It was however a valid example of why a ‘system’ needs to adapt to the current market context.
I suppose when you think about it the reverse is unlikely to happen, so maybe it’s just another one of those old sayings.
I’m not sure that I encounter only the 3 conditions, up, down or sideways, then maybe I’m only making things more difficult than they really are.
Times when I think it will be up, nice and slowly it jumps like a…long before I have time to enter, next day I think it will jump and it crawls up, then down, then up again. Then after the weekend it gaps past my sl, then quickly reverses, then soars to the moon taking my short with it and my sl in it’s back pocket.
And then there is sideways, my old friend, gives my system loads of time to think it has it right, price has completed x,y and z exactly like it was supposed to, the system has set the buy, sideways has calmed my nerves - and along comes Draghi.
100% hedge is probably overkill and is also likely to cause people a fair bit off aggravation trying to untie the hedge with a profit. A partial hedge of 30-50% of the size of your open trades would be better, with perhaps another one further down at 25-30% of the size. (Potentially further away than where you’d put SL.)
Assuming you’re long, the benefit is that you still gain if the market gaps up. If it goes down, the hedge position should be of a reasonable size to take out (even at a loss) if the market moves back up, as the sl (or get out price) of the hedge position is only 30-50% of your ‘original’ trade size.
If your overall position is close to BE, or a low profit/loss, you might be more comfortable just closing it off (or reducing it significantly) to virtually eliminate the worry, but still leave you ‘in the market’.
I know it’s often hard to accept missing the ‘jump’, especially when it would have gone in your favour. But I find it far, far easier to accept the fact and then just get straight back into analysing the market and looking for a new possibilities that I do having to deal with the aftermath of a position going against me. Not really what you need on a Monday morning…
NOTE: As with all this advice, I don’t necessarily do this myself, every time. No, being human means I like to do a little target practice with my feet on occasion.
If you go into the weekend naked (or partly naked) you are asking for trouble. Which is why many successful traders sell before the weekend, or only trade intraday during the most liquid and reliable times of the day.
If you are a corporate trader with large funds on a carry trade, you will trade past not only one weekend but many weekends… can you imagine a hedge fund closing their positions every Friday?
For small-size fish (like me), I agree that holding positions over the weekend may not be the best, but gaps are not a regular event, so sometimes it makes no sense to cover your position on a Friday just out of fear that Saturday will bring a Forex Armageddon…
Hedging is mathematically equivalent to closing the position since it makes you net flat. There is absolutely zero difference between fully closing out and a 100% hedge.
Jolly Roger, from your posts I can see you’ve had “issues” with forex trading. Have you had any bad experiences with brokers, or is there any you could recommend?
That is only true for small US retail traders due to the Dodd-Frank law of 2010. Very large traders and foreign traders can (and often do) go long, for example, 10 lots EURUSD and simultaneously short 10 lots EURUSD. The small US retail trader has to get creative and either close his positions or come up with a synthetic hedge using a different pair that tends to trend in the opposite direction. For the small guy it’s often better just to close a position if you want to avoid gap threat.
Yes, technically you’re right, but only at that point in time the hedge trade is put on and if it is 100%. (But why you would do 100% - I haven’t got a clue.) If you unwind the hedge and even only BE on the original trade, you are still better off, as you haven’t thrown away the SL pips.
Also, people seem to repeatedly suggest (or infer) that placing a covering 100% sized hedge trade on is what is done/should be done when people talk about hedging.
I prefer a scaled down hedge, that is used to slow a position that is potentially retracing, thus allowing the position to move a bit more and possibly work out of the temporary reversal, unwind the hedge (small profit,BE or small loss) and then let the position move back into profit on the original trade.
Yes, a bit more time and effort (and “yawn” the tiny extra spread for the extra trade), but for the freedom of not having to eat 10-20 pips of SL loss (or more), sometimes I prefer it.
If it is a true reversal of the trend, you can just start trading that direction, with the hedge trade being the initiator. True, you will have to pay for the cost of the original trade, but as we’re only talking about giving back some profits, it’s all just paper numbers until you close the full trade.
Lastly, it’s not very common that you have to hedge in the first place, as the price doesn’t necessarily drop that far, or you have trades that require it in the first place. But it’s nice to not have to ‘worry’ about it or have those trades eat into your capital.
Ok, but you’d rather set a limit on the downside, such as -20 pips, because -21 confirms a reversal? Whereas the fool sitting next to you has set one at -15, or -22? Or 30? They are all arbitrary…the market probably has one at every level throughout the nearby price range.
And I suppose you confirm an upside limit as well, which if it doesn’t hit, it’s a “bad trade”, but if it does, you get out. I guess you don’t want to let your profits run…seems odd to me.
I’d rather ‘trade’ the markets, work with the flow, see my entries achieve, recede, climb higher…and who knows what. You want to put a stake in the sand and lose 20 or gain 30. Fine. Go ahead and reduce your capital with your SL’s and limit your profits with your TP’s.
Just showing there are ways to manage your trades, especially with potential gaps, but some people don’t want to accept you can do it this way.
I really do appreciate this post…in fact I can give you a million likes for this post. Very motivating and encourage, one can easily make a decision base on this.
3 books: Faith’s “Way of the Turtle,” Schwager’s “Market Wizards,” & Covel’s “The Complete Turtle Trader” all tell how the successful traders trade long term and hold positions on the weekly and monthly time frames. Some have held for over a year despite gaps and big drawdowns. A long time ago on the “Trading Made Simple” thread (I think), some guys started scalping for 20 pips on the H4 charts. A reply to that was (I paraphrase): “Hey guys, if you want to be successful and make money in this business, you have to catch the runners, those runs that grab 300-500-1000 pips.” Hard to do but they do happen.
Yes, a winning system can experience big drawdowns… but that doesn’t mean they go into the weekend 100% naked and expose themselves to gap threat on top of drawdown. Unless… you are already sitting on a fat profit. Then a potential gap is not quite as threatening.
