Hedging Question

Beginner Questions
1

I would have a basic question about Hedging. I am aware what does that mean. It means I am being in at least two OPENED opposite (short/long) positions at the same time on the SAME trading symbol. Different traders have different strategy of Hedging and also different goal of it. I normally do Hedging when I am extremely worried that my current loss of OPENED positions would equal (obviously in opposite +/-) balance on account. When this happens, trading account ‘‘explode’’ and all the money is lost. With idea of Hedging my goal is that whenever I see unwanted huge lose (incorrect direction of trade comparing to my entry), I enter the opposite position (short/long) on the same trading symbol.

Here the expectation is very obvious: whenever the lose in unwanted direction increases (position 1), the other, opposite, position comparing to position 1 gets either in profit OR reduced loss (position 2). So theoretically position 1 is going to hurt me even more but ‘‘signals’’ (at least philosophical effect) of position 2 are getting better (increasing of profit or decreasing of loss). Obviously this is changing all the time but theoretically when something hurts on one side, another benefits on another side, this at least partially says that because of those two Hedging positions my account is not going to ‘‘explode’’ yet. With term ‘‘explosion’’ i am referring to the worst nightmare of every trader - entire balance gone due to such huge loss of opened positions.

So before I start asking my question, I want to clarify again this example: position 1 is the one I opened on particular trading symbol at the beginning hoping it will go to wanted direction. Later I noticed my expectation was terrible wrong - trend in opposite direction causing explosion of account balance. Then I was forced to do Hedging in the opposite direction, hoping to make some benefit upon loss which is increasing. This position, being opened by me manually by force to keep my account alive, is position 2. So now I explained what do I mean with ‘‘position 1’’ and ‘‘position 2’’ terms and can finally start asking my question.

I was learning how to finalize procedure of Hedging so how to close either opened position 1 or opened position 2. Please kindly read again what exactly is position 1 and position 2 in previous paragraph. Confusing them will surely provide wrong answer from you. One of most important ideas in closing Hedging is to get entry line (entry = current market price at the time of opening the position) of position 1 and entry line of position 2 as close as possible together. This helps with getting out of BOTH positions sooner. In order to get both entry lines as close as possible together, I must wait that the profit of position 2, i repeat PROFIT OF POSITION 2 ( !!! ), comes to minimum. E.g. if I am in profit of position 2 for like 50 EUR (completely random example), I must wait so it comes to minimum profit like 1 EUR. So I still have some time to close the position (three mouse button clicks) to prevent closing in loss. According to my lesson learned, minimum profit is needed to get both entry lines as close as possible together. If I would close the position 2 ( !!! ) with high profit, I would make both entry lines even more far away which would result in even more trouble for Hedging.

So far I understand what I typed but my problem starts with the next step: According to what I learned, to continue working with Hedging, I must open same position 2 (if i did long, i must long again. If i did short, i must short again) AGAIN immediately or at least as fast as possible after I closed position 2. Here the Hedging process should be repeated again with goal of closing position 2 (that secondary position 2) with minimum profit again and so on until I don’t make benefit of both position 1 and position 2 (obviously latest position 2).

What I said in previous paragraph is still understandable but I don’t understand the following and need to ask two questions about that - they have different severity of problem:

Question 1: This question is less important but would still appreciate a lot your answer. Does it matter how profit comes to the minimum one? Or not? E.g. from loss (regardless how high) to minimum profit or from high profit to minimum profit? Note: I am assuming for the time period of my observation only. Obviously position 2 will be always opened with loss at the beginning only due to the different between bid/ask price. Just asking you for the time period when I look closely at what is happening. So I am asking if is important how (from where) does the price come to minimum profit?

Question 2: This question is extremely important as I am just few tens of EUR away from account balance explosion and since I am unemployed (no income) you can imagine how worried I am. Previously I said that new position 2 (same type so if i did long, i must long again. If i did short, i must short again) must be opened immediately or as fast as possible after previous position 2 with minimum profit was closed. But if I am really so fast as I am saying then price of opening position 2 will be very very very similar, sometimes even identical, than the price where I closed previous position 2. So if the closing price of previous position 2 and opening price of new position 2 are so much similar (sometimes even identical), where would I benefit here? The reason, which will probably help YOU in answering me, why I don’t understand is the following one: the location of entry both lines (previous position 2 comparing to new position 2) on graph will remain being on very very very similar, sometimes even identical, position on the graph. So I don’t understand how would I get position 1 ( ! ) and position 2 entry lines any closer doing what I described? Example: on the graph is shown entry line of previous position 2. When I close it and open as fast as possible new position 2 (same type so if i did long, i must long again. If i did short, i must short again) the entry line will remain being on VERY similar or even identical location. How would this be anyhow more close to the entry line of position 1? I repeat that the accurate way of dealing with Hedging (ultimate solution to close in best possible way position 1, where disaster happened, and position 2) is to get both entry lines, position 1 and position 2, as close as possible together but I don’t understand what I asked.

Your help would be much appreciated

thank you very much in advance.

2

And that is why I don’t hedge.

3

not sure what do you mean and to which part of my message are you referring to.

4

I mean I don’t hedge. Your message about the difficulties you are experiencing in trying to hedge effectively confirms I was right and I should continue not hedging.

But look, isn’t there a more efficient way you can manage risk and still benefit from market price action?

5

Not that I know of assuming that I am (and i really am) in so huge CURRENT loss of opened positions that I am close to account explosion and loss of entire balance on trading account. If you think there is any better way than Hedging, ensuring myself either of the following two goals (either or both):

goal 1: prevent, via Hedging (getting entry lines as close as possible one to another), current loss being equal, in opposite +/- obviously, to balance on account which causes account ‘‘explosion’’.

goal 2: increasing the balance on trading account, as alternative to loading more money (deposit) on trading account in case if i don’t have a regular income, in the following way: position 2*** being all the time closed with as high as possible profit which grows account balance. The advantage of this is then indirectly you are basically ensuring that the lose won’t equal (opposite +/-) trading account balance so you are delaying by far the account ‘‘explosion’’ which is of course very good think because this way there is high possibility that ‘‘explosion’’ (loss of entire balance = automated closure of all opened positions) won’t happen - every time the balance is increasing. The major disadvantage is that what i just said as ‘‘goal 2’’ is the worst possible method of dealing with Hedging because the point of Hedging is to get both entry lines (opposite type of positions on the same trading symbol at the same time) as close as possible one to another. What I just said (’‘goal 2’’) you would be actually increasing the DISTANCE between them every time you close new position 2***. So goal 2 for sure should never be done when Hedging.

Tommor, if you have any better idea, I would appreciate very much if you could please explain what you where you referring to when you said ‘‘more efficient way’’. Kindly keep in mind that i am in so huge loss that I am seriously worried about all account balance ‘‘explosion’’. If you need list of opened positions for accurate explanation of what did you mean, you are very welcome to ask me this and I will list them to you.

However this current message basically has nothing to do with the purpose of opening this forum Thread. I am still waiting for [B]someone else[/B] to please answer me on both questions.

Tommor I was typing this current message you are reading for you only as you are showing that you would like to discuss with me unrelated idea which doesn’t have much to do with the purpose of my primary message. I would like to kindly ask you to please, whenever you will be available and willing to, continue with what you meant what else should I do to get out of this big trouble.

*** note that definition of ‘‘position 2’’ from my first message above still applies.

6

Unfortunately, it’s actually pretty difficult for anyone to try to help you out, constructively, without an enormous input of time, effort and energy.

With absolutely [B][U]no[/U][/B] disrespect intended at all, it’s fairly clear, here, to any experienced traders, that your rather long, complicated, original post is informed by a fundamentally mistaken pattern of beliefs about hedging, which has led you to imagine that hedging somehow has the potential to benefit you in circumstances in which it just [I]doesn’t[/I].

I appreciate that to assert that is easier than to demonstrate it, let alone to try to do anything about it, which is why offering a logical, intelligible, constructive reply to your questions is rather difficult and kind of on the “unappetising” side. :8:

Nevertheless, and in an attempt to say something helpful, a long, slow, careful read through these threads, [I]paying particular attention to the posts of “Rhodytrader”[/I], may assist you …

[B]301 Moved Permanently

http://forums.babypips.com/forextown/74044-need-stop-loss.html

http://forums.babypips.com/newbie-island/46524-newb-question-about-hedging.html[/B]

7

I tried to [B]Rhodytrader[/B] but he doesn’t have feature enabled on his profile to send him a message so. Neither any contact information in profile (e.g. email, skype,…) nor any website URL where could I contact him. So everything that remains is to hope he will see this forum topic and have some available time to reply on two questions I asked in my first message.

Lexys I know you suggested to read his replies on those three forum threads. I did that but didn’t find needed information comparing to my questions in my first message above.

Also waiting for Tommor what he wanted to suggest and of course in the meantime I am doing my best to try to get information on asked questions (both) on my own but so far I didn’t find exactly what I am looking for.

8

Question 1 - No.

Question 2 - As you don’t understand hedging, and that’s how you got into this situation, you have not been able to understand your own question as to how hedging should work. If I give an answer that explains how hedging should work, how would you understand the answer? All bearing in mind that I don’t believe hedging can work for an individual trader.

I wish you good luck.

9

I’m going to disagree slightly with Tommor, here (it does occasionally happen): I think the reality that hedging can’t ever [I]gain[/I], under these circumstances, on an individual currency-pair, for an individual trader, is actually an objective, factual statement, rather than just a “belief”. :wink:

10

That’s fine lexys thanks, with you on this.

11

You might be waiting a little while, Rhodytrader already advised you on another thread how important it is to follow your trading plan. Whereas what you’re doing here is looking for a plan after you got into the trade.

I don’t wish to see your account explode but I can’t tell you a way to restore the account using hedging.

12

I am not asking about explanation how does Hedging work because I already understand the functionality and its meaning but I don’t understand what I asked in my second question. Closing minimum profit position 2 and opening it again doesn’t make entry lines anyhow closer to each other comparing to how close they previously were. This is what I want to figure out.

Tommor if you have any better solution than Hedging and willing to share it, I would appreciate it.

13

OK - What as % of the total account is the current loss on Position 1?

14

Currently I am in 7 opened positions. All of them are in loss at this time. For two trading symbols I am in Hedging. One trading symbol contains ‘‘double hedging’’. I will speak about the symbols I am currently in Hedging:

GBPJPY:

2x short
1x long

EURUSD:

1x short
1x long

I know I haven’t answered anything yet but to simplify the description of the problem a bit I will talk in the next paragraph only about the trading symbol, involving Hedging, which is causing much more problem than the other one also involving Hedging. This one is GBPJPY.

To answer your question: Counting BOTH (2x short) opened positions 1, the current % of loss from total account balance is 45.62%. But if I count ALL THREE (2x short, 1x long) opened positions then the current % of loss from total account balance is 45.69%.

But if I count % loss from ALL opened positions comparing to total account balance then I am currently in TOTAL loss for 62.89%.

15

This is more complicated than I had thought it would be.

I’m assuming that the primary position in each case is matched by the secondary or aggregated secondaries. This means that whether price goes up or down, your risk remains the same. However, it also means your profit is capped by the opposing position(s), whether its the primary or the secondary. To reduce your current unrealised loss on a pair, you will at some point need to close either all positions on one side, either the longs or the shorts and let the remaining position go “naked”.

In each case, does your technical analysis better support long or short? In which case, immediately close the opposing positions. Set a stop-loss at a level derived from TA for the remaining positions. Try to ensure this, if hit, would generate an affordable loss. If TA doesn’t show you a rational place to put the stop, close the remaining position as well.

If the remaining position, protected by an account-protecting chart-based stop-loss order goes into profit, use TA to hold it as far as you can in order to re-coup losses. But at the first sign of weakness, close it.

A second option is simply to close everything immediately and take the loss - at least it won’t get any worse, and you should be left with about half your account.

After that - stop trading and start learning, and this is a fine place to do that.

16

All the strategies related to technical indicators I was learning supports equally long or short. This is because I was writing down important notes while learning and most of the notes start with ‘‘Downtrend is expected if…’’ or ‘‘Uptrend is expected if…’’ However all those technical indicators are used normally when making a decision if closing the positions and not if entering them. So indicators (the technical analysis you are asking me for) are used for tiny time range decisions. When entering the position, it is required to look more widely so more large time range. For this I use horizontal resistance/support lines, trend lines and two self-made requirements that (first requirement) after both said type of lines are crossed, there must be at least one fully formed candle in correct expected direction with expected color and (second requirement) that first next upcoming candle must be going towards my expected direction.

I am not sure if it was just a comment or you asked me (in this case there isn’t a question mark) in which situations do I immediately close opened positions. There are many different cases when I immediately close it. Many. Listing them would be completely offtopic comparing to what I would need from this forum community and I am yet to receive the answer. However, if it was your question, I definitely won’t overlook it and will answer you with one example when i immediately close opened position:

I immediately close opened positions when ALL of the following four conditions are met (this is just one out of many examples):

condition 1: gap occurs in unwanted direction
condition 2: price of candle which is currently BEING formed is going towards unwanted direction
condition 3: unwanted color (color representing unwanted direction) on the candle from condition 2 is shown for at least approximately 20% of time used on time range of graph (defining time per one candle)
condition 4: the location of candle from condition 2 must be below gap in unwanted direction (if i entered long position) or above gap in unwanted direction (if i entered short position) in order to close the position. If this doesn’t happen there are still good signs that trend will be wanted one.

If ALL four conditions are met then I immediately close the position. One condition, which ever one of those four, does NOT mean one example of when do I immediately close position. The example is being constructed of four conditions. I have many such examples when to close position.

However note that what I wrote so far has, I believe so, nothing to do with purpose of my primary message and what exactly I need. I got a feeling you were asking me what I previously typed and I am not the type of the person who would ignore what I am being asked.

I am not really using stop loss or take profit at all. Regarding stop loss: particularly not when I am in loss. The stop loss should be used when you are in profit. If you use stop loss when you are at zero or even in loss then you are basically announcing your own loss. I have no purpose to close the position if it is in loss.

From what I understand in your suggestion you are basically describing the manual version of Trailing order but note that Metatrader and/or at least my broker has nonsense requirement that any kind of entry level (opening position of Stop type of order, take profit line, stop loss line) must be for some quantity of points away from current market price. So its not possible to do Stop Loss line just about anywhere I want.

I would still love to understand the answer on my second question in first post in this topic Thread.

17

Hi Puppy0 - Trading is not as complicated as you think its is (or maybe think it should be).

Stop trading and start learning.

18

Hope you don’t mind if I add a comment here?

The purpose of hedging is to [I]neutralise [/I]a position. I.e. locking in a current situation whether it is a profit or a loss. This may be for many reasons. But any hedging action designed to stabilise and neutralise a current exposure cannot, at the same time, [I]also [/I]be used to make a profit. It’s very nature and purpose is to [I]prevent [/I]a change in the current status.

If one closes a hedge position and immediately reinstates another at the same or similar level it only results in an approximately identical neutral situation with the possible addition of extra transaction costs.

The only solution is to wait until your trading strategy provides a strong signal in one or other direction and then close the opposing leg, whether it is in profit or not, and run the other until it meets either your target or stop loss.

You can only improve your position by lifting at some appropriate stage one leg or the other. You cannot make a profit without an exposure.

These hedges, I feel, were put on for the wrong reasons on an over-exposed account, and only serve to provide breathing space and postpone the decision about when, and at what level, to reintroduce exposure in an attempt to rectify the position. The only way out is to take advantage of this “breathing space” and wait for a good signal, based on, for example, the same analysis as taking a fresh position, and close the appropriate opposing position. Of course this reintroduces your risk exposure, but you cannot gain [I]without [/I]exposure.

Otherwise, just close everything and start again with a smaller risk positions.

19

Manxx has basically nailed it.

I don’t know where you learned all that stuff about hedging and how the position 2 exit should be very close to position 1 entry and such. It makes things much more complicated than they should be.

Here’s the bottom line. You made some poor decisions on the positions you entered - either overexposing yourself or not having a proper exit strategy for if the market went against you (or both). As a result, you have lost a large portion of your capital.

That’s right. You’ve lost that money. Don’t for a minute think that because the positions remain open you haven’t lost that money yet. It’s gone. Sorry, but that’s the simple truth.

The only way you can make that money back - as Manxx indicated - is by once more having a directional exposure to the market. Effectively, you have closed out all or part of your positions via your hedges. You cannot make anything back so long as you have them on. You have to treat it like starting a whole new trade.

20

Thank you to both of you for those replies.

Are you saying that I [B]shouldn’t[/B] work on getting short entry line and long entry line as close as possible together? As far as I understand Hedging this is one of the basic rules to get out of both positions in best possible way. Many sources I was learning from contained same information: every time I open and close position 2, via minimum profit, I should do my best to get both entry lines as closer as possible, every time closer. Are you saying all the sources of knowledge contained wrong information means that it is NOT true to put or try to put both entry lines as close as possible together?

I have no way to earn money to make an additional deposit on my trading account to keep the opened trades running AND at the same time avoid being worried about account balance explosion. All my life savings were invested into this trading account and I was speaking about % of current loss in post number #14 above. So you are basically saying I should only hope that opened positions come into profit and close them when they do? I don’t like being dependent on something what neither me nor anyone else have effect on. I would like to do something that account balance explosion won’t happen because for me, to lose that all money I have, not just on trading account but also in my home and on bank account, is completely unacceptable.

Also I cannot just close all trades (all and not just Hedging ones) just because all of them are currently in loss. So the only solution I see here, as crazy as it sounds (risking something, what is being over-risked by thousands of times already, even more) is to try to find some Signals Provider guru and ask him for at least one, very urgent signal that will guaranteed bring me high profit to keep my account alive. I currently cannot think of anyone who would provide me such suggestion of a signal. Particularly not so fast as I would need it.