Question. When that 50/50 becomes 50/75, what’s your negative exit strategy on the extra 25? A stop? A future “hedge”?
You want to discredit me for only having one post on a forum? Very childish, look at what I say not my forum history. You didn’t say anything about hedging with correlated pairs in your initial post. What you said was to open two positions on the same pair and then close one or open another when the market starts to trend.
This is no different from just waiting for the market to trend and then making one trade in that direction besides the fact that you have to pay extra commission/spread.
Bringing in stops to the discussion is irrelevant. This is not a way of managing risk, it’s a way of paying more commission than needed for no reason.
You say no-one is reading and you don’t read yourself.
So basically instead of closing a position you make another trade in the opposite direction?
This is no different from closing one position and then opening a new one once the market started to trend, it’s all in your mind.
In the stop loss scenario you lose 10 pips, the price moves down another 10 and then you open a new trade and gain let’s say 30 pips from the move. In total you’re up 20 pips.
In your scenario you make a trade in the opposite direction and so go down to -20 pips on the first trade and +10 on the second as you opened it later. You then close the “hedge trade” and the price then moves up the 30 pips.
This means you’d be up 10 pips on the first trade and 10 pips on the second trade for a total of 20 pips.
In your scenario you have two smaller winning trades. In the stop loss scenario you have one loss of 10 pips and one win of 30 pips, totalling +20 pips.
The only difference is that you paid more spread/commission.
Now if you are using different pairs to hedge then there may be something to that, but making two opposite trades on the same pair is completely useless and to be honest your arrogance is quite disturbing from someone that is so misinformed.
Well in that scenario I suppose there wouldn’t be more spread/commission because it’s two trades each but if you did the thing you mentioned before with opening a third trade. You get the idea.
I changed the numbers a bit to make it easier to understand, sorry for not making that clear but the exact numbers are not the point.
The point is that opening a new position against your current one is exactly the same as closing the position except you’re likely to pay more in commission/spread and it’s pointless.
Why on earth would someone trial something on a demo that is demonstrably pointless?
You may have success even with throwing money away with stupid actions like this, that does not make it correct. Think about it.
This is my only account on this site so no you’re wrong and this constant attempt to pull rank or expose me as some other member is just embarrassing.
An increase in commission is not a big deal if it’s worth it but why add additional costs that don’t do anything?
Tell me why you think making a trade in the opposite direction is any different to just closing your position. You can’t and you know you can’t which is why you’re coming up with all this mental gymnastics to try and win this argument.
I may not have made my scenario comparison particularly clear but yours was even worse. Do you want me to make another one? Or perhaps you can come up with one where you make more money by opening a hedge position rather than closing the trade and opening a new one at the same point you close the hedge.
Exactly what I thought. But one last thing before I go. Remember to keep your ego in check, it’s ok to be wrong about something but to argue even though you know are wrong is the kind of attitude that will kill you in this game, and if you keep trying to pull rank in place of an argument you will never improve.
Peace brother.
This is exactly the same as having a stop at -12 pips. There is no benefit gained by “hedging” as opposed to using a stop. All you do is incur the spread and/or commission cost of the second trade if you “hedge”.
…Now price has hit a support you didn’t see and starts to reverse after a few periods you can see that it is a full reversal so you place another trade in the reversal direction… you may pick up 5 pips… 10 pips… 15 pips… 20 pips once the reversal shows weakness you close all and you have turned a position that was going to be a guaranteed 10 point loss into maybe a 7 pip… 3 pip loss or maybe even a 5 pip profit from a losing trade… so your guaranteed 100% loss has become a 50% loss 50% win… effectively 50 - 75%.
Wait. You have a “hedge” on but instead of lifting the short you put on you enter a new long to catch the upside move off support? That just leaves the prior paired long & short in place doing nothing.
In any case, even if you lift the hedge instead of putting on yet another trade, the final outcome of a long/stop/re-enter long is the same as long/hedge/lift hedge. It’s the same number of trades and the same profit/loss. The difference is that if you “hedge” and the market doesn’t reverse within a short period of time you’re stuck in a position which probably has negative carry and for sure has your margin tied up for no good reason.
Bigger picture, though - and I think this is what makes “hedging” appealing to a lot of people - is this whole idea that realizing a loss is bad. People get SOOOO fixated on win % and not wanting to have losing trades. Hedge accounting lets you really contort profit and loss recording. As a result, it can completely delude traders into thinking they are doing better than they are (“I’m not taking losses, so I must be dong well”) and obscures the real source of their performance - where they put on long/short exposure and where they take it off.
Sounds very similar because the facts are the facts. The “fixation” on costs (commissions + spread) is because they are unnecessary. They serve no functional purpose. It’s not like buying an option as insurance or as a hedge. You’re paying for nothing. If you only trade occasionally, then whatever. No big deal. If you trade frequently, though, then it will add up.
So I’m deluded and have been doing it wrong all this time because losses aren’t bad, I should have been taking losses to be doing well??
I have no idea if you’re deluded. If you are profitable over a reasonable period of time, then you are generally making the right calls when to put on long/short exposure and when to get flat, with position-sizing decisions also potentially factoring in there. Whether you use “hedging” or you exit the market is totally irrelevant - though “hedging” [I]could[/I] reduce your returns, depending on its usage.
My biggest issue with hedge accounting is that it seriously muddles the link between long/short/flat decisions and their outcomes - especially for inexperienced traders who need the proper feedback in their learning process. If you make a long call you want to be able to know afterwards whether the market did indeed go up as anticipated. With “hedging” you have the potential for all sorts of additional directional decisions obscuring the original one - and others made along the way.
Using your earlier example, your initial trade sees the market go against it. You put on a hedge at -12, then later take it off at say -20 when you see support hold. The market rebounds. It rallies 22 and you close with a 10 pip profit (-12 + 22). You made 4 different decisions in that sequence. When to get long. When to get flat. When to get long again. When to get flat once and for all. If you count that as one complete trade instead of the two trades it really was, as “hedgers” seem to so often do, then it looks like your initial long was a good one when in fact it wasn’t. It was the second long decision that was the winner.
Who cares if you have to count that as 1 win and 1 loss? You can do quite well for yourself if you have a 50% win rate and your winning trades are bigger than your losing ones. Heck, I’d take a 25% win rate if my winners were sufficiently larger than my losers (though admittedly, the ride is bumpier). On the flip side, I can quite easily show you systems with win rates in the high 90% range that lose money.
Returning to the point, I see traders who attribute their success to “hedging”. That is a complete misattribution. Hedging is nothing more than a method of accounting, just like FIFO. A method of accounting is not a trading system or strategy. It plays no part in net profit (unless it incurs added costs). A trader who believes it does is missing the real source of their performance - their entry and exit decision-making.
I know you don’t trade and have no wish to do so…
You know that, do you? That’s interesting. I’ve been in the markets for close to 30 years now. Still have the original account I opened way back then. Must never have used it, though, since you say I don’t trade. 
I tried hedging like this and it is useless…
Now, if we are talking about going long some assets amd short others, like a hedge fund, to.achieve a balanced long-short portfolio, then we are getting close to the true meaning of the word.
Ps: Rhody is a trader and recently.completed a.PhD.studying retail traders, which he shared publicly here on BP, FOR FREE… Obviously I read it and bloody good it was.too… Perhaps some loud-mouthed people on this thread should bloody well know their facts before accusing Rhody of having no.idea about trading…
If you cared to read…
http://forums.babypips.com/forextown/78902-trader-performance-research.html?highlight=Phd+thesis
Looks very familiar, and I’ll restate it. I do not [B]trade for a living[/B] (you left that bit out of your prior comment), and I have absolutely zero interest in ever doing so. I figured out many years ago that sitting in front of the screen day-in and day-out for years was never something that was going to work for me. I did it for a while. My performance was fine. I just have too many varied interests and demands on my time to sustain the required short-term focus. As a result, I tend to operate in longer time frames, with occasional bursts of shorter-term activity. Trading full-time is not the only form of trading.
If our kids were coming out of the education system with a 95% failure rate we would blame the kids wouldn’t we…??
Hell no... we would all be blaming the system.... and rightly so...
Poor comparison - unless you’re talking about the [I]performance[/I] of the students. Only a small percentage of students are A students. Only a small percentage of forex traders are “A” performers. That doesn’t mean all the rest are big losers (on an individual basis) or that they don’t actually get something out of their trading experience. As you noted elsewhere, some of them just lose a little bit and decide maybe it’s not for them. Or maybe they actually made a bit of money, but didn’t think the time involved was worth the payoff. They nominally get dubbed “failure” in the statistics because they quit, but that isn’t really fair. As you commented, they tried and made a personal choice it wasn’t for them.
If FX traders are coming out of the education system with a 95% failure rate we would blame the traders wouldn't we...?? Certainly would......
I would say - and noted in part of my PhD work - that forex is a negative sum market because of bid/ask spreads and other trading costs. That means, on average, you expect people to lose money. Any trader first has to overcome that (adding “hedge” costs just makes the hurdle higher, which is why I don’t condone that approach). Clearly, most do not. So yes, the odds are stacked against them. And that’s without there being any fraudulent activity in the system.
Loss aversion is already a well documented psychological bias. It factors into why traders tend to be quick to take profits and slow to recognize losses (cut winners short, let losers run). In academia they call that the Disposition Effect. I think in my data the average holding period for winning trades was about half as long as the holding period of losing trades, which is pretty good evidence in favor of the Disposition Effect at work among retail forex traders. That’s not doing them (us) any favors.
This is part of why I don’t like “hedging”. It tends to facilitate the expression of this loss aversion bias.
In the future, a link would be great so readers don’t have to search for the thread and dig through for the post you’re talking about.
Let me see if I’m following correctly. You were short. You had an order to buy (“hedge”, go flat) 200 pips above the 200 EMA - though in this case that sounds like it was also 200 pips above your short entry?
The market makes a sharp reversal on the news, triggering your buy order, getting you net flat at -200. You close out the original short when the market is 270 pips above your original entry. That left the long you entered as a “hedge” remaining. The market continued up and you eventually closed that long with a 1455 profit, or thereabouts.
Do I have that right?
OK, got it. Let me point out a couple of things from your earlier comment.
You noted that when the hedge got triggered it “Locked 200 pip loss”. Looks like it was 180 by your numbers, but that’s a minor detail. The point is you yourself say the hedge locked in your loss. Isn’t that the same thing as if you exited with a stop (or manually, for that matter)? The lock happens regardless.
Because what you ended up doing was functionally the same as if you did two separate trades (first you went short, then you went long), and your time frame is short, there really isn’t any extra transaction cost for the hedge in this case.
But that brings up my major point.
You said “my EA closed the trade with a profitable 1180 pips”, meaning you were counting the whole set of transactions as one trade. It wasn’t, though. It was two different trades - two different sets of decisions. And two entirely different takings of risk.
You put on short exposure at 1252.2. When the market hit your “go flat” level at 1254, you took off the short exposure as per your system rules. One trade sequence done. One risk exposure period complete. You even closed the original short position, indicating that one was over.
The process of lifting the short position created a long exposure at 1255.2. This is a separate trade decision. Your system (presumably) has given you a signal to be long, otherwise you would have closed out both the long and short, or held them in anticipation of seeing the market turn back down (which to my mind would also be a separate market-timing decision). Eventually, your rules led to that long exposure being closed.
In describing this as one trade that made X amount of total profit you’re losing considerable information on one hand, and having potentially misleading info on the other. To the latter point. Your system provided two sets of entry-exit signals. One was profitable. The other wasn’t. That’s a 50% win rate, not 100% as you would measure if you’re only considering it a single trade. This works the other way around on a losing trade, by the way. You could have a situation where the first trade was a winner and the hedge a loser and ended up with a net loss. I’d still make the same case that it should count as 1 winner and 1 loser rather than just 1 loser. As I stated before, the win % doesn’t really matter so long as winners are sufficiently larger than the losers.
In terms of the loss of information, what I’m talking about it being able to accurately analyze your system’s performance and understand where the results are coming from. Primarily, what I mean is if you just count this as one trade you can’t go back and look at how your system did at each of its decision points - of which there were four in total. Were your signals to go first short, then long good ones based on your system intention? Were your exit points in line with what you want?
Also, not counting this as two trades may mean you don’t capture the drawdown represented by the loss on the original short. That means you wouldn’t be capturing the volatility in your equity curve.
These are all important in an environment where systems have a tendency to wax and wane in their effectiveness. If your system starts to struggle, you want to know why and where that’s coming from.
You keep saying newbies should demo it, but newbies especially should be learning about making good entry and exit decisions. They need to recognize that each time they go from flat to long or short, or from long/short to flat, they are making a market-timing decision. If they don’t, they are bound to struggle in their development and their understanding of the source of their performance.
A lot of that has been happening lately, don’t you think?
I’m always one for running my mouth off at other members here, I think it’s time we all tried to make a conscious change - we’re all in the same boat.
No point in making the boat go faster if it’s in the wrong direction.
There again you called it “the trade”. So is it one trade or two? Saying “Only 2 commissions were lost in the making of this profit” doesn’t sound to me like you’re thinking of it as two trades. Maybe you really are, and that’s how you have it recorded in your records, but that is not clear from your writing here.
And you never answered the question about the difference between the hedge locking in your loss and employing a stop to do the same thing. You keep describing stops as “guaranteed” implies that you think of stops as somehow different then active hedges, but then you also seem to admit both do the same thing.
I’m not disputing you made money. You obviously made the right market timing calls - or you designed a system to do so. Honestly, I don’t care how you trade. That’s entirely up to you.
My problem comes when people recommend “hedging” to newbies when it has zero positive value and can potentially be cause them harm. You are not profitable because you “hedge” and they won’t be either.
I’m inclined to agree with this, not by opinion but perhaps more importantly by logic.
You may well have an edge, and no one is disagreeing with you, nor is it the topic of debate here. But I can’t logically see from what you have said how hedging is contributing to your existing edge. If anything, you are paying double the commission and opening yourself to exposed risk, which is perhaps unnecessary?
It’s clearly not always easy to explain over message what a picture can show, as the saying goes ‘a picture is worth one thousand words’ - in this case a chart kinda says it all.
Apologies if I have misunderstood you, but I cant for the life of me grasp the benefit to what you are describing
Here is a great thread on “hedging” with some good replies and resources offered by Lexys (among others):
http://forums.babypips.com/newbie-island/84572-hedging-question.html?highlight=Lexys+hedging
You guys can continue to lead the incoming sheep straight into the slaughter house…
I’ll get back to building my trading business without distraction… win win…adios…