Currency carry and hedging

I have a question on currency carries and hedging.

If I look at the AUDJPY, over the last year there has been a (roughly) 1500 pip range. Would it make sense to have both a buy and sell with very wide stops to carry both trades for a long duration? This would mitigate losses due to market movement and allow the interest to do it’s work. Down the line you could find the best exit points for each trade as well. Any input would be appreciated.

While you will have positive carry for your long AUD/JPY position, you have negative carry for the short trade. At best they simply offset. Most likely end up losing money because there’s a bid/ask spread in carry interest rates.

Just for my own understanding, wouldn’t having a high leverage over a long duration more than make up for the spread? Or is it different for carries?

If your net carry zero, increasing your position size has no effect on your carry return 0 x 10 is the same as 0 x 100.

If your net carry is negative, as I suspect you would see, then using high leverage just means you lose more money.

You do realize, right, that you could have just waited until “the market had started to trend” and opened a position then rather than wasting time and money setting up a “hedge” that served no real purpose?

It’s likely the reason Hedging is banned in US Markets… makes it harder for the LP’s and Brokers to smash accounts…

The US ban on hedge accounting has nothing to do with smashing accounts and such. I saw brokers pre-ban actively promoting “hedge” strategies. FXCM was one of them. You want to talk about unethical behavior. That was basically a way of printing money for the brokers!

Hi rhody,

Hedging was banned in the US due to US regulations. FXCM never banned “hedge” strategies. In fact, traders that trade with FXCM through our UK and Australia entities are still able to use hedging strategies if they so choose.

Jason

Jason, if you re-read what I wrote you’ll see that I didn’t say FXCM banned such strategies. I actually said FXCM [I]promoted[/I] them prior to the NFA/CFTC ban on hedge accounting. They weren’t the only brokers doing it at the time, of course.

Bro, the beautiful thing about forum life is you never quite know who’s who.

Might suggest you do a bit more whey powder before picking a fight with a world class super heavyweight.

Just saying

I have retyped a response a few times trying to clarify my own point, but I think I finally get your point. Obviously you can’t earn interest on your initial investment if it is gone and your are pulling on your margin. I had it stuck in my head that you would earn interest regardless, but it is hard to make interest on less than 0 :slight_smile:

What are you on about? You pay commission/spread twice and don’t have a way to be ahead in the trade until you close a position. Firstly how is that comparable to a stop? Secondly if you don’t want to use stops then just don’t and enter at the point you would have closed one position.

Your profitability is based on where you put on risk and where you take it off. That’s it. Nothing else. A stop and a hedge serve exactly the same purpose - to take off risk. And it both cases, the moment you do you’ve locked in whatever gain or loss you’ve made until you put risk back on again.

I totally agree that you should wait for the trend… but it is a good way to start trading a small account without having your confidence shaken by stops being constantly hit…more accounts are blown by being chipped away by stops than hedging. Yes it can definitely lead into draw down issues but on small lot trades it isn’t account blowing…

Your very last comment there is by far the most important - “small lot trades”. New traders make bad trades. That includes putting stops stupidly close to their entry points. It doesn’t matter whether they “hedge” or use stops when they make bad trades. They lose either way. If they trade big lots they will eventually blow up using either approach. We’ve all see forum posts by traders that put on hedges when they were down 50% on their account and wanted help getting themselves out of the situation.

Jason maybe you can enlighten us simpleton newbie traders on why hedging was banned in the US?

It’s pretty simple. The IRS requires FIFO accounting for tax purposes. All other markets are FIFO. There is NO ECONOMIC BENEFIT to hedge accounting (as admitted by the brokers to the NFA at the time). Those were the reasons why.

Jason knows all to well that the LP’s (or an FXCM subsidiary) constantly moving the market up and down is the algo that constantly hits stops and limits retail profits… with 2800+ posts so should you…

WE ALL know the LPs move the market up and down (or we should). The LPs are passing pricing through from the interbank market where - guess what - prices are constantly moving up and down. The algos that do that are not concerned with retail. It’s chump change compared to the inter-bank market.

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. :slight_smile: