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Hedging vs Stop Loss

  • #321
  • Jun 6, 2014 4:15am Jun 6, 2014 4:15am
Quoting nanningbob
{quote} My USA account I cant hedge
I just wonder why I can hedge on the same pair with Citi FX pro -- it's a US broker. Is there any problem with Citi FX?
  • #322
  • Jun 6, 2014 6:58am Jun 6, 2014 6:58am
Quoting Forexgogo
{quote} I just wonder why I can hedge on the same pair with Citi FX pro -- it's a US broker. Is there any problem with Citi FX?
Some US Brokers offer what they call "hedging in the back office". They take the other trade behind the scenes but on your terminal side it appears that you are hedged. Same with FIFO regs. Don't know if Citi is one or not.
  • #323
  • Jun 6, 2014 8:49am Jun 6, 2014 8:49am
Quoting spyderman
{quote} Some US Brokers offer what they call "hedging in the back office". They take the other trade behind the scenes but on your terminal side it appears that you are hedged. Same with FIFO regs. Don't know if Citi is one or not.
Yeah I can do non-FIFO with Citi FX. I believe ATC does hedging and non-FIFO, too. (I used to do them with ATC, but switch to Citi for the better spreads).
  • #324
  • Edited 3:22am Jun 7, 2014 2:08am | Edited 3:22am
Quoting nanningbob
{quote} My USA account I cant hedge so its Counter trading or closing out the loss. I am a very good counter trader and I showed that in my threads 4.0 and 5.0 here at FF. I posted every trade I took for one year and ended up with almost 20K pips total. After that the markets were getting too volatile to CT trade so I went to trend trading and developed my 10.0 series. I now have a 10.7 series for trend trading, which I think I will no longer need to adjust. I will write my booklet on trading it this summer and finalize my total approach to trading....
Thanks again Bob - I think I've been trading this way for a while(following the trend and scaling in) but without the hedge. By that I mean yep I have always used a sl(albeit) a fairly wide one. I always rejected the hedging strategy bcos I bought into the hype about always having a sl.

Just about every thread on FF espouses the same mantra - 'Always, always use a sl'

So I did and I wondered why they kept getting hit(what a dumbass) - all sl's do is lock in your losses.

Having kept a neutral and unbiased position during this debate I think I'm now a total convert to the hedge camp but need to develop a strategy(this debate has been an eyeopener for me and I think it has completely changed the way I view the FX markets). The BIG question I am going to have to answer tho is when it becomes appropriate to hedge rather than close out. Atm I'm thinking that it will be obvious and will be a major trend change - but guess I'll soon find out lol. Having said that it's not really hedging anyway - as you said it's just another trade in the other direction - so it's CT rather than a hedge.

Another q I have is do you still trade with EA's or do you do this manually.
  • #325
  • Jun 7, 2014 4:33am Jun 7, 2014 4:33am
This from SH;s site made me think a bit.

Hedging works by placing a trade in the opposite direction to your existing basket of trades which are currently in drawdown (DD), generally with the intention of either:
halting further DD until you are able to make a clearer trading decision as to how to get yourself out of DD. This is particularly useful in extremely volatile or uncertain markets where you just need a bit of breathing space without the risk of further DD. In order to use hedging this way, your hedge trade should be the same lot size as the total of all your existing trades; or
to eradicate/claw back your losses when a pair starts massively trending against you and you do not consider that a sufficient retrace is likely to recover your DD. This is useful where there is a well established trend which is moving against you. In this case you would hedge by, for example, 2 or 3 times the lot size of your original basket, using the pips you make from your hedge trade to wipe out your original position DD. It is important that you use a higher lot size than the total of your original basket of trades, otherwise you won't erase any of your existing DD.
However, a word of warning, hedging is an absolute minefield. Once you decide to hedge, YOU are effectively taking control of the trading, not The Beast. Auto Pilot is now set to the off position!
You can't just turn hedging on when you are in deep DD in L3 recovery and expect it to pull you out. When turning hedging on with a multiplication factor, you are effectively making the decision that you think the trend is more likely to continue than to reverse. Therefore you MUST be comfortable with trend trading.
Imagine this scenario....
Your total GBP/USD basket of trades amounts to 0.9 standard lots (0.1 + 0.2 + 0.6), and is deep in DD, with the pair still trending heavily against you. You decide to do something about it and turn hedging on, with an overall basket multiplication factor of 2, therefore it would place a hedge trade of 1.8 standard lots (although, in the hedging options menu, you would actually need to select a multiplication factor of 18, since it's based on your original trade lot size, which is 0.1).
Unfortunately, you turned hedging on just before the BoE announced some solid measures which will assist economic recovery (maybe not the most believeable example, I admit!). GBP/USD starts rising again. Instead of The Beast doing what it does best, sitting patiently until a move retraces and eventually closing its recovery trades for a small profit (which it would have done in this case, but for your hedge trade), you now have a HUGE 1.8 lot postion moving against you. You are now in the vicious circle of hedging and counter hedging until you hopefully work your way out of this mess. Welcome to hell
Hedging TB trades should be treated with great caution. You are effectively taking the view that you cannot sustain any more DD before a likely retrace AND you think that the trend will continue. Your hedge is a pure trend trade. You've got to be pretty sure.
That said, hedging can be very useful when used appropriately. By way of example, this is how I use hedging in respect of The Beast. This actually takes into consideration the fundamental counter-trend principles of The Beast (that movements retrace) despite the fact that it is applied in respect of a trend trade:
The pair is in L3 recovery and DD hits about 10% of my overall equity and is still trending heavily in the wrong direction.
I take a step back and consider how I would place a manual trade with the trend here, generally looking for a good point of entry, e.g. a break of resistance or catching it bouncing off support. This means forgetting about TB's pretty 1 hour charts for a while and going back to basics, checking multiple time frames and getting some old school trend/support/resistance lines drawn on the screen. Once I'm happy with my point of entry, I turn hedging on so that my hedge is 2x my original basket size (although, I will sometimes use a higher multiplication factor if I think the trend has enough momentum, which obviously means I get out of trade more quickly, but carries higher risk if the trend was to reverse).
Once the hedge trade has been placed, I will usually keep my eye on it until it has moved a reasonable amount in the right direction, then I place a stop loss which will lock in a few pips and protect my position if the trend is retracing beyond my point of entry. This way, I can sleep at night knowing I'm not going to wake up with my hedge massively against me. If the hedge does retrace and triggers my SL, I wait for another entry point and carry out the same procedure again, or, if I am really lucky the retrace will be a big one and will wipe out my DD without needing another hedge trade!
This has multiple benefits:
DD is always controlled. Although you may not get out of the DD quickly, it does ensure that your DD does not get any worse from the point you make the decision to hedge.
You can lock in a few pips of profit every time the trend retraces, which can be helpful if you are locked in DD for a long time since it keeps that pair earning some cash and covering swap fees.
With the hedge SL in place, you can sleep easy at night and there is no risk that you end up with a huge hedge working against you.
It is a little trickier if you place a hedge trade and it instantly moves against you. But that's just trading unfortunately. With a position that large, you need to decide whether you want to take a quick loss and re-evaluate your entry, or let it ride in the hope the trend continues.

Have fun, hedging can be a life saver or a nightmare
  • #326
  • Jun 7, 2014 5:02am Jun 7, 2014 5:02am
Rob Booker/Cauldwell on hedging

http://traderspodcast.com/episode59/
  • #327
  • Jun 7, 2014 7:11am Jun 7, 2014 7:11am
Hey Bob,
Another q I'm afraid - I don't use EA's(think I'm a control freak so doesn't fit my MO) so I been digging around to find the strategy the EA's use.
Q is do they still follow the Sell high buy low strategy where you buy in the bottom 3rd of the range and sell in the top 3rd or has it moved on since then?
I found this in some zip files related to V3..
  • #328
  • Jun 7, 2014 10:36am Jun 7, 2014 10:36am
Quoting lcast
{quote} I think is usefull to talk about an hedge vs SL "strategy" ... and not an hedge vs SL "trade". Hedging vs Stop Loss makes no sense, if you are discussing 1 trade long and 1 trade short in only one pair ... a flat position ... with no strategy into it ... without factoring more trades in other pairs ... with no MM ... with no risk management ... is better the Stop Loss Hedging is more than open a trade oposite to the one that is losing money ... There as to be a underlying strategy, usually on the longer TFs, with correlation among pairs...
yep you are right. i may not know about hedge vs stop loss trade but i kknow hedging vs stop loss strategy is if not better as same as booking your sl cos i hav tried it and i found out theres really no difference or advantage of booking sl over edging if you dont have a perfect entry and exit point
  • #329
  • Jun 7, 2014 8:25pm Jun 7, 2014 8:25pm
Quoting stewrigh
Hey Bob, Another q I'm afraid - I don't use EA's(think I'm a control freak so doesn't fit my MO) so I been digging around to find the strategy the EA's use. Q is do they still follow the Sell high buy low strategy where you buy in the bottom 3rd of the range and sell in the top 3rd or has it moved on since then? I found this in some zip files related to V3..
If I counter/range trade I usually use a high/low indicator like Center of Gravity or TMA. They are fairly accurate in getting the highs and low of move every day/week. The high/low indi which I used for quite a while (sixths indi) I changed when I went to trading the trend. However, in ranging markets that is one great indicator.
If I use EAs, I use ones that place me where I want to enter. In other words I am not around so I let the EA enter the trade but I manage it after that. Basically there are two types. MA EAs that form a line on the screen and work similar to trading the break of a TL. MA lines arent as smooth as trend lines but can serve the same basic service. So as price is angling in a certain direction I put a MA on the screen and when it breaks that MA line I want to be in. Same concept as trading trendline breaks. What I like about them is they force you to wait until price actually makes the break so you dont get in too early or too late.

The other use I have for them is breaking a S/R line so things like daily open or pivot EAs can also be useful. I seldom use these kind of EAs anymore because pending orders serve the same purpose as a straight line MA. Since my favorite trade is to enter when price crosses the daily pivot pending orders seem to work best for that kind of trading.

I always find it amusing when some chest thumper comes here and boasts he never uses an EA but uses pending orders. LOL that is still using a computer program (which is what an EA is) to enter a trade. What is the difference between using a computer program on your own computer versus the one used by the dealer/broker/bank. So I will use EAs to get the entrance I want and then manually control the trade after that.

The other EA I will use I call the trade manager programs. They will monitor every trade you have and do thing like at +20 move SL up to +5 thereby preventing a winning trade into becoming a loser.

Since I have discovered that volatility or the highest/lowest point of a move is usually 2-4 hours into a session. That is when I take my profits, so the other times I just let trades muddle in the puddle until the market moves them and then decide how I want to handle them.

So from the picture below you can see where I can sell when price is at the top of the TMA and when I catch the crossing of the yellow daily pivot back into the trend. I determine trend from a different indicator we call the CSS. For a typical currency this allows to get 1-3 trades a week. If a move surprises me and goes beyond those outside lines I know price will come back to its median (unless its a super news story) and enter a 2nd trade to back inside and close out to BE or stay with the trend again. This helped my Thursday with eur/usd spike down from the news. I saw that thing way outside its normal range so I took the profit before it bounced back to its median. That move caught a lot of people by surprise when the eur/usd came all the way back but I got my profit.
Attached Image (click to enlarge)
Click to Enlarge Name: eurusdmh4.png Size: 46 KB
  • #330
  • Jun 18, 2014 10:37pm Jun 18, 2014 10:37pm
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). 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...
I am really interested in trying your method in Demo for a couple months to get used to it. Just curious, when you start creating the 10-15% hedges do you take profit from each one before creating another or do you let them build up till they are equal or greater than the original entry?
Also do you just trade cable only?
  • #331
  • Jun 19, 2014 12:41am Jun 19, 2014 12:41am
Quoting Sherpa
{quote} I am really interested in trying your method in Demo for a couple months to get used to it. Just curious, when you start creating the 10-15% hedges do you take profit from each one before creating another or do you let them build up till they are equal or greater than the original entry? Also do you just trade cable only?
Hey man,It is quite simple - based only a bit on the market conditions and more on money/risk management. I don't use a single indicator and watch chart in candles on 1d and 4h time frames. I trade only cable - it is enough. Most people confuse hedging with diversification. Hedging is a tool that employs price dynamics, not price levels.I'm trying to squeeze some time to shape it all on a thread - something like "Simply hedging" or similar. Peek at my activities next week - would try to start the thread to fully explain it.
  • #332
  • Jul 7, 2014 2:55pm Jul 7, 2014 2:55pm
Hi MichaelPelly

Please do continue with your hedging explanation.

cheers
  • #333
  • Jan 15, 2015 4:37am Jan 15, 2015 4:37am
Where are those fake 'real' traders who trade without stoplosses.I dare you to trade without stoploss again.With EuroChf falling 3000+ pips r.i.p to your forex accounts.i wish swissy rally got you naked with no SL . lol
  • #334
  • Feb 4, 2015 3:35pm Feb 4, 2015 3:35pm
Quoting ericnyamu
Where are those fake 'real' traders who trade without stoplosses.I dare you to trade without stoploss again.With EuroChf falling 3000+ pips r.i.p to your forex accounts.i wish swissy rally got you naked with no SL . lol
....So funny
Trade smart, not hard
  • #335
  • Apr 14, 2015 9:17pm Apr 14, 2015 9:17pm
I have recently gone from using stops to hedging and for me, up to this point I prefer hedging. Whether one is better than the other is up to the individual, hedging requires a lot more work in front of the PC as opposed to stops where you set and walk away, on the other hand, hedging allows you to not only minimize a loss but actually be able to turn a loss into profit. Hedging also allows me to move the hedge closer to the open where as before I would have a stop not less than 30 pips away from open, now I go down as low as 10 for some currencies such as EURGBP. For me to go so low though I do always ensure the open is backed up against a level of some description, be it a support or resistance or trend line. For my hedge I just use the same lot size as the original trade and I will look at opportunities when the trade will pull back or retrace entirely. If I close one side of the trade and it doesn't retrace I am prepared to re-enter the trade again, so far so good.

I would say, just be aware that hedging requires you to be at your PC a lot more, however the offset of this is that instead of a stop being a definitive loss, it now turns into an opportunity when you hedge.
  • #336
  • Apr 14, 2015 9:50pm Apr 14, 2015 9:50pm
you are so smart people go hedge your losing trade
If You Can't Join Them, Beat Them!
  • #337
  • Apr 15, 2015 3:42am Apr 15, 2015 3:42am
I have read in a forum i dont remember if it was here that you can open a position in forex and hedge it on BO however i prefer using s/l
  • #338
  • Jun 19, 2015 4:22pm Jun 19, 2015 4:22pm
Quoting chrisr
I have recently gone from using stops to hedging and for me, up to this point I prefer hedging. Whether one is better than the other is up to the individual, hedging requires a lot more work in front of the PC as opposed to stops where you set and walk away, on the other hand, hedging allows you to not only minimize a loss but actually be able to turn a loss into profit. Hedging also allows me to move the hedge closer to the open where as before I would have a stop not less than 30 pips away from open, now I go down as low as 10 for some currencies...
i´m whit you hedging makes my stop burning acount and get profit losses run in to profit very offen ; )
Scalping
  • #339
  • Jul 11, 2015 6:47am Jul 11, 2015 6:47am
This is my first post So excuse me if not in the subject .
EA hedging on 3 pairs expert attached .
In the test phase very great job .
But I would like to improve it with features repeated opening positions if increase minus on the profit.
I want to eliminate the need for manual input position.
Should work just with hedging opens 1 , 2 or 3 pairs if the items reach a profit that closes all positions
If there is a loss is open again set position.
I think that with accounts on mcrolots that makes sense.
Hedge euro usd / gbp usd It requires no great account the system is to produce a few % per month.
If someone knows how and can add such options i mean window for repeat orders as the next minus on the profit.
I think that useful to everyone.

simply rules
first set is if profit close all
if profit is minus -10 usd set next position
and every -10 ea open next positions

Attached File(s)
File Type: mq4 Hedging Strategy (4Pairs).mq4   8 KB | 386 downloads
  • #340
  • Edited Oct 8, 2015 12:30am Oct 7, 2015 11:35pm | Edited Oct 8, 2015 12:30am
Apologies in advance as I haven't reviewed all the discussion. Without going into a lengthy discussion of all of the ways to hedge in the financial markets what about the following:

FX trader has a position with a substantial or even marginal profit or a loss and there is looming event risk on the horizon. For whatever reason they don't want to close the position and even if it's just psychological, they still want to be flat or near flat into that event. After the event occurs, they can decide how and to what degree to open up their market exposure again. The cost of doing this is spreads plus execution risk plus right/ wrong risk as the position is put on again...

For example, easier to make judgement about market direction 1 hour after US unemployment data than right into it.

Thanks.
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