positive correlation. I think hedging a losing position with another pair that has positive correlation to the orginal pair has more advantage over using a pair that has negativ correlation to the original pair. The main factors to watch for is 1) the difference in the speed with which they move in different sessions, 2) the difference in the distance they normally cover (or atr), and 3) the existing distortion (imbalance) in the correlation....
I have the same question:
It could be that their equity is so high and their lot sizes so small they don't need to care.
It could be that their entry methods are superior to mine.

I generally trade with the swap, if for no other reason than the swap is usually in favor of the more prosperous currency. Trading against the swap complicates things.

Your comment about factors to watch for is informative as well.

I do try to trade as though I have no other trades on the board, but sometimes the hedging thing influences my decision.
  • #107
  • May 31, 2014 5:33am May 31, 2014 5:33am
Quoting nanningbob
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...
Nope. It's the same you're flat. You don't understand it, so why post about it as if you do?

I've already pointed out quite clearly that hedging like that is the same or worse than not hedging. There is never a benefit, and yet you want to go and try to do it.

Yes you can make money hedging, less than you would without hedging but you can make money. You can also make money by trading on a coin flip and being lucky.

Rap Skallion has some interesting posts on using correlation, but again, that is not strcitly speaking hedging and nor is it the same as the 1 long 1 short the same instrument.

One thing I can guess from the fact that so many can't see the obvious, is that they must also not really be going through their trades and doing the numbers. If they did, surely they'd see that their positions ould be accomplished without hedging and pay even less commission
  • #108
  • May 31, 2014 6:10am May 31, 2014 6:10am
Thinking outside the box - trading is all about probabilities and what we know or think. - And............ money management.

So what if we could eliminate the unknowns and increase the probabilities.

So first lets look at what we don't know and I would posit that we don't know EVER which way a currency will go. So our first problem is how to decide whether we go long or short.

So what do we know with any certainty - over time a currency pair will return to 'par' - by that I mean that, as someone mentioned(Bob I think) Currencies range 70% of the time - look at the EU it is where it was 20 years ago, meaning that wherever a currency is today it will probably return over the next few years..

Someone also mentioned that hedging was the same as being flat - Yes and no - actually being both long and short is different in that we know that one of those trades with 100% certainty will make a profit. Being flat is the same as not trading at all and we won't make any money if we're flat.

So lets eliminate the unknowns - Short or long??? - Can't decide? - ok let's do both and hedge

And what do we know for certain(well maybe 70%) - eventually my trade will return to where it is now meaning it doesn't matter if I am long or short

So all thats left to worry about is the MM and some would say that that's the most important aspect of trading anyway.

Think Bobs experiment will be interesting
  • #109
  • May 31, 2014 6:21am May 31, 2014 6:21am
Quoting stewrigh
Thinking outside the box - trading is all about probabilities and what we know or think. - And............ money management. So what if we could eliminate the unknowns and increase the probabilities. So first lets look at what we don't know and I would posit that we don't know EVER which way a currency will go. So our first problem is how to decide whether we go long or short. So what do we know with any certainty - over time a currency pair will return to 'par' - by that I mean that, as someone mentioned(Bob I think) Currencies range 70% of the...
Looked at another way we can know with 70% certainty that all trades will eventually go into profit and all we need to do is harvest some pips along the way. Hedging ensures that at least half(if fully hedged) of our trades will return a profit in the short term.
  • #110
  • May 31, 2014 6:25am May 31, 2014 6:25am
Quoting stewrigh
Thinking outside the box - trading is all about probabilities and what we know or think. - And............ money management. So what if we could eliminate the unknowns and increase the probabilities. So first lets look at what we don't know and I would posit that we don't know EVER which way a currency will go. So our first problem is how to decide whether we go long or short. So what do we know with any certainty - over time a currency pair will return to 'par' - by that I mean that, as someone mentioned(Bob I think) Currencies range 70% of the...
If you want to be able to think outside the box, first you want to be able to think, and think clearly.

You say you know that a currency will return to 'par'. No you don't. This is an incorrect assumption. You talk about EU going where it was 20 years ago...except that the Euro wasn't even in circulation 20 years ago. Come on...think.

And again you're wrong about 'hedging'.

Stop and think. Don't just post things you don't understand.

You want to do both long and short at the same time because you think it's better than flat. Rather than just make wild assumptions, put some numbers to it or go and read my earlier post in which pannet posted trades and I showed hedging offered nothing better.

You're wasting money. I'm trying to help you save money. But you have to help yourself a bit more.
  • #111
  • May 31, 2014 6:30am May 31, 2014 6:30am
Quoting stewrigh
{quote} Looked at another way we can know with 70% certainty that all trades will eventually go into profit and all we need to do is harvest some pips along the way. Hedging ensures that at least half(if fully hedged) of our trades will return a profit in the short term.
I don't know how new you are to trading, but again this is poor thinking.

Firstly, you are quoting stats that have no basis.

Second, I coudl have a system that wins 95% of the time and I could still lose my entire account. Because what happens in the other 5% is key, you can't just ignore it. So even if it were true that 70% of trades go into profit eventually (I'd say it's actually higher, but then it depends on entry), then that doesn't mean you'll make money in the long term.
  • #112
  • May 31, 2014 6:41am May 31, 2014 6:41am
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

You would think so, and when I see this pattern, I usually trade the third pair. But although the correlation is very high, there is still some risk.
somebody big is buying xxx/111 : some group is buying 333/xxx. But a national bank some 4 time the size of the other parties may decide for the sake of the stability of its currency that That 333/111 wants to go down, and has the muscle to overwhelm what would otherwise be a rising 33/111.

Doesn't happen often. I used to think never, until someone pointed out an example to me, and since then I have observed it several times.

The market is not 100% efficient. It is not, strictly speaking a zero-sum game ( tho pretty close). The forex expands and contracts in size, Just to throw complexity into the mix. It does so hourly, weekly, monthly, and yearly. The number of entities trading and the total size of the trades changes constantly.
Just because you are apply mathematics to your analysis does not mean you are applying the correct formula.

But you know what? So what?
  • #113
  • May 31, 2014 6:43am May 31, 2014 6:43am
Quoting SupraSense
{quote} If you want to be able to think outside the box, first you want to be able to think, and think clearly. You say you know that a currency will return to 'par'. No you don't. This is an incorrect assumption. You talk about EU going where it was 20 years ago...except that the Euro wasn't even in circulation 20 years ago. Come on...think. And again you're wrong about 'hedging'. Stop and think. Don't just post things you don't understand. You want to do both long and short at the same time because you think it's better than flat. Rather than...
The Euro was established in the Maaschrict treaty - 1992 Thats actually 22 years - Notes were introduced in 1999.

Over time currencies tend to range or return to par and I said 70% of time not 100.
  • #114
  • May 31, 2014 6:58am May 31, 2014 6:58am
Quoting stewrigh
{quote} The Euro was established in the Maaschrict treaty - 1992 Thats actually 22 years - Notes were introduced in 1999. Over time currencies tend to range or return to par and I said 70% of time not 100.
You seem to be trying to argue rather than learn. A treaty is just a treaty. So hopefully, rather than argue when you're wrong, you'll admit you are wrong (see how your own bad habits spill over into your trading as you don't wish to close losers there either!). Now read the wiki article and you'll see it hasn't been traded for 20 years. Yet you think it's going to return to some value 20 years ago when it wasn't even traded. That's nonsense. Accept it, and learn.

Lets take GBPUSD, it once traded above 2.1170 and once traded below 1.3500. So suppose you took a short below 1.35, anywhere below there and held onto it, you would not have seen it return there in almost 30 years, and there's no sign that it will return there in the next 5,10 or even 30 years. If you took 100 trades down there, then it's not that 70% of them price would have returned, price hasn't returned in 30 years for any of them. If you held a long from above 2.1170, it hasn't been there in about 33 years.

So when you say price will always come back, you're wrong. Price may never come back, and even if it does, it might not be in your lifetime, and even if it was in your lifetime, it would not be worth the wait, all the rollover costs, the margin and so on, just so you can close for a small profit 40 years later. We can do similar arguments for lots of currencies.

If you think it will alwaye come back, you're in for a nasty surprise one day.
  • #115
  • May 31, 2014 7:04am May 31, 2014 7:04am
Quoting SupraSense
{quote} If you want to be able to think outside the box, first you want to be able to think, and think clearly. You say you know that a currency will return to 'par'. No you don't. This is an incorrect assumption. You talk about EU going where it was 20 years ago...except that the Euro wasn't even in circulation 20 years ago. Come on...think. And again you're wrong about 'hedging'. Stop and think. Don't just post things you don't understand. You want to do both long and short at the same time because you think it's better than flat. Rather than...
And again you're wrong about 'hedging'. Stop and think.

I am not wrong about hedging because I have no opinion - just an open mind atm - I'm not an advocate or an anti but I am prepared to listen to all sides of the argument - even from a SFB like you.
  • #116
  • May 31, 2014 7:08am May 31, 2014 7:08am
Quoting stewrigh
{quote} And again you're wrong about 'hedging'. Stop and think. I am not wrong about hedging because I have no opinion - just an open mind atm - I'm not an advocate or an anti but I am prepared to listen to all sides of the argument - even from a SFB like you.
That's how you address someone who has tried to help you see some truth. You're not open minded at all.

Long EURUSD at 1.36, short EURUSD at 1.3599 (have to pay the spread). EURUSD moves up to 1.37. Profit for account -1 pip - commissions

Flat EURUSD at 1.36. EURUSD moves up to 1.37. Profit for account 0 > -1pip - commission.
  • #117
  • May 31, 2014 7:24am May 31, 2014 7:24am
Quoting SupraSense
{quote} You seem to be trying to argue rather than learn. A treaty is just a treaty. So hopefully, rather than argue when you're wrong, you'll admit you are wrong (see how your own bad habits spill over into your trading as you don't wish to close losers there either!). Now read the wiki article and you'll see it hasn't been traded for 20 years. Yet you think it's going to return to some value 20 years ago when it wasn't even traded. That's nonsense. Accept it, and learn. Lets take GBPUSD, it once traded above 2.1170 and once traded below 1.3500....
Lets take GBPUSD, i

By all means lets look at the GBPUSD again it is exactly where it was 20+ years ago - Why would you short it below 1.35 - is that how you normally trade? sell the bottom? But even at 140 I notice that price revisited that area 4 times in the last 20 years.
  • #118
  • May 31, 2014 7:29am May 31, 2014 7:29am
Quoting stewrigh
{quote} Lets take GBPUSD, i By all means lets look at the GBPUSD again it is exactly where it was 20+ years ago - Why would you short it below 1.35 - is that how you normally trade? sell the bottom? But even at 140 I notice that price revisited that area 4 times in the last 20 years.
Clueless, muddled thinking and unable to admit that you're wrong. You are failing as a trader. You'll deny it, because your ego won't let you admit it. But we both know you are failing.
  • #119
  • May 31, 2014 7:29am May 31, 2014 7:29am
Quoting nanningbob
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...

I will definitely be watching for that NB. I am currently using a similar strategy with E/F and working well.
  • #120
  • May 31, 2014 7:31am May 31, 2014 7:31am
Quoting Adal
{quote} I have done similar trades without using hedging. The key is thinking in total position size, instead of individual trades.
Adal,

Thanks for the detailed response. I don't have time this morning to assimilate all this but definitely will later and let you know my thoughts.
1 trader viewing now