So i am trying to learn the trend and open positions based soley on this information, no indicators. However on occasion i am wrong, on one occasion very wrong so as the price went the other way in a rather quick manner i opened another another trade on the same currency pair as my first trade, only in the opposite direction. This really helped to cushion the blow as instead of losing $1200 i lost about $300 to $400.
So did i hedge or offset?
that is hedging i my humble opinion
The term hedging as it is used among retail forex traders is not the same as hedging as it’s commonly used in the financial markets as a whole. I would not call what you did hedging. It’s an offset. I know others disagree with me. If you want me to explain my point of view, just let me know.
Hi, Please explain hedging in further detail pls. Thanx
Lets hear it Rhody.
Also could you please comment if what i did is called hedging or offsetting in the OTC forex broker industry? Even thought this may be technically offsetting i am wondering what terminology most forex brokers use. For example some advertise that you can hedge on the same currency and others brokers won’t allow this. Are they talking about what i just did (offsetting)?
You are on the right path. Technically this is not hedging but that is what the brokers will call it. My question is if you opened an opposite position then why not close the first position? It sounds like you went into the trade with out an exit stratgey plan. You should check out my post “lets do an experiment.”
… but that is what the brokers will call it.
Actually, the brokers calling it hedging is a new thing in response to what has apparently become common parlance among retail traders. If you were to talk to an interbank dealer about hedging a forex position, I very seriously doubt he would think you were talking about taking a matching position in the same currency only in the opposite direction.
First, let me define hedging as most folks in the financial markets would basically call it. It is the process by which one attempts to completely or partially offset a specific risk to a position they are in.
For example, in the stock market one might take a long position in Google, but to protect against an adverse move in the general market, he would go short S&P 500 futures. By doing this he continues to have Google specific risks (bad earnings, law suit, etc.), but at least partially offsets the impact that a down turn in stocks as a whole would have on the value of his position.
Notice also that while this hedge offsets a particular risk, it also reduces the upside potential in one way or another. Being short the overall market would hinder profits in a market rally. Of course options and other strategies can be used to cap the losses suffered on the hedge, but at least some will occur. It’s like an insurance policy in that you are protected against adversity, but there’s a price.
Here’s why I don’t consider what many forex traders are doing hedging.
What happens when you go long 100,000 USD/JPY, then go short 100,000 USD/JPY? You end up with a net position of zero. No matter whether the market goes up or down, so long as you have both positions open your account will see no change in value.
Actually, that might not be totally correct. If your broker applies carry interest you’ll probably see a gradual decline in your account value because most likely the amount you pay out on the negative carry position will probably more than offset what you receive on the positive carry position.
But let’s stick strictly with the pip movement. If you were to simultaneously open a long and short position in the same pair you will automatically take a loss equivalent to the spread since you’d be buying at the offer and selling at the bid. And you would never make that money back so long as you had both positions open. Of course, if you can time it out so that your buy price is lower than your sell price, you would lock in a profit. But again, so long as both long and short trades remain open, your account value will not otherwise change.
A hedge implies that one could still profit from a position, and that the secondary transaction made minimizes the potential loss. To my mind, having a long in USD/JPY and selling an equal amount short doesn’t satisfy that criteria. Yes, the downside is protected, but there is no upside.
Of course brokers love this whole hedging thing. It creates more volume for them, which is where they make their money.
Quite the contrary my piping friend. My exit plan is simple. Don’t close a trade unless it is in profit. In this case i was watching a sudden drop in price when i had bought and i was already in the hole a bunch of pips. Since i was still long term bullish i opened a short and closed that when it started to go up.
Uh, am I missing something here, or did you not take a loss on your short position “when it started to go up”?
As a follow-up, what happens when the turn-around never happens? You may not have faced that yet, but at some point you’re going to get caught in a trend reversal that never gets you back to profitable on your original trade.
rhodys got my back. I had that same attitude this past January. I was long on EUR/JPY and doing good. Then it fell I held on untill I got stopped out. Good thing it was only a demo but lesson learned. The fact of the matter is “if you don’t have a stop loss measure, your broker will.” And that sucks!
What was your used/unused margin and how many pips were you down when you were margined out?
If you had the margin and just waited would you have recovered?
Not sure if i am explaining myself very well. My theory is if you are smart and have the unused margin you can wait any trade out and see a profit. However twice i have not stuck to this theory as i was impatient and saw other trades that i wanted in so i closed at a loss.
In the example in this post there was a sudden and large drop, more than i expected. I had the margin to wait it out but instead i offset my loss with an order the opposite way. Offsetting is something i only do when a trade really gets out of hand in the wrong direction and i am not willing to close at a loss. When the trade finally reverses then i close the offsetting position and wait for profit on the first one. In this example i made a profit on the offset trade but a loss on the original trade because i was impatient. Had i waited both trades would have been in profit.
That may work for a while, but if you trade long enough it will eventually come to pass that a trade goes against you and just keeps going. It never comes back. Once upon a time, back in the middle 90s, USD/JPY was down around 80. Had you gone short at the wrong spot you would still be waiting for that one to come back. And you would have been on the wrong side of the carry trade the whole time too. That’s another part of the equation. If you are on the wrong end of the interest rate equation it’s going to eat away at your available margin, slowly but surely.
how do you hedge properly in forex then? anyone know?
i googled it, and everything that came up was “you long and short the same pair at the same time”
The more correct question is “What do you want to hedge?” What exposure or risk do you want to reduce or eliminate?
If you think the AUD is going to appreciate, but are worried about a decline in gold prices hurting the currency you could sell gold futures or a gold ETF as a hedge.
If you are long the USD, but are worried about interest rates declining you could buy Treasury Note futures.
I don’t think you understand what margined out means. If I had the margin then I would not have been margined out. In other words if I had the money then I could have stayed in the trade.
But it dropped over 2000 pips in less than 2 months. Yes it has come back and is up 500 since then, but it just recovered at the start of this month. So are you really going to hold onto a 2000 pip loss for 3 months hoping for it to come around??? And like rhody says if you are on the wrong side of the intrest it could be another 100 profit that is lost due to negitave roll over. If you want to go that long on the negitave then you have to place positive roll over trades.
In the mean time when you are down 2000 pips that is going to eat up your margin so you are limted to what trades you can play, unless the 2000 pips is eating up less than 25% of your margin. That is why I limit all my trades to a max of %5. If I go down that much I’m out, no questions asked and no regrets. Self doubt, Regrets and no stop loss plan is one of the things that will kill you.
hi everyone
in this case there is much more into it and lot of hard work to figure it out how to use it and only few traders found the right way.
keep it up and have a good one 
What makes you think i don’t understand margin? Edit: I was inquiring about what % of used/ unused margin starting off the trade.
Holding on to a 2000 pip loss does sound quite drastic unless of course you offset your trade.
Share with the group. I know there are a number of strategies out there that folks refer to as “hedging”. Let us all know what you consider it to be.
I assume that by offset you mean taking an opposing position. Please explain why you think that would be better than just using a stop to exit your trade.