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Hedging vs Stop Loss

  • #341
  • Oct 8, 2015 10:04am Oct 8, 2015 10:04am
My opinion is that stop-losses are very important part of trading. How you will shift your locking position, as you can doing this with stop-loss. Locking - it is very risky strategy, because, you work with several orders in one time, which depends of each other.
  • #342
  • Oct 8, 2015 10:18am Oct 8, 2015 10:18am
A strategy involves direction and/or timing. Therefore same-pair hedging is not a strategy, it is merely a different (and slightly more expensive) way of getting from long/short back to flat. Any same-pair hedge method can be translated into a method without the hedging, and it will harvest exactly the same pips, but without the additional costs (spread/swap). Explained in detail here and here.
  • #343
  • Oct 8, 2015 6:30pm Oct 8, 2015 6:30pm
Quoting hanover
A strategy involves direction and/or timing. Therefore same-pair hedging is not a strategy, it is merely a different (and slightly more expensive) way of getting from long/short back to flat. Any same-pair hedge method can be translated into a method without the hedging, and it will harvest exactly the same pips, but without the additional costs (spread/swap). Explained in detail here and here....
Yes, but similar to how people use the term 'cell phone' incorrectly as cell phones were no longer in market long, long, ago... some in FX have broadened the term hedging to include getting flat or partially flat in a position.
  • #344
  • Oct 8, 2015 11:04pm Oct 8, 2015 11:04pm
hedging is for people who want to stop the losses to go any higher, but know how to trade out of those losses at a later date when the market is more favourable.

no different from holders of a stock portfolio, who in times of great uncertainty hedge their position with a future or options on S&P500 or Nasdaq100.
these portfolio holders cannot short the stocks they own in their account, because they cannot be long AND short Apple stock for instance. they have to hedge with something else, even if that hedge is not perfect. they still will have to unhedge sometime in the future and swallow the losses or trade out of the losses.
these holders must be quite envious how we forex traders can have a perfect hedge by being long and short in the same pair.
  • #345
  • Oct 9, 2015 12:36am Oct 9, 2015 12:36am
hedging and stop loss are both means of money management when trade entry is not in favor.
there is no either one better than an other.
the key is how to use it per your own trading style/strategy/system.
patience is a virtue
  • #346
  • Edited 6:44pm Oct 9, 2015 9:55am | Edited 6:44pm
Quoting yonnie
hedging is for people who want to stop the losses to go any higher, but know how to trade out of those losses at a later date when the market is more favourable.
(1) You buy EU at 1.1300 and price falls 50 pips to 1.1250, so you (2) hedge by opening a sell, leaving you net flat. You wait until price rises 60 pips to 1.1310, then you (3) close your buy at a profit of +10, leaving you net short. Then you wait for price to fall 100 pips to 1.1210, and you (4) close your sell for a profit of +40. Total profit = +50. Now you've traded your way out of a loss, right?

Well, here is how to achieve exactly the same result without same-pair hedging:

(1) You buy EU at 1.1300 and price falls 50 pips to 1.1250, so you (2) close out for a result of -50, leaving you net flat. You wait until price rises 60 pips to 1.1310, then you (3) open a sell, leaving you net short. Then you wait for price to fall 100 pips to 1.1210, and you (4) close your sell for a profit of +100. Total profit = +50, exactly the same result.

Why the same result? Because both traders are net long while price falls 50 pips, net flat while price rises 60 pips, and net short while price falls 100 pips.

You can make up more complex examples if you want, but the fact remains that, in every conceivable scenario, as long as you replicate the hedger's net position at every point along the way, you will harvest exactly the same pips, and without the hedging. And because you're out of the market instead of being hedged, you pay less swap (because, when hedged, your br0ker will charge you more swap on one position than he pays you on the other), hence you're actually better off.

I know for sure that this is true because a few years ago I rewrote an EA for a US trader to work around NFA's 'no hedging' rule. The revised EA executes exactly the same strategy, and then instead of hedging it simply calculates and maintains the same net position as the original, at each point along the way. To test my coding, I ran both EAs in parallel for a while, and both made exactly the same number of pips, except that the new EA paid less swap. Seeing is believing.

Please understand: I'm not saying that you can't make money by same-pair hedging: after all, the first trader in my example made +50 pips. What I am saying is that you can always be slightly more profitable, no matter what price does, by not hedging.

This is my last post, as I don't want to get into yet another debate on this contentious and polarizing topic. There is a more detailed explanation, and plenty more examples, in the links in my earlier post. People either see the illusion for what it is, or they don't.
  • #347
  • Oct 9, 2015 10:27am Oct 9, 2015 10:27am
Everyone who talks about this topic miss the one thing that hedging actually provides. I'm not talking about what happens when the hedge is on, what matters is what happens when the hedge is closed.

You can only open and close a position once. The benefit of hedging is that your original position is still active in the market working for you.

Hedging allows you to keep a long term position in the market at times of uncertainty. Instead of closing that position, you can attempt to keep it alive through hedging by temporarily using a hedge to put you flat in the market. Note temporarily.

That position which has already run 500 pips in profit might run to another 1000 pips profit but it is only by hedging can you keep that position open because once the position is closed it is closed forever.

Hedging makes most sense for long term position traders who build positions with the trend, which is not what most people here do.

Anyone who has attempted long term position trading knows it can be difficult at times to get long term positions in the market, the survival rate can be as low as 20%, therefore it makes sense to try and keep those surviving positions open, and hedging is one such way of doing so.
  • #348
  • Oct 9, 2015 11:41am Oct 9, 2015 11:41am
It's probably uncommon amongst the retail forex spot traders, but using Nadex options to hedge is a great alternative to a stop loss for the shorter term trader. However, it does require timing and some knowledge/skill to execute. For example using Nade Spread Options. The risk is capped with spread options (as is the profit) but the beauty is rather than risk getting stopped out with a S/L only to see the market move in your direction, you just let the option expire and consider the option loss as insurance. If price moves against your primary trade, the collected profit on the option should offset the loss minus the premium paid. The skill/knowledge comes in terms of picking the right spread at the right price in order to minimize the premium. If you cut the primary trade early enough you come out ahead on the option trade if it moves enough to make up the loss on the primary. But that's not the goal. The goal is to either lower the risk amount in the case of a loss or increase the "wiggle" room for the same price as what you would have risked with a stop loss.

You could do the same with Nadex Binaries. If you really want to get tricky, you could do some butterflies, condors, straddles, or strangles. But that's getting pretty deep for the topic at hand.
  • #349
  • Oct 9, 2015 11:54am Oct 9, 2015 11:54am
Quoting JR97
It's probably uncommon amongst the retail forex spot traders, but using Nadex options to hedge is a great alternative to a stop loss for the shorter term trader. However, it does require timing and some knowledge/skill to execute. For example using Nade Spread Options. The risk is capped with spread options (as is the profit) but the beauty is rather than risk getting stopped out with a S/L only to see the market move in your direction, you just let the option expire and consider the option loss as insurance. If price moves against your primary...
It's All good in theory, but you know what's the problem with all that hedging/insurance thing? TOO MANY IF's! If this happens, if that, if then......if the timing is right........ why make things complicated? Just take the loss and move on. "Keep it simple, stupid". Trying to avoid the unavoidable(loss) leads to destruction.
  • #350
  • Oct 9, 2015 11:59am Oct 9, 2015 11:59am
Quoting hanover
{quote} (1) You buy EU at 1.1300 and price falls 50 pips to 1.1250, so you (2) hedge by opening a sell, leaving you net flat. You wait until price rises 60 pips to 1.1310, then you (3) close your buy at a profit of +10, leaving you net short. Then you wait for price to fall 100 pips to 1.1210, and you (4) close your sell for a profit of +40. Total profit = +50. Now you've traded your way out of a loss, right? Well, here is how to achieve exactly the same result without same-pair hedging: (1) You buy EU at 1.1300 and price falls 50 pips to 1.1250,...
I respect you persistence in trying to set people right here but obviously some will never get it. You are a good and patient man but some things will never get through. Leave them be and let them donate liquidity.
  • #351
  • Oct 9, 2015 12:03pm Oct 9, 2015 12:03pm
Quoting alphaomega
{quote} It's All good in theory, but you know what's the problem with all that hedging/insurance thing? TOO MANY IF's! If this happens, if that, if then......if the timing is right........ why make things complicated? Just take the loss and move on. "Keep it simple, stupid". Trying to avoid the unavoidable(loss) leads to destruction.
Hence this part of my statement:
Quote
it does require timing and some knowledge/skill to execute.

It isn't complicated at all once you understand how a spread option works. And I agree.. take the loss. But why not take the loss at a lower cost while at the same time giving your initial trade a chance to win rather than getting stopped out automatically? Put the numbers in your favor over time by improving your r:r.
  • #352
  • Edited 2:28pm Oct 11, 2015 1:29pm | Edited 2:28pm
Quoting Agro
{quote} I respect you persistence in trying to set people right here but obviously some will never get it. You are a good and patient man but some things will never get through. Leave them be and let them donate liquidity.
Thanks for your kind words.

It's perhaps surprising that even many knowledgeable and experienced traders (look at some of the names in this thread, for example) can't see what, to me and others, is mathematically obvious. Then, instead of working thru the examples and proofs (e.g. the links in the third paragraph of this post) for themselves, they assume that they understand something about same-pair hedging that we've supposedly overlooked, when their angles have already been covered in our posted examples! Or they present the straw man argument "I use hedging and it's profitable" without even bothering to read what is being said.
  • #353
  • Oct 11, 2015 1:33pm Oct 11, 2015 1:33pm
Quoting hanover
{quote} Thanks for your kind words. It's perhaps surprising that even many knowledgeable and experienced traders (look at some of the names in this thread, for example) can't see what, to me and others, is mathematically obvious. Then, instead of working thru the examples and proofs (the relevant links in this post) for themselves, they assume that they understand something about same-pair hedging that we've supposedly overlooked, when their angles have already been covered...
Hi Hanover,
sorry for disturbing here but I need to ask something related with Metastock PREV function . Would you please let me know where and how can I ask it. Thanks in advance.
  • #354
  • Oct 11, 2015 2:29pm Oct 11, 2015 2:29pm
Quoting Rockerzeus
{quote} Hi Hanover, sorry for disturbing here but I need to ask something related with Metastock PREV function . Would you please let me know where and how can I ask it. Thanks in advance.
I use MetaTrader, not MetaStock. Perhaps you could try opening a new thread in Platform Tech, and somebody who is familiar with MetaStock will answer your question.
  • #355
  • Oct 11, 2015 4:17pm Oct 11, 2015 4:17pm
Quoting hanover
{quote} I use MetaTrader, not MetaStock. Perhaps you could try opening a new thread in Platform Tech, and somebody who is familiar with MetaStock will answer your question.
Thanks for reply.
  • #356
  • Oct 13, 2015 7:22am Oct 13, 2015 7:22am
Quoting EveningStar
Hi guys, I have something in mind about hedging a position versus setting a stop loss for it. Say for example I open a long position for GBPUSD and it goes against me. Now, instead of setting a stop loss and having the trade hit that SL, I open a short position when it reaches the price point where I would have set a SL. The net loss will always be equal to that and when I open other trades and cover that net loss I'll simply close the position and be done with it. Psychologically speaking, I think hedging the position is a better thing to do. What...
Any strategy related to the hedging unprofitable. The difference between locking and stop loss is small. Plus hedge are additional costs for fees. Better to use a stop loss.
  • #357
  • Feb 23, 2016 6:49am Feb 23, 2016 6:49am
Hi guys,

Hedging is definitely the way to go, but as some have mention you need to find a broker that accept hedging. I'm using Avatrade in Ireland as I'm based in the UK.
What I'm looking for with my hedging strategy is to find a robot that can cancel pending hedging order when original entry hit profit.
Anyone that has experience with one?

Cheers...
  • #358
  • Feb 23, 2016 2:55pm Feb 23, 2016 2:55pm
I no longer use robots. I think that discretionary trading is the way to go.
However, I suppose you can use alerts so you can close manually, but I guess that depends on time frame you are using or how quickly you need to act
  • #359
  • Feb 24, 2016 11:39am Feb 24, 2016 11:39am
Quoting avner
I no longer use robots. I think that discretionary trading is the way to go. However, I suppose you can use alerts so you can close manually, but I guess that depends on time frame you are using or how quickly you need to act
Yes. Using advisors is dependent on your trading time frame. If you trading on H4, for example, you can close and open an order without robot. And if you use scalping strategy, you'd better use an advisor.
  • #360
  • Apr 2, 2016 3:46am Apr 2, 2016 3:46am
Hedging is a doubled Edged sword... Entry is easy but exit is where you need to make a wise decision, if not then you would drag your losses further.

I personally use hedging instead of stop loss... One thing you really need to be successful using hedging is "PATIENCE"... Once a hedged trade is opened, I generally wait for price to move at least 50-70 pips in either direction and then wait for it to retrace a bit (15-30 pips) then again enter a hedged trade... My profit is 15-30 pips on per hedged trade.

Hedging is a lot broader concept, you just need to find what hedging strategy works for you best and continue with it..
Losers Hope, Winners Believe
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