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  1. #1
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    Default Hedging.

    Dear Jason,

    I have recently been trying a trading contest with another broker and

    I enjoyed using hedging on any one pair; on my FXCM forex account

    I have to hedge one pair with another, and I wondered if there were any

    plans to introduce the option of hedging within a same pair, on FXCM accounts.

    This would really benefit my long-term trading strategy, so it would be something

    I would like to develop.

    Thanks.

  2. #2
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    If you are a US trader, FXCM cannot offer you pure offset "hedging". It's against the regulations.

    And in any case, it is 100% the same as exiting the position (or the part of the position you're hedging) in terms of your P&L. Actually, it might be better in some ways.

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    Quote Originally Posted by rhodytrader View Post
    If you are a US trader, FXCM cannot offer you pure offset "hedging". It's against the regulations.

    And in any case, it is 100% the same as exiting the position (or the part of the position you're hedging) in terms of your P&L. Actually, it might be better in some ways.
    I am in the UK (unless Scotland goes its own way)...

    Thanks Rhody, but there is a case for trying this in my approach to trading... It would serve me well, I feel.

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    Quote Originally Posted by PipMeHappy View Post
    I am in the UK (unless Scotland goes its own way)...

    Thanks Rhody, but there is a case for trying this in my approach to trading... It would serve me well, I feel.
    Hi PMH,

    Hedging is only prohibited for US residents, and FXCM even has a solution for them.

    Since you have an FXCM UK account, you should have hedging enabled by default. If not, please click on the MyFXCM button. On the webpage that pops up, you can update your Hedging Functionality.

    That said, Rhodytrader has a point about hedging. The only valid application I know of is to run multiple strategies on the same currency pair. For example, Strategy A may place long term trades using weekly charts, while Strategy B may be a scalping off of 5-minute charts.

    If however, your goal with hedging is simply to avoid taking a loss on an existing trade, it's important to understand that placing a second trade in the opposite direction on the same currency pair to avoid closing the first trade is mathematically equivalent to closing the first trade. Any gains you make on one trade will be offset by losses on the other for as long as both long and short positions are open in the same currency pair.
    Last edited by Jason Rogers; 07-07-2016 at 03:01 PM. Reason: typo (said "scalping" in last paragraph when I meant to say "hedging")
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    Quote Originally Posted by Jason Rogers View Post
    Hi PMH,

    Hedging is only prohibited for US residents, and FXCM even has a solution for them.

    Since you have an FXCM UK account, you should have hedging enabled by default. If not, please click on the MyFXCM button. On the webpage that pops up, you can update your Hedging Functionality.

    That said, Rhodytrader has a point about hedging. The only valid application I know of is to run multiple strategies on the same currency pair. For example, Strategy A may place long term trades using weekly charts, while Strategy B may be a scalping off of 5-minute charts.

    If however, your goal with scalping is simply to avoid taking a loss on an existing trade, it's important to understand that placing a second trade in the opposite direction on the same currency pair to avoid closing the first trade is mathematically equivalent to closing the first trade. Any gains you make on one trade will be offset by losses on the other for as long as both long and short positions are open in the same currency pair.
    Thank you, Jason, for that really helpful answer!

    Yes, I know what you mean... I have a hunch that using hedging at the beginning of entering a long-term

    trade (position trading is what I am becoming specialised in) in a congestion phase would act as my 'fee'

    for insuring that my choice of bias was correct... It is something I want to trial for this use specifically,

    nothing else.

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    Jason,

    I logged into My FXCM but I cannot seem to find an option for 'Hedging' that I can change; I just tried

    to open two opposing trades on my other (demo) FXCM account and when I opened the sell position

    on the same pair it just closed the buy posiiton, so hedging is clearly not set up.

    Could you help me find the tab/settings area where I can facilitate this?

    Thank you IMMENSELY!

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    I can understand in the case of operating in different time frames how it would make sense to be able to use hedge accounting (and all we're talking about here is an accounting method). I'm talking about something like holding a long-term trend position and trading around that with shorter-term positions on a different strategy. From a strategy monitoring perspective I can see the value.

    What hedging will not do in any way, shape, or form is change your net performance, however. Anything you would do as a hedge trade could be replicated in a non-hedge fashion. That's a simple mathematical truth.

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    Quote Originally Posted by PipMeHappy View Post
    I have a hunch that using hedging at the beginning of entering a long-term

    trade (position trading is what I am becoming specialised in) in a congestion phase would act as my 'fee'

    for insuring that my choice of bias was correct... It is something I want to trial for this use specifically,

    nothing else.
    Hi PMH,

    If I understand what you said correctly, then this does not seem like a good reason to hedge.

    You said you want to use "hedging at the beginning of entering a long-term trade" as insurance. This is not insurance. The mathematical effect is simply that you put off making a decision on the market direction and pay the spread an extra time (on your second trade) for your trouble.

    To prove this, I will walk you through the two possible outcomes. For my example, let's assume you are bullish on cable and want to place a long term trade buying 100k GBP/USD at 1.2800. That means, according to your hedging plan, you would go long 100k GBP/USD in one trade 1.2800 and short 100k GBP/USD at 1.2800 in another trade. (I'm ignoring the bid/ask spread to keep this example simple but note the sell price on your second trade would probably end up being a bit lower than the buy price on your first trade.)


    Scenario 1: GBP/USD goes up 50 pips in your favor and is now trading at 1.2850. That means you are floating a 50 pip profit on Trade 1, and a 50 pip loss on Trade 2. Therefore your Net P/L at this point is 0 pips. (Again this ignores the spread.) Since your idea of buying GBP/USD seems to be working so far, you decide to close your short trade. This locks in your 50 pip loss on that Trade 2 which on a 100k short equates to $500. You are now net long 100k on Trade 1. Suppose GBP/USD then goes up to 1.3800. You close the trade for a 1000 pip profit. That equates to $10,000 on Trade 1. But remember you have to subtract the $500 loss from Trade 2. That means your P/L overall is $9500. That's equivalent to 950 pips on a 100k GBP/USD trade. That means, even though you took profit at 1.3800, it was as if you initially bought 100k GBP/USD at 1.2850, not 1.2800. That means the whole time you were hedged from 1.2800 to 1.2850 was as if you had no trade open at all.

    Scenario 2: GBP/USD goes against you dropping 50 pips and is now trading at 1.2750. That means you are floating a 50 pip loss on Trade 1, and a 50 pip profit on Trade 2. Therefore your Net P/L at this point is 0 pips. (Again this ignores the spread.) Since your idea of buying GBP/USD seems not to be working, you decide to close both your long trade and your short trade. This locks in your 50 pip loss on Trade 1 and your 50 pip profit on Trade 2. You lose $500 on Trade 1 and that is offset with a $500 profit on Trade 2. That means the whole time you were hedged from 1.2800 to 1.2750 was as if you had no trade open at all.


    The question then becomes: If you are unsure when you first get a buy signals for GBP/USD at 1.2800, why not simply watch the market without placing a trade at 1.2800 and wait to see if the price rises to 1.2850 before buying 100k GBP/USD there? If the price instead falls to 1.2750, then you don't place a trade at all.
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  9. #9
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    Quote Originally Posted by PipMeHappy View Post
    Jason,

    I logged into My FXCM but I cannot seem to find an option for 'Hedging' that I can change; I just tried

    to open two opposing trades on my other (demo) FXCM account and when I opened the sell position

    on the same pair it just closed the buy posiiton, so hedging is clearly not set up.

    Could you help me find the tab/settings area where I can facilitate this?

    Thank you IMMENSELY!
    It's my pleasure, PMH

    It sounds like you have an FXCM US demo. Note that US regulations prohibit hedging. To set up a demo that let's you hedge like your real FXCM UK account, use this link.
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  10. #10
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    Quote Originally Posted by rhodytrader View Post
    What hedging will not do in any way, shape, or form is change your net performance, however. Anything you would do as a hedge trade could be replicated in a non-hedge fashion. That's a simple mathematical truth.
    Quite right, Rhodytrader

    Quote Originally Posted by rhodytrader View Post
    From a strategy monitoring perspective I can see the value.
    Yes, this is why many of our clients use hedging, and I just thought of another application: Suppose I have an EUR-denominated trading account, but I am long term bearish on the Euro. If my account balance is 50,000 Euros then I can short 50k EUR/USD and hold that trade as a long term hedge against a falling Euro. That way I am free to place other trades in EUR/USD without having to worry about whether they will cancel out.
    Last edited by Jason Rogers; 07-07-2016 at 06:06 PM.
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