Is hedging allowed in forex? | Forex Factory

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Is hedging allowed in forex?

  • #1
  • First Post: Dec 20, 2014 5:03am Dec 20, 2014 5:03am
Hello,

I was wondering if hedging trades is legal in the forex market? From what I've read this is regulated in the U.S..?
  • #2
  • Dec 20, 2014 5:32am Dec 20, 2014 5:32am
Sure is mate, I think some brokers regulate it but you're fine in AUS.
  • #3
  • Edited 6:02am Dec 20, 2014 5:38am | Edited 6:02am
I sense I'm going to have problems with all brokers. Logic + right conditions you can't loose

I wonder if this is what the big player HF trading is all about.

10k to 4mil+ in less then a year on backtest.. plateus when you hit the 100 lot size limiter
  • #4
  • Dec 20, 2014 6:15am Dec 20, 2014 6:15am
Quoting krumpy
I sense I'm going to have problems with all brokers. Logic + right conditions you can't loose I wonder if this is what the big player HF trading is all about. 10k to 4mil+ in less then a year on backtest.. plateus when you hit the 100 lot size limiter
How many open positions in the end?
  • #5
  • Dec 20, 2014 6:20am Dec 20, 2014 6:20am
Quoting Robertk
{quote} How many open positions in the end?
none
  • #6
  • Dec 20, 2014 6:27am Dec 20, 2014 6:27am
you forget changing spreads, requotes........
I am what Many Dream to be but only a few can achieve, im a part of the 1%
  • #7
  • Dec 20, 2014 6:38am Dec 20, 2014 6:38am
Quoting krumpy
{quote} none
you must be careful, i had my custom version of forex hacked, on backtest it turned 1k into millions, did it every single time but on farward tests it didnt even make a dime... forex is a marathon not a race, you need to be smart also and have other skills in order to make it.
I am what Many Dream to be but only a few can achieve, im a part of the 1%
  • #8
  • Edited 5:29pm Dec 20, 2014 6:39am | Edited 5:29pm
Quoting Soros
you forget changing spreads, requotes........
Cover this by adjusting TP or Lot size slightly after calculating the difference?

And yeah will be doing allot more testing. I lied a little.. you do loose a little equity if the market fails to decide a direction after X attempts or you can play it super safe but it takes much longer to compound... It's just about finding that relatively safe X amount with respectable lot sizes based on a low equity percentage..

ohh and backtest was from 1k lol..
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  • #9
  • Dec 20, 2014 7:01am Dec 20, 2014 7:01am
Quoting Soros
{quote} you must be careful, i had my custom version of forex hacked, on backtest it turned 1k into millions, did it every single time but on farward tests it didnt even make a dime... forex is a marathon not a race, you need to be smart also and have other skills in order to make it.
Yeah, I've been at the charts for a few years.. I'm working on a much more subtle approach.. Just read about hedging so decided to incorporate to try minimise risk..

Didn't quite realise its potential but just like my previous approach I bet its to good to be true. Brokers won't allow it.
  • #10
  • Dec 20, 2014 8:39am Dec 20, 2014 8:39am
i can let you use my vps to test for 2 weeks, if it works like you said well discuss further
I am what Many Dream to be but only a few can achieve, im a part of the 1%
  • #11
  • Dec 20, 2014 10:01am Dec 20, 2014 10:01am
Quoting Soros
{quote} you must be careful, i had my custom version of forex hacked, on backtest it turned 1k into millions, did it every single time but on farward tests it didnt even make a dime... forex is a marathon not a race, you need to be smart also and have other skills in order to make it.
Your method was also hedging ?
  • #12
  • Dec 20, 2014 6:50pm Dec 20, 2014 6:50pm
Quoting krumpy
{quote} Cover this by adjusting TP or Lot size slightly after calculating the difference? And yeah will be doing allot more testing. I lied a little.. you do loose a little equity if the market fails to decide a direction after X attempts or you can play it super safe but it takes much longer to compound... It's just about finding that relatively safe X amount with respectable lot sizes based on a low equity percentage.. ohh and backtest was from 1k lol.. {image}
Hello krmpy, By x attempts do you mean consolidation/range ? also is your risk reward 1:1 ? thanks and good luck for your trading.
  • #13
  • Edited 9:53pm Dec 20, 2014 7:42pm | Edited 9:53pm
Quoting metta87
{quote} Hello krmpy, By x attempts do you mean consolidation/range ? also is your risk reward 1:1 ? thanks and good luck for your trading.
By X attempts I'm referring to how many orders will be opened/covered until the market hits your target; but yeah I guess this is also dependent on the range size your looking at. In theory the smaller the range the less movement the market needs to hit your target. RR @ 2:1 on original trade. The money is made by consistency and leveraging the last cover order.. not so much pip count
  • #14
  • Dec 20, 2014 10:41pm Dec 20, 2014 10:41pm
Quoting krumpy
Hello, I was wondering if hedging trades is legal in the forex market? From what I've read this is regulated in the U.S..?
You've written an EA, right? And by "hedging" I assume that you mean having both buy and sell positions open simultaneously in the same pair?

So if your br0ker doesn't allow same-pair hedging, then all you do is modify the EA code to keep track of the net position (long, short or zero), and simply adjust the position to the net, at every point (when the long and short positions in the hedge balance each other, you are simply out of the market). I converted an EA for a client back in 2012, and it worked fine, i.e. made exactly the same pips without the hedging. Also, you pay less swap and spread by maintaining a net position, which all adds up to more profit in the long term.
  • #15
  • Dec 20, 2014 10:52pm Dec 20, 2014 10:52pm
Quoting hanover
{quote} You've written an EA, right? And by "hedging" I assume that you mean having both buy and sell positions open simultaneously in the same pair? So if your br0ker doesn't allow same-pair hedging, then all you do is modify the EA code to keep track of the net position (long, short or zero), and simply adjust the position to the net, at every point (when the long and short positions in the hedge balance each other, you are simply out of the market). I converted an EA for a client back in 2012, and it worked fine, i.e. made exactly the same pips...
Hanover, I didn't get it. What do you mean by net position? Do you mean if someone wants to Hedge (as you defined about) one lot Long with one lot Short, should close the Long and remain on sidelines. But if someone wants to hedge one out of two lots Longs, each opened with a different profit/loss target, should close one but keep track of it as if it was hedged?
The Thief of Wall Street
  • #16
  • Edited 12:40am Dec 21, 2014 12:04am | Edited 12:40am
Quoting Chicky
{quote} Hanover, I didn't get it. What do you mean by net position? Do you mean if someone wants to Hedge (as you defined about) one lot Long with one lot Short, should close the Long and remain on sidelines. But if someone wants to hedge one out of two lots Longs, each opened with a different profit/loss target, should close one but keep track of it as if it was hedged?
Chicky,

Simply calculate the net position at every given point. Some examples:

  1. if currently 'hedged' at 3 lots long and 2 lots short, this nets out to 1 lot long, so EA is simply 1 lot long.
  2. if currently 'hedged' at 1 lot long and 1 lot short, this nets out to zero, so EA is simply out of the market.
  3. etc

The net position is all that counts. Suppose trader 'A' has 3 lots long and 2 lots short on EURUSD at $10/pip. Then price rises 10 pips. So he makes $300 (3 lots x $10/pip x 10 pips) on the long position and loses $200 on his short, for a net result of $100. Trader 'B' simply holds the net position of 1 lot long. Price rises 10 pips, so he makes $100, exactly the same. Suppose price then falls 20 pips. 'A' loses $600 on his long and gains $400 on his short, for a net result of $-200. 'B' simply loses $200 on his long, for the same $-200 result. No matter what price does henceforth, as long as 'B' maintains the same net position as 'A', they will both bank the same amount.

[EDIT: fixed the math errors in the paragraph above, but the principle and end result remain the same].

OK, some more examples:

Example 1: you're net 3 lots long, and the rules require that you open a sell position of 2 lots at this level. Hence you simply close 2 lots long, leaving the same net result (1 lot long).

Example 2: you're net 3 lots long, and the rules require that you open a sell position of 5 lots. Hence you close the 3 lots long, and open a sell position of 2 lots, leaving the same net result (2 lots short). Mathematically, 3 minus 5 equals -2.

If you reach a profit target or a stoploss, you'd be closing part or all of a position. Again, you calculate the effect that this would have on the net position, and close trades accordingly. So if you're 3 lots long, and you are required to close 1 lot when price reaches a certain target, and price hits that target, you do so, leaving 2 lots long still open.


Conclusion:
Entries and exits are merely adjustments to your net position. As I've said many times: to be profitable, you must be net long while price is rising, and net short when it's falling, frequently/heavily enough to overcome costs. That is all that counts. Whether you use entries, exits, hedging, scale in/out, SLs, TPs, all of these are merely different ways of adjusting your net position.

For example, if you're 1 lot long and you reach your TP, it doesn't matter whether you close the position or simply sell 1 lot. Either way, you're net position becomes zero. Closing a long position is the same as opening a short position, and vice versa. In fact, the TP is a sell order that your br0ker effectively matches with an equal buy order placed by another trader.

Your strategy is ultimately where you time these changes to your net position. The more accurate your timing is, relative to market highs/lows in your chosen trading horizon, the more pips you bank. Strategy is all about timing and direction; the way in which you adjust your position is merely an operational issue.

About the extra costs when same-pair hedging: when hedged, if your hedge is open at 5pm New York time, you receive less swap on the 'carry trade' position than your br0ker charges you on the opposite position, i.e. an overall loss on the swap. Hence you save yourself money by simply being out of the market. Also, in some situations you can pay more spread when hedging, as in Merlin's example here.

So it's easy enough to get around all of the NFA's anti-hedge and FIFO rules, by simply maintaining a net position.

Typed this in a hurry and I've waffled a bit, hope it all makes sense.

Have a wonderful Xmas and New Year.

David

  • #17
  • Edited 12:46am Dec 21, 2014 12:23am | Edited 12:46am
Quoting hanover
{quote} Chicky, Simply calculate the net position at every given point. Some examples: if currently 'hedged' at 3 lots long and 2 lots short, this nets out to 1 lot long, so EA is simply 1 lot long. if currently 'hedged' at 1 lot long and 1 lot short, this nets out to zero, so EA is simply out of the market. etc The net position is all that counts. Suppose trader 'A' has 3 lots long and 2 lots short on EURUSD at $10/pip. Then price rises 10 pips. So he makes $30 on the long position and loses $20 on his short, for a net result of $10. Trader 'B'...
You are very capable person and I have great respect for you, one reason I chose you for this question. Very carefully, It is deeper than many may think.
1. Hedging/counter trading one pair > Not relevant
2. Hedging with a different pair - fully, partially or overly > Not relevant
3. Hedging several pairs with several other pairs > Not relevant
4. Hedging several pairs with several other pairs in order to have "Zero Net Position" > Relevant

The question I have is based on your understanding of this market, what is the estimated degree of total "Portfolio Value" fluctuation because of the change in correlations among pairs. Let's say only 20 most frequently traded pairs. How deep it can take you below the water, in terms of Portfolio Value diminishing? The percentage, estimated.

ps. I am not good at statistics, can one calculate this variation based on sum total of standard deviation of correlations among the pairs? Some are 90% correlated, some are 25% correlated (positive or negative), but most are correlated. That means the mean should be somewhere above 50%. In other words, the draw-down in normal situation should not be more than 50% if one wisely uses positive and negative correlations. I don't know if this makes sense.
The Thief of Wall Street
  • #18
  • Edited 1:25am Dec 21, 2014 1:02am | Edited 1:25am
Quoting hanover

Example 1: you're net 3 lots long, and the rules require that you open a sell position of 2 lots at this level. Hence you simply close 2 lots long, leaving the same net result (1 lot long).

Example 2: you're net 3 lots long, and the rules require that you open a sell position of 5 lots. Hence you close the 3 lots long, and open a sell position of 2 lots, leaving the same net result (2 lots short). Mathematically, 3 minus 5 equals -2.
Sorry misunderstood you originally.. this makes sense.. However means your dumping equity in hope you picked the right trade. Obviously can counter again but now with less capital to work with.. Does seems like a work around to holding all your positions but I thought it was just banned against having both a sell and buy on the same chart? Obviously would only get moderated if your making some solid coin.
  • #19
  • Dec 21, 2014 1:21am Dec 21, 2014 1:21am
Quoting krumpy
{quote} This would work in theory but will increase your exposure significantly.. You'll have allot less cover orders to work with.. And will actually require a decent entry strategy to counter that.. Long term positions will help with that. I guess if your trying to avoid NFA thats the work around. Hopefully for me being in AUS this won't be required.
Think about what kind of gamblers Casinos hate? Also, since you live in Australia, try to find out those 3 Australians (two of them are Chartered Accountants) who are not allowed to play lotto in Australia. These same people also won an American State lottery with no odds against them. The only odds created was because of an administrative mistake, they bought one sequence twice and missed to buy one sequence. But they won anyway. I am not a big gambler, but was still shown door twice in Las Vegas.

This is not about winning or losing. They don't hate you even if you win millions ......... not at all, but if you get into calculations they all will be after you. Why they are afraid of calculations? Why they banned counter-trading/Hedging in the United States? They want you to enter and exit with no calculated moves even if they have to pay you millions because they know the end result of no calculation and the end result of calculated betting.
The Thief of Wall Street
  • #20
  • Dec 21, 2014 1:27am Dec 21, 2014 1:27am
Quoting Chicky
{quote} You are very capable person and I have great respect for you, one reason I chose you for this question. Very carefully, It is deeper than many may think...........
Chicky,

If there is a difference between your point #3 and #4, then I’m missing something, and hence I’m not knowledgeable enough to answer your question.

According to my simplistic understanding, for example EU x UJ = EJ. Or, by using algebra, EU x UJ / EJ = 1. So in theory, if you balance the position sizes correctly, you’d maintain a net zero position (ignoring costs). We can extrapolate this to include more pairs, e.g. EU / EG x UJ / GJ = 1, and so on. Correct me if I’m wrong, but my understanding is that the position sizes need constant re-balancing, as the $/pip for each pair, relative to my ‘home’ currency (that my account is denominated in), is constantly changing. As long as the pairs in the hedge form a perfect ring, i.e. the algebraic result of combining them equals 1, then any P/L depends solely on imbalances in the sizing.

My understanding is that correlation only becomes an issue when the pairs in the basket fail to make a perfect ring. As a simplest possible example, EUR is highly positively correlated with CHF (partly due to the 1.20 capping). So if I trade both EU and UC long, then the net result is EU x UC = EC, as opposed to 1. While EUR and CHF are 100% correlated, the price of EC does not move, and hence EU x UC = a constant, and (if the position size are correctly balanced, and ignoring costs) a zero net position is maintained. But if/as the correlation moves away from 100%, the net position will show a profit or a loss. So when a perfect ring doesn’t exist, P/L depends both on (1) the correlation between the currencies in the net algebraic result, and (2) any imbalances in the position sizing.

How big this profit or loss (drawdown) is, relative to the account size, would depend on the size of the positions relative to the size of the account, and how far the correlation fell away from 100%. Unless you have a crystal ball, you have no way of knowing future fluctuations of the correlations. However, the position sizes could (at least potentially) be continually adjusted to compensate for vagaries in the correlations (no doubt a very complex process!).

I have no experience in trading baskets, and haven’t studied portfolio value in this context (no doubt there’s a raft of academic and statistical papers on this topic). Hence I’m simply attempting to use math and logic to answer your question, given the relationships that exist between currencies and pairs. I’m afraid that’s the best that I can do.

David
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