Hedge Large Upswings - Is it advisable?

i have a question .. which is more a leverage/margin protection thing ..

i have a small strategy build where i managed to generate about 300% in about 16 days or so.
it simply aims to partly close the opening Gap on market opening

my strategy works as follows ... my TP is about 50%-150% of the gap (depends on past activity mainly)
however, this usually happens in a VERY short time and before it happens the price moves against the gap
my strategy is to take the whole way down until my TP for the most gain.

i usually have a 1M chart open .. mark the important price levels needed to do this ... and next to it a 10 Tick Chart with Heikenashi overlay to see when things to actually happen.

this worked pretty well so far.

the problem is the equidity/margin ..

lets just assume we have a 50pip GAP UP .. immideatly the price continues to raise another 100pip
since this all does happen in about 10-100 secounds ... there is not much room for analytics ..
so what i do is simply SELL on every indication of a reversal .. as a "save reversal signal" would cost me all of the pips to gain ..

so willingly i selling into a raising price (i know i'm crazy) ..
anyway .. sooner or later the price does turn arround .. so the last time i sell into the reversal will be immideatly in profit, but the other ones (some times this happens 3 or 4 times) are in HUGE Loss ..
i dont worry much about that since they all going to head to the Gap just as the first one.

the "problem" however is the margin/equidity ..

so i had the sort of idea to open sell and buy trades at the same time there the BUY trade just used to keep the equidity in level as they will make short term profits.

however not exiting the trades ... just wait until the price falls back and cancel the on break even or at "some" loss ..

i did test this today .. was able to sell 35 Contract on DAX (GER30) at a very reasonable margin ..
however i could not close the positions fast enough so i had about 100USD loss on the reversing hedge positions ... and ended up with almost double the earning in the end as i could sell alot more contracs.

guess this needs some sort of training

usually i not have any loosing positions doing this strategy .. so this may not looks so good on the portfolio ...
i can however with this buy a lot larger positions with out risking a margin call.

my question is now. is there a flaw ? i not thinking of all aspects ?

i attached a picture of todays action .. where i start "to hedge" above the blue line ...

guess the picture is quite clear about what i try to accomplish ..
as you can see . .some of the trades went 300 pips in loss before turning profitable ..

Ah gap trading strat. My advice to you is just forget it. I backtested this myself years ago but this strategy just doesn't work. Tried with both 1:1 risk to reward and 2:1 risk to reward across multiple pairs.

If you don't use SL, your win rate will be high but your risk to reward ratio will be horrendous (eg 300p drawdown to get 30p) and you account will be guaranteed to blow up sooner or later.

Why? Gaps don't always close. See the EURAUD bottom in 2012? Gap still there. See the current GBPUSD gap from brexit? Still there. Even the ones that do close can run for hundreds if not thousands in the other direction. Go do more extensive backtesting and you'll see what I mean.

Finally there's no difference between your "hedging" and taking a SL. Only that with "hedging" it'll cost you double in swap fees and commission and you'll end up married to the trade instead of cutting it loose.

well thats exactly why i open this thread
there are some aspects the screenshoot i attached does not show ..

1. iam not after the gap as such.
my aim is the swing arround it .. and the goal is to catch as much as possible of the way back to the gap.

the traditional risc/reward thing can't be aplied in this situation, simply because it happens way too fast.
so in order to NOT get Stop-out and waste a ton of money on spikes naturally happen in this period of time due to automated orders in the beginning of the day the HEdge idea did come up.

2. as my aim os not really the close of the gap, my aim is on the swings do happen arround it.
because you are right, some gaps do not close .. there are recently 2 gaps on GER30 that would have blown my account for sure in less than 2 days as they where "gap-and-go" scenarios .. well i did not trade them because my strategy did not give me enough confirmation.

off market events like "brexit" are for me as 100% technical a no-go if somethings like this does happen .. i just dont trade at all as its not possible to cover the outcome via a technical aproach .. and i simply have not enough background knowledge on the FUndamental side of trading.


if i become married to a trade via a hedge trade .. well thats still better paying 50$ in swap than loosing 500on a stoploss ..

well that was my idea about all this before starting this thread ..

hereis my fxbook graph for this test ..
you see there is a drawdown of 46% recorded ... that was where i used stoplosses in the beginning of the test.
even on that day i had a gain in the end on 1.8% of the account balance ..

on the other side of the argument ..
lets say it fails (which it does on about 1,5 out of 10 trades) .. i have a hedged position open which will cost me after 3 days about 2% of my account, the usual gain however is between 5 and 17% and this does happen in less than 24 hours as usual.

thats the true risk/reward ratio .. right ? only difference is, its not based on the stoploss but on the overall turnover of the trade.

again iam sure i do miss somethings ... thats why we talking here

Well like I said earlier there's no difference between SL and your "hedging". Because you're not really hedging.

Real hedging is if you are long a stock and instead of a stop loss you buy put options for less than what it'll cost you if it got stopped out. Hence you'll have positive expectancy from your arrangement.

What you're doing is just opening another position in the opposite direction to neutralize your market exposure instead of closing the position which does the EXACT same thing. But the problem is what you're doing is -ve because it'll cost you 2x in fees. When you open your "hedge", its the same as closing your initial position (same as SL at your blue line for example) and when you close your "hedge" its the same as reentering the position. Understand what I'm saying?

I've already stated why I think gap trading is unprofitable so I'll leave it to you whether to listen. But keep in mind if all you're doing is closing at 50% of the gap for example, all you're doing is halving your reward for the same amount of risk.

Also many gaps often take hours, days or even weeks to close. If the gaps that you're trading are so small that it takes only 10-100 secs to close and you're getting 50% drawdown from those then you're probably overleveraging. It's only a matter of time until account blow up. Since you're lucky enough to get 300% without blowing up, I'd seriously consider withdrawing most of it ASAP so you don't give it all back.

if i "hedge" .. i have no balance-drawdown like if accept stoploss and re-enter positions.
also this way does not kill my equity as a non-hedged position would
and if i do get married to a position ...
instead of blow the account, i can make the decision hours/days later to exit by accepting a 50$ fee on double comissions instead of 500$ on a stoploss.

but yes, i get your points .. thats why i was thinking of this way protecting me from that.

i guess i have to make some math on that about how are the real costs are.

and yes its not really hedging .. as i set a stoploss for the hedged positions to be just a few pips in plus to cover the double comission and the spread ...
its not intended to make any money .. just to protect the equidity.
while the profit of the hedge position getting smaller i place more sell orders to cover the more gained distance on the actual way back to the gap (thats what i try to accomplish in the first place)

If you plan on using a hedge, just remember that at some point, you will have to break the hedge and take the loss. So keep a close eye on your total drawdown on your account on the losing side. Otherwise, if you know how to offset positions effectively, it is a trading strategy. I doubt that it is the most efficient way to make money however. Hanover has done many papers and links on this subject. So be aware of what you are doing.

i think the pitfall is simply timing .. buy/sell hedge positions near Support can lead to expensive misstakes ... i guess i just have to try it out a little more (few months or so)

right now i simply place hedge orders (stops) above the resistance in the same size as my actual trade positions.
if the breakout happens the hedges are being filled .. and my "loss" is the distance of the S/R zone.

and this distance plus the way to the next S/R is the base i use to calculate the risk. so i can skip 2 S/R zones and still on acceptable risk.
afer that its time to close as the hedges minus the actual trades will bring lesser then my risk allows .. and iam not a martingale type of person .. so thats where i would close them all off at the calculated loss however the time and distance till this happens is MUCH MUCH greater .. and i can make a decition based on pattern and observation .. and much much less emotion.

yes you are right .. its somethings need to be monitored closely .. basically i just do that to buy me some time and space regarding the risk level.
and it enables me to buy more positions much at a much higer/lower price , which widens the profit potential extremly.

the account drawdowns on the myfxbook screenshoot are from the time where is actually used a stoploss and positions where closed off.
i re-enterd them at a later time even at the day with 46% drawdown i did go out on profit.. but the portfolio is damaged forever

the biggest fear i think is to place the hedge orders too close to a resistance zone ... if the price reverses 3 pips after the hedge is open .. all goes down the drain.

here is todays Action

with each open short i set a buy stop in the same size to hedge it. only 3 hedge orders where filled.
initially opened 3 positions they both went into "hedged stoploss" causing 90$ Drawdown before hedge orders where filled on equidity


Totals:
Account Drawdown: 21$ (closing of hedge positions spread and fees of hedge)
Equidity Drawdown: 92$
Winning positions: 451$

loss/risk: ~3% (or 4,3% if include the cost of the hedge)
over all gain: 16%
in 69 Minutes.

16% in an hour of price action on any non exotic pair would indicate that you are using very high leverage. Be aware that this can lead to the sudden death of your account.

just hedge ..

well okay my target today was only 70% of the gap .. and that would be only somethings arround a 1:1.5 Ratio
the price dropped far more down .. as expected (= plain luck)

What is the leverage that your broker offers and how much of it do you use if I may respectfully ask?