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Hedging/Nedging

  • #1
  • First Post: Apr 20, 2017 10:34am Apr 20, 2017 10:34am
Hello,

I was browsing through various threads about Hedging/Nedging that is specific to Forex.

Let's say we want to go long on EUR/CHF which implies we expect EUR to get Stronger Or/And CHF to get weaker.

Also, Long EUR/CHF can be replicated by:

Buy EURUSD
Buy USDCHF

Does using two orders, i.e. getting USD into the mix {acting like a buffer} offer any Hedge or is it as good as taking the Straight Long EURCHF trade?

Thanks
  • #2
  • Apr 20, 2017 6:02pm Apr 20, 2017 6:02pm
If you are hedging for the purpose of account preservation then same pair hedging is the way in my opinion.

The safest way is to forget about profiting from the hedge (2nd position) - use it only to protect your account and close near BE.

Even safer is to avoid the need to hedge but that said hedging can be a very useful tool if the time comes.
Indentify > Plan > Accept > Execute
  • #3
  • Apr 20, 2017 7:39pm Apr 20, 2017 7:39pm
Never hedge within the same pair. No advantage whatsoever. You actually put yourself at a disadvantage due to costs. Just reduce your original position size.
  • #4
  • Apr 21, 2017 1:27am Apr 21, 2017 1:27am
Quoting 2+2=4ex
Never hedge within the same pair. No advantage whatsoever. You actually put yourself at a disadvantage due to costs. Just reduce your original position size.
That is a matter of opinion. It may not be a method that suits you but to say no advantage whatsoever when others are saying it can be a useful tool is a bit ignorant.

I occasionally use same pair hedging - if it offered no advantage then I wouldn't use it. In fact I have made profit from both positions in a same pair hedge on many occasions.
Indentify > Plan > Accept > Execute
  • #5
  • Apr 21, 2017 3:01am Apr 21, 2017 3:01am
Thanks Wizlon32 and 4eX,

I understand the two school of thoughts on Hedging on the same pair. One being the hedge can be replicated by a single trade,as it is balancing the exposure without the additional costs. The other being hedging offers some ability to switch between trends,replacements etc..


What i am trying to understand is hedging between two different pairs, totally with 3 currencies.

Does entering {(Long EURUSD+Long USDCHF)} instead of Long EUR/CHF offer any benefits?
  • #6
  • Apr 21, 2017 4:02am Apr 21, 2017 4:02am
Quoting wizlon32
{quote} That is a matter of opinion.
No. It's a fact.

It's not an opinion. It's not an alternative fact. It's a fucking fact. That you would suggest someone is "ignorant" for stating something that is the purest of facts is not even ironic; It's simply sad.

You make me sad.

There are too many people like you on this goddamn forum, and I wish you would all just go away. You are the lowest common denominator, and it's pathetic.

And worse, you can't be told, nor taught. You'll argue your ignorance to no end.
Congratulations ScalaFX for coming out of the closet!
  • #7
  • Apr 21, 2017 4:29am Apr 21, 2017 4:29am
Quoting nubcake
{quote} No. It's a fact. It's not an opinion. It's not an alternative fact. It's a fucking fact. That you would suggest someone is "ignorant" for stating something that is the purest of facts is not even ironic; It's simply sad. You make me sad. There are too many people like you on this goddamn forum, and I wish you would all just go away. You are the lowest common denominator, and it's pathetic. And worse, you can't be told, nor taught. You'll argue your ignorance to no end.
Indentify > Plan > Accept > Execute
  • #8
  • Apr 21, 2017 4:46am Apr 21, 2017 4:46am
Nedging can be useful at least for one purpose: for protection of the long-term trade from a weekend gap.
If there is a possibly large weekend gap in the financial instrument from an expected effect (say, French elections, OPEC meetings etc.) one could protect the gains by opening a trade in the opposite direction just before the weekend. I believe that this actually one of the mechanisms why weekend gaps in liquid markets almost always close and then very often bounce immediately after closing the gap (people get out of their nedging positions and proceed with their usual strategy).

Cheers,
k
  • #9
  • Apr 21, 2017 4:54am Apr 21, 2017 4:54am
Quoting kprsa
Nedging can be useful at least for one purpose: for protection of the long-term trade from a weekend gap. If there is a possibly large weekend gap in the financial instrument from an expected effect (say, French elections, OPEC meetings etc.) one could protect the gains by opening a trade in the opposite direction just before the weekend. I believe that this actually one of the mechanisms why weekend gaps in liquid markets almost always close and then very often bounce immediately after closing the gap (people get out of their nedging positions...
Kprsa,

I mean it is as good as closing the position before the weekend and reopening after the market opens on Monday. Isn't it?

This is my understanding:

If we hedge in Same Currency Pair, we lock in the profit/loss which will be the same if we exit the position instead of opening a position in the opposite direction.

Example: Short EURUSD @ 1.0020|| Price goes to 1.0080

1.Hedging/Nedging: Long [email protected]

From here market could whichever way, the price movement is negated and we have locked in a loss of 60 Pips.

2. Direct Exit @1.0080

Loss of 60 Pips...


What I am trying to understand is Hedging between two different Pairs.

Thanks
  • #10
  • Apr 21, 2017 5:24am Apr 21, 2017 5:24am
Quoting aaven
{quote} Kprsa, I mean it is as good as closing the position before the weekend and reopening after the market opens on Monday. Isn't it?
Not really:
1. it may be useful to have entered at the more advantageous positions (bottoms/tops of prior pullbacks). It is difficult to know what the market would do in the future so your after-weekend trade may take a loss whereas the long term position can accept one more eventual pullback.
2. It has a psychological advantage IMHO.
3. Also if one has the money to move the market (or expect that people who do would be trapped in losing positions by the gap) one can get rid of a losing nedge without loss.

Cheers,
k
  • #11
  • Edited 5:15pm Apr 21, 2017 9:50am | Edited 5:15pm
Quoting aaven
Hello, I was browsing through various threads about Hedging/Nedging that is specific to Forex.......
I don't trade EURCHF. The two currencies are too positively correlated for my liking. But as a general principle, I can't find any mathematical advantage in (for example) being long in both XXXYYY and YYYZZZ, as opposed to simply being long XXXZZZ.
[EDIT] More info here.

As for same pair (h/n)edging, a few years ago I was approached by a trader with an EA that used nedging, and was no longer functional due to the NFA's ban on nedging in the USA. I modified the EA for him so that, instead of nedging, whenever an order was opened or closed (and by also maintaining a table of SLs and TPs of open orders) it simply calculated the overall net position (i.e. the difference between the longs and shorts), and maintained a single order with this position. To test the correctness of my coding, I ran both EAs in MT4's strategy tester, and both returned exactly the same overall P/L. (In real life I would expect the modified version to actually perform better, because it pays less swap differential to the br0ker). Hence I'm satisfied that there is no mathematical advantage in same pair nedging, i.e. reached the same conclusion as 2+2=4ex and nubcake. However, depending on how you trade, there may be an operational benefit, in that (at least with MT4) each of the two orders allows a SL and TP, giving you more set-and-forget options, and making it easier to mentally keep track of the positions created by your strategy.
[EDIT] More detailed info in the posts here and here.
  • #12
  • Apr 22, 2017 12:49am Apr 22, 2017 12:49am
It makes me smile to think some of you dumb dumbs will get a nice surprise one day when you have your genius nedges on, and then the spread widens and takes you out of both sides.

Because that's the key here, it's not actually equivalent to being out of the market. You are still exposed to a number of issues that simply don't exist when you don't play stupid games.

Of course, you'll just blame the broker for "cheating" you, like usual. Carry on, kids.
Congratulations ScalaFX for coming out of the closet!
  • #13
  • Apr 22, 2017 1:04am Apr 22, 2017 1:04am
Quoting hanover
{quote} I don't trade EURCHF. The two currencies are too positively correlated for my liking. But as a general principle, I can't find any mathematical advantage in (for example) being long in both XXXYYY and YYYZZZ, as opposed to simply being long XXXZZZ. [EDIT] More info here. As for same pair (h/n)edging, a few years ago I was approached by a trader with an EA that used nedging, and was no longer functional due to the NFA's ban on nedging in the USA. I modified the...
Hanover,

"However, depending on how you trade, there may be an operational benefit, in that (at least with MT4) each of the two orders allows a SL and TP, giving you more set-and-forget options, and making it easier to mentally keep track of the positions created by your strategy."

I read many posts on this topic the common theme falling in either being Hedging/Nedging is useful or it's not useful, but here you have given a specific advantage if needed that can be availed vis a vis having a SL and TP for each of the order.

Thanks
  • #14
  • Apr 22, 2017 1:08am Apr 22, 2017 1:08am
Quoting nubcake
It makes me smile to think some of you dumb dumbs will get a nice surprise one day when you have your genius nedges on, and then the spread widens and takes you out of both sides. Because that's the key here, it's not actually equivalent to being out of the market. You are still exposed to a number of issues that simply don't exist when you don't play stupid games. Of course, you'll just blame the broker for "cheating" you, like usual. Carry on, kids.
I am curious...

"then the spread widens and takes you out of both sides"

Say there are two opposing orders on the same instrument. How does spread widening takes out on both the sides?

Thanks
  • #15
  • Apr 22, 2017 2:38am Apr 22, 2017 2:38am
Quoting aaven
{quote} I am curious... "then the spread widens and takes you out of both sides" Say there are two opposing orders on the same instrument. How does spread widening takes out on both the sides? Thanks
I guess he is assuming a stop loss on both, but hey, it could give you a take profit both side too right?

Too much for my little brain....

It takes a lot for me to IGNORE you, but you can try.
  • #16
  • Apr 22, 2017 3:16am Apr 22, 2017 3:16am
Quoting Erebus
{quote} I guess he is assuming a stop loss on both, but hey, it could give you a take profit both side too right? Too much for my little brain....
Come on Now Erebus...

My intention is not to have a discussion of hedging/nedging on the same pair but rather on two different pairs with a common currency in between.
  • #17
  • Apr 22, 2017 4:00am Apr 22, 2017 4:00am
Quoting aaven
{quote} I am curious... "then the spread widens and takes you out of both sides" Say there are two opposing orders on the same instrument. How does spread widening takes out on both the sides? Thanks
Erebus was on it.

Also, consider margin requirements shifting as both positions go further into loss.

None of which is necessarily relevant to what you started the thread about, except you included nedging in the title and thus opens the sewer gates.
Congratulations ScalaFX for coming out of the closet!
  • #18
  • Apr 22, 2017 9:36am Apr 22, 2017 9:36am
Quoting nubcake
It makes me smile to think some of you dumb dumbs will get a nice surprise one day when you have your genius nedges on, and then the spread widens and takes you out of both sides.
Large spread is a concern but less so in relation with the long-term character of the positions that I was referring to. However, as I've mentioned before, the behaviour of a liquid market after the weekend gap is usually consistent with large traders doing the nedge and getting trapped on the wrong side of the trade. While I may be dumb, Goldm@n $achs isn't.
k
  • #19
  • Edited 12:24pm Apr 22, 2017 12:10pm | Edited 12:24pm
Quoting TGS
So I know I'm going to get flamed by no-nedgers......
No flames from me, but I do find your post confusing. 2+2=4ex is talking about same pair hedges; you then refer to a three pair ring situation (EURUSD, USDCHF, EURCHF), but then post a TE example using only one pair (GBPCAD).

"Nedging" is a term coined by merlin (one of the founding fathers of FF) that refers specifically to same pair hedges - here is the post containing his original explanation. (If anybody finds the term unflattering, then their argument is with merlin, not me. )

Nobody is saying that you can't be profitable nedging; after all, it is merely an operationally different way to maintaining a single position. By "maintaining a single position", I mean having only one position open at any given time, it doesn't mean using only one "magical" trade throughout the whole process. There are numerous worked examples in the links that I gave at the end of post #11.

The cost of "single position" will always be less than or equal to that of "nedging", unless you can find a br0ker who pays you more swap on the carry trade than he charges you for holding the reverse position (e.g. who pays more swap on a NZDUSD buy than he charges on a NZDUSD sell). There are also possible situations where you pay less spread using "single position", as demonstrated by merlin here.

I agree with you that, ultimately, only results matter.
  • #20
  • Apr 22, 2017 1:23pm Apr 22, 2017 1:23pm
Quoting hanover
{quote} No flames from me, but I do find your post confusing. 2+2=4ex is talking about same pair hedges; you then refer to a three pair ring situation (EURUSD, USDCHF, EURCHF), but then post a TE example using only one pair (GBPCAD). "Nedging" is a term coined by merlin (one of the founding fathers of FF) that refers specifically to same pair hedges - here is the post containing his original explanation. (If anybody finds the term unflattering, then their argument is with...
Mr. Hanover,

I found a video that may be conveys what i am trying to achieve:


Inserted Video



From 6:05 on wards, {Each Trades on AUDCAD and USDCAD}

When you get a chance, could you please give your take on it...

Thanks
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