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Hedging is it really useful?

  • #1
  • First Post: Nov 29, 2015 7:32pm Nov 29, 2015 7:32pm
May I ask what the advantages of perfectly hedging your exposure are compared to just closing the position?

I see so many people on this forums saying that they "don't want to give the broker their money" but by hedging you are essentially locking in your negative balance on the equity side which is exactly the same as closing the trade right away.
If you want to believe that the trade could be profitable in the future and currently is just a correction why not close and reopen the trade later on?
If you hedge a long position by entering a short trade you still have to buy back the lots if you want to release the hedge leading exactly to the situation as opening a fresh buy at this time.

There even is the downside that you have to pay interest on open position and for some broker you reduce your margin you can use.

I understand that there are a few scenarios where hedging can be useful:

  1. If you construct some kind of payout profile (e.g. options) and partially hedge risk
  2. you use another financial instrument due to lack of liquidity in one market or because of distributed money in different accounts
  3. you want to hedge against a certain type of risk / dollar neutral or sector risk etc...

but in regards to the perfect 1:1 perfect hedge in forex this does not apply.

Hedging lets you manipulate your statistics by postponing a loss, altering your win/loose statistics or some other ratios but overall it will not have a positive effect on your account.

What am I missing here?
The only reason I can see here is that it simplifies your order management if you have multiple positions open in different directions with different sls and tps. This also could be achieved by using a little bit of math and partially closing or adding positions on the fly. It does not matter at what price you entered a position as long as the time you hold your net exposure is the same.

  • #2
  • Nov 30, 2015 12:05am Nov 30, 2015 12:05am
Quoting Kilian19
What am I missing here?
Nothing. Everything you've said is backed by math and logic that's self-evident.
  • #3
  • Nov 30, 2015 1:02am Nov 30, 2015 1:02am
Hedging is very usefull for those who r fear push the triger
at some or most time. For that u have interests whats going on and take the positin again.
Trade fearless not careless...
  • #4
  • Nov 30, 2015 1:04am Nov 30, 2015 1:04am
By psychological reasoning, there are instances where certain methods may require hedging to aid their application with this additional cost deemed as application 'fees'. Practitioners of hedging can illustrate this added value to their method which lies in the psychological domain and not on math/logic per se.
  • #5
  • Nov 30, 2015 1:16am Nov 30, 2015 1:16am
Hedging is a technique like any other, can be useful and can cause failure. However, it can be useful only if you are right at when you hedge and when you end the hedging. Sometimes hedging causes your positions to be in loss for long time, during which you can trade inside the sandwich " Sell - Buy ". For example: if you open a one lot sell position at 1.5 and a one buy position at 1.6, then between 1.5 and 1.6 you can open a sequence of trades until you reach a point at which you can close one of the originally opened positions.
If you get the right point at which you exit the hedge, it sometimes can double your profit. But you need to be familiar with the pairs that you are trading and be aware of the upcoming events, hence you can hit the right point of exit.
  • #6
  • Edited 11:15am Nov 30, 2015 3:31am | Edited 11:15am
Quoting skyway
By psychological reasoning, there are instances where certain methods may require hedging to aid their application with this additional cost deemed as application 'fees'.
Assuming that you're referring to being long/short simultaneously in the same pair.......

If you can embrace the math/logic, i.e. fully understand how simply maintaining a single net position achieves exactly the same result -- in every conceivable situation -- then any psychology instantly becomes a non-issue. At least it does for me. Then there's no need for me to pay my br0ker for the privilege of being out of the market. I resent paying my br0ker any more than I absolutely have to.

IMHO the psychological issues start when traders focus on avoiding losses on individual trades, instead of aiming to maximize risk-adjusted return over a series of trades.

Quote
Practitioners of hedging can illustrate this added value to their method which lies in the psychological domain and not on math/logic per se.
Anything in the "psychological domain" is entirely subjective and therefore can not be shown to add methodological value. Moreover, hedging (in the same pair) is not a methodology in itself; it is merely a different (operational) way of executing a given methodology.
  • #7
  • Nov 30, 2015 4:06am Nov 30, 2015 4:06am
hedge funds called like this for hedging different equities and instruments like gold against oil and so on but hedging is not good it is a waste of time i never made money using it i make it when i cut my loss and gain more
all have a nice day please
focus while relaxed to see better
  • #8
  • Nov 30, 2015 4:06am Nov 30, 2015 4:06am
I agree with the OP. Hedging is pointless in a perfect 1:1 hedge. When you are in a hedged position, you will have to close the positions once in the future. If you can end the hedging in profit that means you know when to buy or sell. So why can't you just close the first position instead of hedging and open the second position at the right time and save some commission/spread?

Quoting meedoing
For example: if you open a one lot sell position at 1.5 and a one buy position at 1.6, then between 1.5 and 1.6 you can open a sequence of trades until you reach a point at which you can close one of the originally opened positions. If you get the right point at which you exit the hedge, it sometimes can double your profit. But you need to be familiar with the pairs that you are trading and be aware of the upcoming events, hence you can hit the right point of exit.
If you can open a sequence of trades (profitable) between 1.5 and 1.6 to the point where you can close the original hedged position (in profit or BE) then why can't you just close the first position instead of hedging it and then make some profitable trades between 1.5 and 1.6? You could save some commission/spread.
  • #9
  • Nov 30, 2015 5:52am Nov 30, 2015 5:52am
Quoting mohsinali
Hedging is very usefull for those who r fear push the triger at some or most time. For that u have interests whats going on and take the positin again.
But in what possible scenario is this useful? If you want to enter into the trade later again why don't you just open it at the time you want to be in that position again?

Quoting meedoing
if you open a one lot sell position at 1.5 and a one buy position at 1.6, then between 1.5 and 1.6 you can open a sequence of trades until you reach a point at which you can close one of the originally opened positions.
But what is the upside on having the position at 1.5 and 1.6 open at the same time compared to just closing the 1.5 when you would open the long at 1.6?

Quoting hanover
.... Then there's no need for me to pay my br0ker for the privilege of being out of the market. ... IMHO the psychological issues start when traders focus on avoiding losses on individual trades, instead of aiming to maximize risk-adjusted return over a series of trades.
I really like this sentence as it summarizes everything said with a few words.

Quoting mepox
When you are in a hedged position, you will have to close the positions once in the future. If you can end the hedging in profit that means you know when to buy or sell. So why can't you just close the first position instead of hedging and open the second position at the right time and save some commission/spread?
That illustrates another aspect of the problem nicely thanks.


What I can not comprehend is how so many people throw their money at something without first understanding the basic concepts. How can anyone legitimately put their hard earned money into the market they simply do not understand (spending money on useless hedging or some kind of funky money management like martingale as their only "edge"). Wouldn't there be some merit to write down those traps once and make everyone who comes to the forum read and understand those rules...
  • #10
  • Nov 30, 2015 6:04am Nov 30, 2015 6:04am
I mean if u u r in trade which going against u then better to stop out u place hedge trade on opposite the out come of this is u not give up and try again, but if u stop out u occasionly try again...
Jt is my hard experience...
Trade fearless not careless...
  • #11
  • Nov 30, 2015 7:50am Nov 30, 2015 7:50am
Here's what you are missing. It is mostly used in long term trades. It is used instead of a stop loss, bc situations change much more over a long period of time than over a short period. This allows you to not get stopped out, thus giving you time to re-evaluate your position... MB you wish to take on more, mb get out of some....Now, its used before a movement, usually based on some fundamental value. Once the movement "starts" the hedge is exited, and one position is left open to obtain its target. Think of this as useful if you have a very big account that you need to keep a large amount invested, and will hold positions for a very long time. Think Warren Buffet.
  • #12
  • Nov 30, 2015 9:55am Nov 30, 2015 9:55am
Quoting Kilian19
What am I missing here?

Nothing significant at all, regarding most leveraged, retail traders.

(It's arguable that there might be some convenience-value in imbalanced hedging, to retail traders who are trading under circumstances and with brokers where they effectively don't have the facility of partially closing positions. And even in those cases, using a better broker in the first place would avoid it.)
  • #13
  • Edited 11:31am Nov 30, 2015 11:12am | Edited 11:31am
Quoting hanover
{quote} Assuming that you're referring to being long/short simultaneously in the same pair....... If you can embrace the math/logic, i.e. fully understand how simply maintaining a single net position achieves exactly the same result -- in every conceivable situation -- then any psychology instantly becomes a non-issue. At least it does for me. Then there's no need for me to pay my br0ker for the privilege of being out of the market. I resent paying my br0ker any more than I absolutely have to. IMHO the psychological issues start when traders focus...
Practitioners of hedging are fully aware of the additional cost, the math/logic is simple enough for most traders.The question remains why they choose to pay this additional cost ? Some posters above ^ have laid out some of the reasons which are much related to the application aspect of their method that also include the psychology benefits. 1. To buy time to reassess their trades which the trader believes to remain valid. 2. To remain connected to the expected price movement which may not yet play out as they expect but they maintain their initial expectation that it will do so some time in the future.These are some reasons for hedging that depends on the traders method and it's relevance of application has more to do with psychology than logical reasoning. I don't use hedge but I am open to contrary views which may be in stark contrast to my beliefs. And I have learnt a thing or 2 more that's added to my trading toolkit.
  • #14
  • Edited 2:19pm Nov 30, 2015 11:42am | Edited 2:19pm
Quoting skyway
Practitioners of hedging are fully aware of the additional cost, the math/logic is simple enough for most traders.The question remains why they choose to pay this additional cost ? Some posters above ^ have laid out some of the reasons which are much related to the application aspect of their method that also include the psychology benefits.
.......
I don't use hedge but I am open to contrary views which may be in stark contrast to my beliefs. And I have learnt a thing or 2 more that's added to my trading toolkit.
If traders prefer to pay an additional cost that allow them to nurse unnecessary psychological foibles, well I guess that's their choice.

If prior "hedging" threads (e.g. those in the list below), the majority of arguments used by the pro-hedging folk reflect non-understanding of the math (e.g. those who say that the NFA's 'no hedge' rule has made it impossible for them to be profitable; those who wrongly believe that folk like me are saying that it's impossible to hedge profitably, etc -- they have apparently missed the math-based point). A few acknowledge the benefit of multiple positions allowing additional SLs and TPs -- an operational benefit -- but there is very little direct mention of psychology.
http://www.forexfactory.com/showthread.php?t=68598
http://www.forexfactory.com/showthread.php?t=163814
http://www.forexfactory.com/showthread.php?t=137836
http://www.forexfactory.com/showthread.php?t=163467
http://www.forexfactory.com/showthread.php?t=264690
http://www.forexfactory.com/showthread.php?t=174626
http://www.forexfactory.com/showthread.php?t=351191
http://www.forexfactory.com/showthread.php?t=400463
http://www.forexfactory.com/showthread.php?t=487176
http://www.forexfactory.com/showthread.php?t=515248

Quote
1. To buy time to reassess their trades which the trader believes to remain valid. 2. To remain connected to the expected price movement which may not yet play out as they expect but they maintain their initial expectation that it will do so some time in the future.
An understanding of the math can allow traders to see beyond this, if they are willing to embrace it.
I'm not saying that you're wrong, it's just I prefer to think in terms of RAR instead of individual trades as 'units'. It comes down to personal preference.

Quote
Practitioners of hedging can illustrate this added value to their method which lies in the psychological domain and not on math/logic per se.
When it comes to analyzing trading processes, the ability to make clear distinctions between method, operation, and execution (the "psychological domain") is important IMO. For example, when I analyze my own performance, I find it helpful to establish whether failings are the result of poor execution, or whether the method itself needs refinement.
  • #15
  • Nov 30, 2015 12:00pm Nov 30, 2015 12:00pm
hedging can be useful in long-term trading.

look at the Nasdaq100 for instance.......from March 2009 it starts to climb and you know its likely this trend will continue for the next 5-9 years.
you`re one of those traders/investors who enter every 100 points on the way up and hold all trades until hell brakes lose and the trend ends.
now you don't want to lose any of those positions and some people hedge the last few positions if price comes back before continuing on.

Other traders are comfortable that they can make back the floating loss on a current position.
They could set a stop loss, close out the position and get back in later.
But rather than doing that, they like to have the original position and the hedge with all the details on their terminal instead of on a scrap of paper.

Hedge or no hedge: who cares - you do what`s most comfortable, even if it costs a little more.
  • #16
  • Nov 30, 2015 2:26pm Nov 30, 2015 2:26pm
Hedging to trade the news can be very useful too. I used to do this with index options across two separate accounts during 07 08 09 for a fund I worked for... helped out with the volatility during FED news (which was ridiculous at some times with the DOW fluctuating 150-200 points in minutes) and allowed me to be in the market much more safely than if I were to have a stop loss, or waited to get in for a trend continuation. Just to kinda give you an idea...
  • #17
  • Nov 30, 2015 2:42pm Nov 30, 2015 2:42pm
Quote
An understanding of the math can allow traders to see beyond this, if they are willing to embrace it.

Could you please explain what you mean. My major was in mathematics, and I do know that a lot of funds use stochastic models when deciding on allocation for a hedge and everything seems to checkout.
  • #18
  • Nov 30, 2015 3:26pm Nov 30, 2015 3:26pm
Quoting klaarmann
Could you please explain what you mean. My major was in mathematics, and I do know that a lot of funds use stochastic models when deciding on allocation for a hedge and everything seems to checkout.
The "hedging" that I was referring to is having both buy and sell positions, of the same size, open simultaneously in the same instrument/pair. (Strictly speaking, this is not hedging in the traditional sense, which involves different instruments). Because -- no matter how price moves subsequently -- any profit obtained from the buy position is lost in the sell position, or vice versa, this has exactly the same effect as being out of the market altogether.

Many proponents of same pair hedging argue that having two positions open creates the possibility that (1) both positions can later be closed in profit, and that (2) this offers a strategic advantage. Point (1) is absolutely true, but what some of them apparently fail to see is that closing one of the hedged positions, and thus leaving oneself net long or short, can be replicated by simply opening a buy or sell position from a state of being out of the market, hence there is no strategic or mathematical advantage to be obtained from the hedge itself.

The "math" has little to do with anything as complex as stochastic models; it is merely an understanding that at any point in time, any combination of simultaneous long and short positions in the same pair can be equally represented by a single net position that is the difference between the two, e.g. being X lots long and Y lots short is effectively the same as merely being X-Y lots long (or Y-X lots short). Hence my earlier comment that the math/logic involved was self-evident.
  • #19
  • Nov 30, 2015 3:35pm Nov 30, 2015 3:35pm
For a long term position, by hedging you are ensuring you are paying a net swap contribution to your broker (as contrary to some traders expectations, the swap values don't net each other out, due to the spread between interest rates used in the calculation). As others have said, it does have some psychological value, especially for a newer trader who has yet to figure out that all they have really done is close out all or part of the trade! There is additional risk however if you were to get a CHF type event, where the spreads on both of the hedged trades widen massively and potentially close out both trades as losers with a margin call or stop loss hit. There is no magic in hedging!
  • #20
  • Nov 30, 2015 5:14pm Nov 30, 2015 5:14pm
There is both a strategic and mathematical advantage due to volatility and variance within the stochastic system. Its a flexible alternative to a stop loss which some times you pay a little more for, but not so much so where its not worth it if it utilized thoughtfully. If you want I can try and find some stuff on how its used to defer risk "properly." I understand that you are saying that you can just exit and enter later, but what is easier and sometimes more effective due to the uncertainty of both the spreads, price or position, of a future trade is to range variance between lets say X and V and a brake out to be V+1 or so to exit you hedge thus giving you a more definitive and more certain strategy. Obv if one is doing a fairly straight forward trade with a standard technical SL and TP, then its not very useful, but if its a trade that takes into account some volatility ranges over a few days, its very useful.
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