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Thread: Hedging

  1. #11
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    Quote Originally Posted by hedge View Post
    Because not only do you freeze margin, but you can take a profit on your hedge trade at a turning point in the market and wait for it to come back to your original trade. If it does not, you place another trade in the same direction as the original thus lowering your average. Keep taking those hedge trades to boost balance and keep averaging down.
    Somewhere folks seem to have forgotten that spot forex trading is like futures. Your account is marked-to-market. That means it's current value takes in to account the current open gains or losses of the positions you have on. To say that taking profits from these so called hedges boosts your balance is incorrect. Sure, it increases the realized p/l, but since you still have an open loss in the original position, there is no change in your total account value.

    Quote Originally Posted by hedge View Post
    Eventually when price retraces you make a killing.
    And when the market goes into a runaway trend you either miss out because you are all tied up in a net neutral position or you get slaughtered by being on the wrong side. Oh, but then you just put on another hedge, right? And lock in yet more losses.

    Quote Originally Posted by hedge View Post
    Brokers love to malign this technique ....
    Actually, I should think that brokers love this stuff. It creates extra transaction volume and they are happily grabbing the spreads and/or commissions from you.

  2. #12
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    Quote Originally Posted by rhodytrader View Post
    That definiation is fine, but somewhat general. It falls short.

    The fact of the matter is that nowhere but in forex does the term "hedging" even come close to suggesting taking an opposing position in the same instrument. No stock trader would ever short Google to hedge a long position in the stock. No futures trader would buy February Gold to hedge a short position in February Gold.

    Maybe this is just my university finance education coming in to play here, but I look at hedging in terms of the intent. A hedge is meant to isolate a certain risk involved in a position (or a transaction to be made at a future time) and either reduce or eliminate it.



    All I can say here is Yikes! Seems to me like you need to trade smaller.

    Avoiding a margin call should never be the basis for any kind trading. The fact that you are even putting yourself at risk of one means you're trading too big. I have never had a margin call in all the years I've traded forex for the simple reason that I don't put my portfolio in that kind of risk. It takes a lot to come back from losing that percentage of your portfolio, both financially and psychologically.
    Never say never...no disrepect though...but there are all kinds of "hedges" out there that involve just that...taking an opposite position from an outright futures postion, e.g., long Feb Gold at 620, and long a Feb 615 Put Option...it's two opposing positions..not exactly as you stated...but this is used quite often in lieu of a stop loss in order to protect the long position...if Gold takes off to the upside...you just let the option expire worthless.

    As far as the example of two futures contract though..true...you can never even execute long one Feb Gold and short one Feb Gold without offsetting...unless you crazily wanted to use two accounts..

    But as far as hedging futures contracts...it's not a crazy thing to be long Feb Gold and short April...in case you wanted to hold on to your position overnight but you expected some large move against you and didn't wanted to use an option put or a stop loss...there is the issue, however, of which leg to drop and when...

    Another "hedge" is spread trading...such as buying one contract and selling another in related markets...such as Britsh Pound and Canadian Dollar...the spead value between the two will either increase or decrease...and you can profit from that.

  3. #13
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    Quote Originally Posted by vmcd62 View Post
    Never say never...no disrepect though...but there are all kinds of "hedges" out there that involve just that...taking an opposite position from an outright futures postion, e.g., long Feb Gold at 620, and long a Feb 615 Put Option...it's two opposing positions..not exactly as you stated...but this is used quite often in lieu of a stop loss in order to protect the long position...if Gold takes off to the upside...you just let the option expire worthless.
    As you say, that isn't a directly opposite position, and it's not a hedge. You said it yourself. It's a stop.

    Quote Originally Posted by vmcd62 View Post
    As far as the example of two futures contract though..true...you can never even execute long one Feb Gold and short one Feb Gold without offsetting...unless you crazily wanted to use two accounts..
    Hmmm. It's not crazy to use seperate accounts (or sub-accounts) to take opposing long and short positions in forex, but it is in gold?


    Quote Originally Posted by vmcd62 View Post
    But as far as hedging futures contracts...it's not a crazy thing to be long Feb Gold and short April...in case you wanted to hold on to your position overnight but you expected some large move against you and didn't wanted to use an option put or a stop loss...there is the issue, however, of which leg to drop and when...
    That's called a calendar spread, not a hedge. You're exposure is to changes in the price difference between the two contracts.

    Quote Originally Posted by vmcd62 View Post
    Another "hedge" is spread trading...such as buying one contract and selling another in related markets...such as Britsh Pound and Canadian Dollar...the spead value between the two will either increase or decrease...and you can profit from that.
    Spread trading is NOT hedging. It's spread trading. It's attempting to profit from changes in the price difference between two things. Your upside and downside are both unlimited.

    As for "spreading" the Pound against the $C, you do realize that's GBP/CAD, a cross rate, right? You can trade that outright - not easily via futures, but certainly in spot.

  4. #14
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    Quote Originally Posted by rhodytrader View Post
    As you say, that isn't a directly opposite position, and it's not a hedge. You said it yourself. It's a stop.



    Hmmm. It's not crazy to use seperate accounts (or sub-accounts) to take opposing long and short positions in forex, but it is in gold?




    That's called a calendar spread, not a hedge. You're exposure is to changes in the price difference between the two contracts.



    Spread trading is NOT hedging. It's spread trading. It's attempting to profit from changes in the price difference between two things. Your upside and downside are both unlimited.

    As for "spreading" the Pound against the $C, you do realize that's GBP/CAD, a cross rate, right? You can trade that outright - not easily via futures, but certainly in spot.
    Thanks for the point-by-point analysis...my goal wasn't to get into a huge debate...

    Spread trading is a "form" of hedging, in that you are indeed deflecting some of the risk of an outright long or short position by taking an opposing position...this is all just semantics...but I do think that this type of trade does fit under the general heading of "hedging"...how that "hedge" is executed is variable...imho...

  5. #15
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    Quote Originally Posted by vmcd62 View Post
    ...you are indeed deflecting some of the risk of an outright long or short position by taking an opposing position...
    That word "some" is the point I'm making in differentiating what I consider hedging vs an offset. The hedge leaves some risk, which allows for profit or loss on the trade. The offset eliminates all risk, meaning no gain or loss can be made while the two positions are both one.

  6. #16
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    Quote Originally Posted by rhodytrader View Post
    That word "some" is the point I'm making in differentiating what I consider hedging vs an offset. The hedge leaves some risk, which allows for profit or loss on the trade. The offset eliminates all risk, meaning no gain or loss can be made while the two positions are both one.
    Point made my friend...I think you were making that point to someone else that maybe was not understanding what hedging is...and not to beat a dead horse...the other examples I gave are examples of hedges..although one would question the motives of the person doing a long Feb Gold, short April...the two contracts are not equal, and so do have a spread difference...and thus one is actually "hedging" the risk of the outright long...either to wait out an adverse move, or to profit from an increasing spread..and the other example of long Feb Gold and Long Feb Put is, imo, a "hedge" also, since you have two active opposing positions, both going up or down in value..an offset, or SL is not active in the market(at least from a futures viewpoint) until it's executed...and then, the position is gone altogether...

    "Hedging" in forex, the way I'm reading about in this thread..where one is trying to buy and sell the same instrument in two accounts is an offset also...true dat...although the two positions are still active...

  7. #17
    One other form of supposed 'hedging' I see around at the moment is the use of correlated pairs, where the aim is to make money off the daily interest. FreedomRocks and ForexForSmarties are two such programs that I've come across that go down this route.

    If you're going to use this sort of system know what you're getting into!

    Using multiple forex pairs for correlation purposes does not result in a perfect hedge, and you would be well advised to learn what factors that will impact on the resulting cross rate(s).

    Other than that I just gotta say that there's some good info in this thread about hedging in forex land. When you're 'hedging' on the same forex pair all you're really doing in effect is just reducing your exposure/open lot size.

    I will occasionaly use it but find that it just makes things more complex than I would like. If a position is going against me and I think it's going to continue going against me, I'd rather just get out, instead of hedging it and then having to deal with when to close the hedge as well.
    Last edited by colin; 01-12-2007 at 06:27 PM.

  8. #18
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    Quote Originally Posted by colin View Post
    One other form of supposed 'hedging' I see around at the moment is the use of correlated pairs, where the aim is to make money off the daily interest. FreedomRocks and ForexForSmarties are two such programs that I've come across that go down this route.

    If you're going to use this sort of system know what you're getting into!

    Using multiple forex pairs for correlation purposes does not result in a perfect hedge, and you would be well advised to learn what factors that will impact on the resulting cross rate(s).
    So true. It goes back to the old statment "there's no free lunch". To make money in the markets (and elsewhere) you must take some risk.

    Correlated pairs do not move in tandem 100% of the time. All it takes is one terrorist incident or something like that for scared money looking for a safe haven to flow in to the Swissy (EUR and CHF most often used in these kinds of trades) and completely blow apart the correlation - and lots of people's positions!

    Other than that I just gotta say that there's some good info in this thread about hedging in forex land. When you're 'hedging' on the same forex pair all you're really doing in effect is just reducing your exposure/open lot size.

    I will occasionaly use it but find that it just makes things more complex than I would like. If a position is going against me and I think it's going to continue going against me, I'd rather just get out, instead of hedging it and then having to deal with when to close the hedge as well.
    Amen, brother!

  9. #19
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    Default Risky business

    Forex traders assume risk to turn a profit. To eliminate risk is to eliminate profit. I see no place for hedging in our business. I cant even think of a situation where hedging would increase my profits or cut my losses.

  10. #20
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    Quote Originally Posted by colin View Post
    One other form of supposed 'hedging' I see around at the moment is the use of correlated pairs, where the aim is to make money off the daily interest. FreedomRocks and ForexForSmarties are two such programs that I've come across that go down this route.

    If you're going to use this sort of system know what you're getting into!

    Using multiple forex pairs for correlation purposes does not result in a perfect hedge, and you would be well advised to learn what factors that will impact on the resulting cross rate(s).

    Other than that I just gotta say that there's some good info in this thread about hedging in forex land. When you're 'hedging' on the same forex pair all you're really doing in effect is just reducing your exposure/open lot size.

    I will occasionaly use it but find that it just makes things more complex than I would like. If a position is going against me and I think it's going to continue going against me, I'd rather just get out, instead of hedging it and then having to deal with when to close the hedge as well.
    I'm not familiar with that type of hedge..but when you mentioned 'correlated pairs', that brings me back to spread trading...which when done correctly, you buy one instrument and sell another because they have a 'correlation factor' that is very positive...meaning that on most days when one is moving up, the other one is too, and vice versa for down moves...but that doesn't mean that they always move together 100 percent of the time...in fact, when it appears that they aren't moving together, someone might buy the spread or sell the spread between the two...and they would do so with the knowledge that eventually the spread will come back inline with the norm for the two instruments...

    Anyway...that's my two cents...so, to Rhodytrader...you may be correct in saying that spread trading is not a 'hedge' at all if the correlation goes haywire for some reason or another...and it just becomes two open positions with no stop loss on either...which would be nightmarish if it happened...

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