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…
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.
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.
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