Is hedging allowed in forex? | Page 2 | Forex Factory

Options

Go to
Permalinks
Print Thread

Similar Threads

"Dll calls must be allowed!" 3 replies

1 Pip Spread plus Scalping allowed Brokers 21 replies

[NFA] broker cancel executed orders no longer allowed 3 replies

"expert function calls are not allowed" (?) 6 replies

Attachments: Is hedging allowed in forex?
Exit Attachments

Is hedging allowed in forex?

  • #21
  • Dec 21, 2014 1:42am Dec 21, 2014 1:42am
Quoting krumpy
{quote} 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.
My understanding is that NFA-compliant br0kers in the USA now prohibit same-pair hedging (being long and short simultaneously in the same pair), and enforce FIFO (if you have two buy positions, you must close the first completely, before you may start closing the second; same applies to sell positions), regardless of whether you're making solid coin, or not.

Don't understand your point about dumping equity or picking the right trade. The fact that a trader who same pair hedges (i.e. has opposing positions of X lots long and Y lots short) will always make the same P/L as a trader who has a single position of X minus Y lots long, no matter what the market does subsequently, is an inviolable mathematical truism. That was the point I was endeavoring to make.
  • #22
  • Dec 21, 2014 1:57am Dec 21, 2014 1:57am
Quoting hanover
{quote} 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...
Yes, I missed something in 3. above. It should be hedging several pairs with several other pairs without trying to net off the position to zero.

No. We don't have to keep it at Net Zero all the time, just once. Then wait for it to go positive, bank the profit and again go back to Net Zero. There will be fluctuations in the Portfolio Value but logically, it cannot go to zero or even near that. Even if all the pairs change their directions the portfolio will still maintain its value. It is like maintaining a portfolio that starts with Net Zero and then it keeps on fluctuating from positive to negative and vice versa. Logically, there should be a limit to its down side.

There is a 15 page thread discussing hedging eur/usd with usd/chf. The idea at first seems crazy. Open a completely hedged trade with both the pairs at the same time and pay the spread to the lucky br0ker. But, they had the same concept of fluctuation in mind to benefit from price arbitrage which is not possible if they net off and buy/sell only eur/chf because they look to benefit from the Price Speed Gaps, that is, both pairs move with different speed in the same session. They were afraid that this correlation won't remain for long ......................... that was many years ago.

A safer approach would be to add as many pairs as possible. A 90% correlated pair would show very little fluctuation but a 25% correlated pair would show wider fluctuation. Again providing a chance to balance the holding ratio to control the fluctuation level. For example, If I don't want wider fluctuations would hold more pairs that are closely correlated and less of the pairs that are loosely correlated.

I am tired. Going to bed.
The Thief of Wall Street
  • #23
  • Dec 21, 2014 1:59am Dec 21, 2014 1:59am
Quoting hanover
{quote} My understanding is that NFA-compliant br0kers in the USA now prohibit same-pair hedging (being long and short simultaneously in the same pair), and enforce FIFO (if you have two buy positions, you must close the first completely, before you may start closing the second; same applies to sell positions), regardless of whether you're making solid coin, or not.
100% correct David. Same pair hedging has been prohibited in the US for a few years now. The FIFO while enacted at the same time, was not very closely "watched" and thus some br0kers had ways around it until just a couple months ago. Now any and all br0kers must comply with that ridiculous rule as well. This is why going into the new year I'll have a different account.
Ghost Rider - WWTBMD?
  • #24
  • Dec 21, 2014 2:09am Dec 21, 2014 2:09am
Quoting Chicky
{quote} Yes, I missed something in 3. above. It should be hedging several pairs with several other pairs without trying to net off the position to zero. No. We don't have to keep it at Net Zero all the time, just once. Then wait for it to go positive, bank the profit and again go back to Net Zero. There will be fluctuations in the Portfolio Value but logically, it cannot go to zero or even near that. Even if all the pairs change their directions the portfolio will still maintain its value. It is like maintaining a portfolio that starts with Net...
I tested this approach for some time with excellent results, but don't do it any more until I make trading a full time job. I don't want any new rules before I retire or my broker to get more richer.
The Thief of Wall Street
  • #25
  • Dec 21, 2014 2:14am Dec 21, 2014 2:14am
Quoting hanover
{quote}Don't understand your point about dumping equity or picking the right trade. The fact that a trader who same pair hedges (i.e. has opposing positions of X lots long and Y lots short) will always make the same P/L as a trader who has a single position of X minus Y lots long, no matter what the market does subsequently, is an inviolable mathematical truism. That was the point I was endeavoring to make.
Sorry 12hr day at work feeling confused myself now.... But to try explain it with the example you gave:

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.

Your basically betting that on that move you will hit your TP (that is enough to cover your now closed long orders).. and if the market goes against you again.. your now dealing with 2 bad shorts and 3 previous longs to make up for. (since you closed them)

My theory is basically just remaining flat with your last order leveraged that little bit extra... sooner or later the market will hit your TP unless all movement halts.. lol
  • #26
  • Dec 21, 2014 2:24am Dec 21, 2014 2:24am
Actually I see how that would work.. obviously close the buys at your original entry with a sell order ready.. Under the assumption your trade originally favoured in your direction..
  • #27
  • Dec 21, 2014 2:41am Dec 21, 2014 2:41am
Hedging has for my trading a vey different meaning than the arguments stated above. I´ll show what I mean with the following pair : USD/JPY :

On October 23rd I´d opened a long position at 107.45. On Nov. 19th price touched resistance at 119, and since my MACD-Divergence-Indicator showed a bearish signal I opened a short position at 118.78, with a TP-Target at 117.50. Shortly after closing the countertrend-trade I doubled the long-position and set my Target at 121.00.
  • #28
  • Edited 3:56am Dec 21, 2014 3:26am | Edited 3:56am
Quoting Chicky
We don't have to keep it at Net Zero all the time, just once. Then wait for it to go positive, bank the profit and again go back to Net Zero. There will be fluctuations in the Portfolio Value but logically, it cannot go to zero or even near that. Even if all the pairs change their directions the portfolio will still maintain its value. It is like maintaining a portfolio that starts with Net Zero and then it keeps on fluctuating from positive to negative and vice versa. Logically, there should be a limit to its down side.
Simply banking profits, and waiting for losses to return to breakeven or better before closing them, is not in itself a winning strategy. The problem of course being that the losses might spiral out of control.

Mathematically, the basket trader is really trading the (algebraic) net position. If he is net long while the net position rises, and net short while it falls, he will profit. His P/L is dependent on the correlation, and how the position sizes are balanced.

At least that's the way I understand it.

Quoting krumpy
Your basically betting that on that move you will hit your TP (that is enough to cover your now closed long orders).. and if the market goes against you again.. your now dealing with 2 bad shorts and 3 previous longs to make up for. (since you closed them) My theory is basically just remaining flat with your last order leveraged that little bit extra... sooner or later the market will hit your TP unless all movement halts.. lol
I'm not betting anything. I'm simply saying that, if one trader has two positions, one of 2 lots long and the other 5 lots short, then he will always make the same P/L as a trader who has one position, 3 lots short, no matter what the market subsequently does.

This is not about strategy. It is simply a statement that two same-pair positions can be resolved into a single net position, with an identical result.

Quoting parsifal23
Hedging has for my trading a vey different meaning than the arguments stated above. I´ll show what I mean with the following pair : USD/JPY : On October 23rd I´d opened a long position at 107.45. On Nov. 19th price touched resistance at 119, and since my MACD-Divergence-Indicator showed a bearish signal I opened a short position at 118.78, with a TP-Target at 117.50. Shortly after closing the countertrend-trade I doubled the long-position and set my Target at 121.00.
I can make exactly the same pips as you, without any hedging.

1. When you open your long at 107.45, I do likewise. We both make the same pips.

2. When you open your short at 118.78, your two hedged positions effectively cancel each other. Whatever one position gains, the other loses an equal amount. So your total P/L doesn't change. Hence I can replicate this by closing my long, and staying out of the market, so that my P/L likewise doesn't change. Neither of us make any pips, until your short reaches its TP.

3. When your short reaches its TP at 117.50, you close it, leaving yourself net long once again. So I simply replicate your position by opening another long position. Now we are both long, and make the same pips.

4. If you double your long position, I also enter another long position at the same point, to replicate your situation. Again, we will both make the same pips, and the same P/L.

5. When price reaches the target of 121.00, we both close our positions.

Now I have made the same pips as you, without any hedging.

Quoting albchr
{quote} 100% correct David. Same pair hedging has been prohibited in the US for a few years now. The FIFO while enacted at the same time, was not very closely "watched" and thus some br0kers had ways around it until just a couple months ago. Now any and all br0kers must comply with that ridiculous rule as well. This is why going into the new year I'll have a different account.
Agreed Chris, the NFA intervention is draconian and unnecessary. The fact that the rules can be worked around so easily highlights their pointlessness.

Hope you have a great Xmas and New Year. May 2015 bring prosperity to all of us.

David
  • #29
  • Dec 21, 2014 1:39pm Dec 21, 2014 1:39pm
Quoting Chicky
{quote} 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...
Why did they ban counter-trading/Hedging in the United States? Thanks.
  • #30
  • Dec 21, 2014 4:03pm Dec 21, 2014 4:03pm
Quoting metta87
{quote} Why did they ban counter-trading/Hedging in the United States? Thanks.
Id say because if applied correctly you have a very high (almost certain) chance of profiting regardless of market direction...
  • #31
  • Edited Dec 22, 2014 12:34am Dec 21, 2014 9:34pm | Edited Dec 22, 2014 12:34am
Quoting metta87
{quote} Why did they ban counter-trading/Hedging in the United States? Thanks.
If I recall correctly, NFA were attempting to save naive traders who use same-pair hedging, from unnecessarily paying extra spread/swap to their br0kers.

While I'm strongly opposed to authorities dictating how traders may trade, the no-hedge restriction is inconsequential, because any hedging 'strategy' can be replaced by a single-order method without affecting the P/L, as I explained in earlier posts.
  • #32
  • Dec 21, 2014 10:10pm Dec 21, 2014 10:10pm
buy and sell signal comes and goes . some people just can't wait 1 trade to hit sl/tp before the next trade.
can't figure more profitable ways to use this hedge...
  • #33
  • Edited 2:12pm Dec 22, 2014 3:33am | Edited 2:12pm
Quoting Gwan
buy and sell signal comes and goes . some people just can't wait 1 trade to hit sl/tp before the next trade. can't figure more profitable ways to use this hedge...
Take a look at the picture below:

DISCLAIMER: THIS IS NOT A SYSTEM - IT'S JUST AN EXAMPLE TO ILLUSTRATE THE IDEA. DON'T TRY TO USE IT ON REAL!

Attached Image (click to enlarge)
Click to Enlarge Name: Recovery hedging.png Size: 218 KB


As Krumpy said it right, you have to apply it correctly, i.e. to use the right money management, position sizing and so on - but, the truth that it is possible to trade the market without any loss at all. Of course, it's not a holy grail and you can blow account even faster, but, again - it's all about money management.

Also, I suggest to watch this video (thanks to Rag2RichesFX for this):

Inserted Video


Best regards,
Artem
Let's go with the flow
  • #34
  • Edited 2:13pm Dec 22, 2014 11:52am | Edited 2:13pm
Quoting artem_t
As Krumpy said it right, you have to apply it correctly, i.e. to use the right money management, position sizing and so on - but, the truth that it is possible to trade the market without any loss at all. Of course, it's not a holy grail and you can blow account even faster, but, again - it's all about money management.
I watched this video several months ago. If you look beyond the apparent sophistication and sales pitch, his system is just another grid/martingale.

In your diagram, every time price alternates between a cross of the blue and red lines, you must increase the position size in the following sequence: 1,2,3,6,12,24,48,96,192,384, ...... and the sequence is not broken until price reaches either the green or yellow line, which represents recovery to breakeven (and that's ignoring costs). The only winning situation is where the initial position (size=1) reaches the green line before the red line. For example, if I'd opened at 0.7750 on the NZDUSD yesterday, using your 20 pip grid, I'd be at 24 lots already (see screenshot), just trying to recover to breakeven.

You could ensure a win every time (i.e. return to breakeven+1 instead of breakeven) by using the sizing sequence 1,3,6,12,24,48,96,192,384, ...... but now it takes one less double to reach the margin call.

Here's the problem: it doesn’t matter what MM you use, you can never eliminate the possibility of the ‘death sequence’ completely. And moreover, the tinier your starting position size (to allow a greater number of doubles before the margin call), the tinier your return is. For example, with 0.01 lots and a 20 pip grid, you'll get $2 per win, which is hardly going to make you rich. Better to spend the $2 on a lottery ticket!

Incidentally, this is exactly the same concept used in the Viper grid EA, and FOREXflash's EA in this thread. As discussed in that thread, the best way to reduce the probability of loss is to open trades only during times of the day when volatility is at its greatest, and/or trade the most volatile or strongest trending pairs. In other words, forget about focusing on the MM and actually perform some analysis! But even then, there's nothing you can do to make it completely safe.

Uncapped martingale is always an all-or-nothing gamble. That’s why no serious professional trader uses it. Anyway, your money, your choice.
Attached Image (click to enlarge)
Click to Enlarge Name: PPI 155.png Size: 25 KB
  • #35
  • Edited 1:43pm Dec 22, 2014 1:24pm | Edited 1:43pm
Quoting hanover
{quote} I watched this video several months ago. If you look beyond the smoke and mirrors, his system is just another grid/martingale.
I didn't say that his system is perfect. I just meant that there are few interesting ideas in this video, imo.

Quoting hanover
{quote} It doesn’t matter what MM you use, you can never eliminate the possibility of the ‘death sequence’ completely. Uncapped martingale is always an all-or-nothing gamble.
Yes, I agree that we can't eliminate it totally, but with the right money management and, for example, using the max fixed amount of attempts (hedging trades) we can have some losses, but still be able to avoid the big one. This way this is not all-or-nothing gamble.

Quoting hanover
{quote} That’s why no serious professional trader uses it. Anyway, your money, your choice.
Seriously? You know all and each "serious trader" in the world? C'mon, man

P.S. Okey, while I was typing, your post became twice bigger than the original. Anyway, I have only one thing left to say - I have never said that this is the holy grail. It should be used wisely and, perhaps, for most of people - it's better not to use at all.
Still, Krumpy's result shows that the idea has the right to live.
And thank you for the point to ViperGrid EA - but I have already been familiar with this thread too )

P.S.2.
Quoting hanover
{quote}For example, if I'd opened at 0.7750 on the NZDUSD yesterday, using your 20 pip grid, I'd be at 24 lots already (see screenshot), just trying to recover to breakeven.
Oh, man.. That was just an example - not a strategy to use! I think I should add a disclaimer to my post..

To be honest, I have regretted that I decided to reply to you - your 6K posts had to warn me of who I am dealing with Lol
Anyway, I got your point of view - thanks again, and let's close this discussion, because this is the road to nowhere in any case

Best regards,
Artem
Let's go with the flow
  • #36
  • Dec 22, 2014 2:12pm Dec 22, 2014 2:12pm
Quoting artem_t
Seriously? You know all and each "serious trader" in the world? C'mon, man
By serious trader, I mean somebody with an account size of (say) > $250,000. To state the obvious, he's not going to use an uncapped martingale, because he can't risk losing his entire account to one 'death sequence'. Or a fund manager with several million under management, who has a responsibility to protect his clients' capital.

I'm happy to end the discussion. No hard feelings, you seem like a very friendly and positive person.
I wish you a very happy holiday season, and a prosperous 2015.
  • #37
  • Dec 22, 2014 2:19pm Dec 22, 2014 2:19pm
Quoting hanover
{quote} By serious trader, I mean somebody with an account size of (say) > $250,000. To state the obvious, he's not going to use an uncapped martingale, because he can't risk losing his entire account to one 'death sequence'.
Yes - if we are talking about risking the entire account, then I totally agree with you.

Quoting hanover
{quote} I'm happy to end the discussion. No hard feelings, you seem like a very friendly and positive person. I wish you a very happy holiday season, and a prosperous 2015.
Thank you for your kind words. Absolutely mutually

Merry Christmas and Happy New Year to you too! Best wishes for 2015! )

Regards,
Artem
Let's go with the flow
  • #38
  • Edited 11:16pm Dec 22, 2014 10:54pm | Edited 11:16pm
Quoting hanover
Here's the problem: it doesn’t matter what MM you use, you can never eliminate the possibility of the ‘death sequence’ completely. And moreover, the tinier your starting position size (to allow a greater number of doubles before the margin call), the tinier your return is. For example, with 0.01 lots and a 20 pip grid, you'll get $2 per win, which is hardly going to make you rich. Better to spend the $2 on a lottery ticket!
Albert Einstein — 'Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.'

Yes, I admit this idea is not a 100% win rate.. and seems ludicrous.. But clearly shown can be very powerful. I do like that your educating the novice traders and users of this forum that hedging can be very devastating and not as straight forward as it looks. I proved the threat of 'death sequence' can be avoided with the correct understanding in my BT under the right market conditions.. It's not all about trying to be a 100% but rather focus on consistency and capitalize on that. Losses will be had but your only at threat if it occurs frequently in a short period of time.. but everything can be conditioned if you understand what your working with. I prefer to keep an open mind on everything rather then side other peoples failures.

Quoting hanover
If I recall correctly, NFA were attempting to save naive traders who use same-pair hedging, from unnecessarily paying extra spread/swap to their br0kers.
LOL!... Not sure if your naive or taking the piss....

I was just curious if Forex globally are influenced by NFA regulations but doesn't seem to be the case.. Thanks for the input everyone and best of luck with your trading!

If I'm successful I'll consider changing my avatar to match accordingly.
  • #39
  • Edited 2:20pm Dec 23, 2014 2:54am | Edited 2:20pm
Quoting krumpy
Albert Einstein — 'Compound interest is the eighth wonder of the world. He who understands it, earns it ... he who doesn't ... pays it.' Yes, I admit this idea is not a 100% win rate......
Back in 2012, after the NFA had banned same-pair hedging, I rewrote an EA that previously used same-pair hedging, so that it no longer used hedged positions. I explained how I did that earlier in the thread. The EA now makes exactly the same pips as it did before, by simply maintaining the same net position at every point, and it pays less spread/swap to the br0ker. Hence it is even more profitable without the hedging.

Because every hedged position can be replicated by a non-hedged position, hedging is not really a strategy; it is merely one way of implementing a given strategy. I explained all that back in post #16.

It is possible to be extremely profitable using hedging, as your equity curve in post #8 demonstrates. But it’s always possible to be even more profitable by using exactly the same strategy, without the hedging (due to less br0ker costs).

Hence I’m deadly serious with my comment about the NFA attempting to save traders from paying spread/swap to their br0kers unnecessarily. It’s not at all naïve. It has nothing to do with strategy, or analysis, or price behavior, or even entries and exits; it is simply about the math behind position sizing and P/L. If you’re not convinced, read post #16, and/or this post, and then the posts of merlin, smittens4212, 7bit, pipmutt, nubcake, birdt, capitalist88, philmcgrew, aediaz1, LazyPawn, euclid and others in the many links. Perhaps they explain it better than I do.


Let’s not confuse three completely separate concepts: compounding, martingale, and same-pair hedging, which you seem to be combining together.

Compounding is implicit in any kind of fixed fractional position sizing. You can compound your gains by simply risking a consistent X% per position. A lot of pro traders compound their gains without using either hedging or martingale.

Martingale is all about increasing position size, in an attempt to recover from recent losses. You can use martingale without hedging. The ‘death sequence’ is a martingale concept; you can same pair hedge without martingale, and thus eliminate all risk of the ‘death sequence’.

And we’ve already discussed same-pair hedging. To answer your original question: there are plenty of non-US br0kers that allow hedging. I have accounts with both AxiTrader and Pepperstone, and, being outside of the NFA’s jurisdiction, they are not subject to any NFA regulations. If you want to shop around further, there’s a good list of MT4 br0kers here.


Finally, if you're interested in developing and testing mechanical systems, you might be interested in the (prolific) writings of Daniel Fernandez. I've learned a lot from the articles in his blog (but nowadays I prefer a more 'discretionary' approach).

Congratulations on the performance of your back-test, and I wish you a great Xmas and New Year.
  • #40
  • Last Post: Dec 26, 2014 9:13pm Dec 26, 2014 9:13pm
Hedging is not trading. Hedgers are using the forex to offset currency risk incurred through business operations unrelated to forex. Forex traders take those positions not because they are hedging but because they are trading. Trading is never hedging.
0 traders viewing now