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Hedging is it really useful?

  • #21
  • Nov 30, 2015 6:23pm Nov 30, 2015 6:23pm
Here's where the hedging rule frosts my mug.
Open a long position entered using the daily chart, I expect to be in the trade for 4 or 5 day.
I notice on my 15 minute chart that there is a retrace starting, I want to trade that retrace. I click short. Trading platform says 'hedging not allowed.'
I'm not tying to hedge - I'm trying to trade with two independent strategies one long term and one short term, and I cannot consider the two strategies independently of each other. I don't need a regulator telling me I cannot do that.

Cost with no hedging allowed:
Long - spread cost (+ long strategy risk) - close, short - spread cost (+ new short risk + new risk to long strategy) - close, Long - Spread Cost - close.
- 3 spread costs, long strategy risk, short strategy risk and new long strategy risk.

Cost with hedging allowed:
long - spread cost (+long strategy risk) - short - spread cost (+new short risk) - close short - close long.
- 2 spread costs, long strategy risk and a short strategy risk.

Which is better?
  • #22
  • Nov 30, 2015 6:29pm Nov 30, 2015 6:29pm
You can open sub-accounts with most brokers. That will allowed you to perform what you want.
  • #23
  • Nov 30, 2015 6:41pm Nov 30, 2015 6:41pm
"You can open sub-accounts with most brokers"
You just made my point - I cannot use the two strategies without special consideration to 'get around' the restriction.
  • #24
  • Nov 30, 2015 6:56pm Nov 30, 2015 6:56pm
Quoting Kilian19
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...
1:1 hedging is useful if you are trading long term trend with no stop loss, for example eurusd which should in the long term be USD favorable. If there is some unexpected event, which in the short/medium term, makes the pair trend the opposite to the norm, then you hedge your positions and your account is safe from margin call. Once the trend resumes, you unhedge your positions early and you can make extra profit as the opposite hedge would have been in profit, and the trend resumes.
This will only work if you get it right both ways. Don't hedge too late, and don't release the hedge to early.
  • #25
  • Nov 30, 2015 7:26pm Nov 30, 2015 7:26pm
hedging is the essence of trading for market makers and professional traders. It's one thing to think about "hedging" an open position with an opposing position in the same instrument. What if you have hundreds or even thousands of open positions? in different time horizons? maybe many different instruments? this is inevitably what a market maker has to deal with. Do you know who "always" makes money in trading?
"If The Fool persists in his Folly he will become wise." - William Blake
  • #26
  • Nov 30, 2015 9:03pm Nov 30, 2015 9:03pm
Quoting EventHorizon
{quote} 1:1 hedging is useful if you are trading long term trend with no stop loss, for example eurusd which should in the long term be USD favorable. If there is some unexpected event, which in the short/medium term, makes the pair trend the opposite to the norm, then you hedge your positions and your account is safe from margin call. Once the trend resumes, you unhedge your positions early and you can make extra profit as the opposite hedge would have been in profit, and the trend resumes. This will only work if you get it right both ways. Don't...
And once again please tell me what the advantage of this hedge is compared to just closing the position during the correction and open it later on?
You are only paying the broker while gaining nothing in return and you actually have an increased risk despite being flat as chris mentioned last page due to the fact that spread could widen unexpectedly forcing you to close out your position due to margin requirements (admittedly this will rarely be of any impact).
  • #27
  • Nov 30, 2015 11:16pm Nov 30, 2015 11:16pm
Nedging is never useful. Or should I say, nuseful. Yeah, that's it.

Nedging is nuseful you nucking netards. Get it in your thick heads, please.

Opening a long and a short at the same time on the same pair is like wearing two condoms to hump a Hasselhoff pillow. You've paid twice for the privilege with no actual payoff and are just embarrassing yourself when you admit it to the public.
Congratulations ScalaFX for coming out of the closet!
  • #28
  • Edited 11:50pm Nov 30, 2015 11:30pm | Edited 11:50pm
Quoting lukeb
Cost with no hedging allowed: Long - spread cost (+ long strategy risk) - close, short - spread cost (+ new short risk + new risk to long strategy) - close, Long - Spread Cost - close. - 3 spread costs, long strategy risk, short strategy risk and new long strategy risk.
I believe you've miscalculated here, and this example shows how:

 "Athalon" is the trader using the "same pair hedged" (aka "nedged") approach, as in your example - 2 trades, 2 spreads
 "Merlin" is capturing exactly the same pips without hedging - 2 trades, 2 spreads
 "Hanover" is making the 3 trades as in your example. He pays 3 spreads, but ends up making more pips from the 3 trades than the others do from their 2 trades.

You are comparing Athalon's result to Hanover's when you should be comparing it to Merlin's.
________________________________

Quoting The Fool
hedging is the essence of trading for market makers and professional traders. It's one thing to think about "hedging" an open position with an opposing position in the same instrument. What if you have hundreds or even thousands of open positions? in different time horizons? maybe many different instruments? this is inevitably what a market maker has to deal with. Do you know who "always" makes money in trading?
1. I expect the intended target audience of this thread was retail traders, not market makers. (How many retail traders have "hundreds or even thousands of open positions?")
2. The OP concedes the operational convenience aspect; I believe he is querying whether nedging offers any strategic or mathematical benefit.
3. His argument is not against holding positions in different instruments.
4. Some retail traders make money, and without nedging.
  • #29
  • Nov 30, 2015 11:51pm Nov 30, 2015 11:51pm
Quoting nubcake
Nedging is never useful. Or should I say, nuseful. Yeah, that's it. Nedging is nuseful you nucking netards. Get it in your thick heads, please. Opening a long and a short at the same time on the same pair is like wearing two condoms to hump a Hasselhoff pillow. You've paid twice for the privilege with no actual payoff and are just embarrassing yourself when you admit it to the public.
Totally agree.....but there is always an unless comment.............. unless .....unless ....... you have positive net swap (pretty rare but most brokers have a few instruments with this lurking around) and plan to hold a nedged trade for an extended period (as a carry trade) to at least recover the extra transaction costs of the hedge.....but you can do better with interest differentials using other assets.

The AUDCAD below has had positive swap on both sides with one of the Brokers I use for at least a year now and it probably has been going for a while before that.

Attached Image (click to enlarge)
Click to Enlarge Name: Swap.JPG Size: 55 KB


Of course you could do a dodgy and set up an account with one broker and an islamic account with another and get a few more options...........if you could be bothered......mind you it does provide a quantifiable edge as small as it may be.....but all edges are worthwhile considering.
  • #30
  • Nov 30, 2015 11:59pm Nov 30, 2015 11:59pm
Quoting Copernicus
{quote} Totally agree.....but there is always an unless comment.............. unless .....unless ....... you have positive net swap (pretty rare but most brokers have a few instruments with this lurking around) and plan to hold a nedged trade for an extended period (as a carry trade) to at least recover the extra transaction costs of ther hedge.....but you can do better with interest differentials using other assets. The AUDCAD below has had positive swap on both sides with one of the Brokers I use for at least a year now and it probably has been...
Wouldn't it be easier to milk a unicorns tears? Holy shit. And how long will positive swap last for? I don't pay attention to this stuff so I'm not hip to all of the latest ways to arbitrage broker mistakes.
Congratulations ScalaFX for coming out of the closet!
  • #31
  • Dec 1, 2015 12:01am Dec 1, 2015 12:01am
Quoting nubcake
{quote} Wouldn't it be easier to milk a unicorns tears? Holy shit.
Yes...... LOL

In times of depression you can however get a slight buzz from holding a fully loaded nedged pair like AUDCAD for a few years and sit back and think you have beaten the system........

PS I am a chronic depressant. :-)

PPS the AUDCAD has been running for a while now. I don't want to inform the broker cause it may just be an error.....and we all hate brokers don't we.
  • #32
  • Dec 1, 2015 12:09am Dec 1, 2015 12:09am
Quoting Copernicus
{quote} Yes...... LOL In times of depression you can however get a slight buzz from holding a fully loaded nedged pair like AUDCAD for a few years and sit back and think you have beaten the system........ PS I am a chronic depressant. :-) PPS the AUDCAD has been running for a while now. I don't want to inform the broker cause it may just be an error.....and we all hate brokers don't we.
Well now you've gone and done it. You should have PM'ed me so we could share the mad loot, but now everyone is going to be all up in that.
Congratulations ScalaFX for coming out of the closet!
  • #33
  • Edited 12:41am Dec 1, 2015 12:11am | Edited 12:41am
Quoting nubcake
{quote} Well now you've gone and done it. You should have PM'ed me so we could share the mad loot, but now everyone is going to be all up in that.
Attached Image


PS Just been doing a few calcs on the AUDCAD example. You make about $25K using a nedged 10 contract position each side holding for 669 days or approximately $35 bucks a day AUD.......after transaction costs.......of course if net swap goes negative you immediately close both sides.

Some useful links for any that want to investigate identifying net positive swap options between brokers further.

http://www.100forexbrokers.com/rollo...-free-accounts

http://www.forexchurch.com/forex-broker-swap.cfm

PPS Be aware that if the brokers catch on to what you are doing....they may suspend your account. If you want to venture down this route Islamic accounts are a dead give away so consider using traditional accounts between brokers where you can identify good net positive swap arrangements.

Also if you go Islamic accounts make sure they do not charge rollover fees which is a way they compensate for interest free arrangements without being interest.....not that there is anything wrong with the word 'interest'.
  • #34
  • Edited 12:42am Dec 1, 2015 12:19am | Edited 12:42am
Quoting hanover
{quote} I believe you've miscalculated here, and this example shows how:  "Athalon" is the trader using the "same pair hedged" (aka "nedged&quot approach, as in your example - 2 trades, 2 spreads  "Merlin" is capturing exactly the same pips without hedging - 2 trades, 2 spreads  "Hanover" is making the 3 trades as in your example. He pays 3 spreads, but ends up making more pips from...
Athalon hedge his position at B because he knows the market will go to D eventually but at point B he feels that the market will not reach D in this attempt, there will be a retracement shortly from here. How deep this retracement he does not know and in what shape and form he does not know at this point in time. He locks his position(short hedge trade) and when he feels the market is ready continue with it's journey to D( he only knows that in the future) then he will unlock his position(close his short hedge trade).

Merlin is the smarter trader to execute trades the way he did but the value of his smartness is to not pay for the additional cost, a logical reasoning to direct his decisions. So why did Athalon paid this additional cost? By his execution of locking and later unlocking his position by way of hedge trades, 1. He feels he is more connected to this particular market move from A to D. If he had close his initial long position, he feels that he is totally disconnected to this AD move. He may move on to other pairs to scout for fresh possibilities, by then he would have forgotten about his original AD hunch. But because he lock his position at B giving him 2 open positions, he still has to keep an eye on this pair while scouting for opportunities on other pairs. This lock gives him time to reassess his initial hunch as the market plays out in front of him, what he decides to do from here - B, he is still very much connected to this pair although he has no net position.

Another pov is when Athalon unlocks his position at point C, the 30pips (50-20) acts as a cushion to help him take the plunge to unlock his position. Yes, Merlin is smarter to bag the pips by closing his position earlier at B, but those same 30pips profit is not directly connected to his current decision to initiate a new trade at C, they are completely separate trades to him.

Athalon applied psychological reasoning to execute his hedge trades which are interrelated to his overall hunch of the market that moves from A to D, whereas Merlin applied logical reasoning to see his trades as separate and each trade calls for individual decision at the current market price.This is the 'psychological domain' I referred to earlier. I hope I have described it well enough, this coming from someone who is not a practitioner of hedge trading.
  • #35
  • Dec 1, 2015 12:34am Dec 1, 2015 12:34am
Whatever i see, hedging brings no profit because of your intention. When i open a trade, i always try to support my trade even the trend is going against me. So, better to close the trade and open a new one when it seems to be in right trend.
  • #36
  • Dec 1, 2015 12:46am Dec 1, 2015 12:46am
Quoting skyway
{quote} Athalon hedge his position at B because he knows the market will go to D eventually but at point B he feels that the market will not reach D in this attempt, there will be a retracement shortly from here. How deep this retracement he does not know and in what shape and form he does not know at this point in time. He locks his position(short hedge trade) and when he feels the market is ready continue with it's journey to D( he only knows that in the future) then he will unlock his position(close his short hedge trade). Merlin is the smarter...
summary: There are no shortage of people who will happily pay to delude themselves, because it's easier to deny reality and manufacture your own. Nobody was under the illusion that nedging is not demented, which is really what you mean by "psychological domain"... yes, it is demented and that's what we are saying.
Congratulations ScalaFX for coming out of the closet!
  • #37
  • Dec 1, 2015 12:47am Dec 1, 2015 12:47am
You only have to ask yourself one question:
Do i know how to trade?

Because if you don't, 'nedging' or otherwise, you're *@#$ed!
That's it really.
You can run scenarios or look back in hindsight all you want, but it will not help. It is a complete and utter waste of time.

rgds
SK
  • #38
  • Dec 1, 2015 12:52am Dec 1, 2015 12:52am
Quoting skfx
You only have to ask yourself one question: Do i know how to trade? Because if you don't, 'nedging' or otherwise, you're *@#$ed! That's it really. You can run scenarios or look back in hindsight all you want, but it will not help. It is a complete and utter waste of time. rgds SK

Trading is easy. I am not sure why it's such a big deal. This is how I short for example :-)

Attached Image (click to enlarge)
Click to Enlarge Name: Trading.jpg Size: 85 KB



...and here is a perfect hedge.

Attached Image
  • #39
  • Dec 1, 2015 12:55am Dec 1, 2015 12:55am
Quoting Copernicus
{quote} Trading is easy. I am not sure why it's such a big deal. :-) {image}
LOL...nice one C!
Everything is easy when you do it right!
  • #40
  • Dec 1, 2015 1:05am Dec 1, 2015 1:05am
Quoting skyway
{quote} Athalon hedge his position at B because he knows the market will go to D eventually but at point B he feels that the market will not reach D in this attempt, there will be a retracement shortly from here. How deep this retracement he does not know and in what shape and form he does not know at this point in time. He locks his position(short hedge trade) and when he feels the market is ready continue with it's journey to D( he only knows that in the future) then he will unlock his position(close his short...
You are trying to prove a point using the above(see bold).
Does this sound right to you?
This wreaks of time wasting.

Like i said, learn how to trade and the rest is history.

rgds
SK
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