I am just curious as to how ‘hedging’ is illegal & what EXACTLY is hedging within forex?
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I know it is long & short on same currency, but why is it illegal?
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Because the cftc decided so. In all other countries it is legal. You can however hedge: Just open accounts at two brokers and you are set. One for long, one for short. 
http://forums.babypips.com/forextown/21479-nfa-bans-hedging.html
Hedging for forex always seemed kind of useless to me and a waste of spread. As Rhodytrader pointed out a few times the retail traders idea of what hedging is bears no resemblance to what pro traders / institutions understand hedging to be.
Yes, but is the practice of ‘one individual’ still illegal?
Does it clarify ‘per person’ can’t do it, or per account?
Don’t say it isn’t, because the U.S. has some pretty stupid laws.
I guess it is just a law for brokers and not their clients. Even if so, it depends then what you understand under hedge. In the financial market hedging means to cover one assets price change with an opposite assets price change. That is at least even so in forex. You just hedge short orders against long orders. However, what if you have two trading systems independent from each other? Or two different robots? That has nothing to do with hedging. If you have two robots for instance and hedging is not allowed, those bots would not work properly, if they both open long and short orders. In this case the only solution would be to open two accounts at different brokers or use an offshore broker.
ah okay, I just don’t want to give it a try for fun and end up regretting it for getting in stupid trouble.
So as long as it is under a couple different accounts, I should be good?
If you want to be sure, just look at the laws. Anyways, I do not see a problem. You can also try to ask your broker if he allows two accounts and in one account a system to trade with long/short orders independent from the other accounts system with long/short orders.
This isn’t about law, it’s about accounting. It’s a question of whether the broker shows you with opposing positions when you go long, then short, or whether it nets the positions out to show that you have a zero bottom line exposure. The NFA says the US brokers must do the latter to indicate net exposure.
However, what if you have two trading systems independent from each other? Or two different robots? That has nothing to do with hedging. If you have two robots for instance and hedging is not allowed, those bots would not work properly, if they both open long and short orders.
The bots will work just fine. If one is long and the other is short the same amount you have no net position - can’t win or lose at all - until one or the other bots reverses out. The anti-hedging rules do not prevent you from making the EXACT same buy/sell decisions. They only define how the broker must reflect them in your account. You’re free to keep a seperate record in a “hedging” manner.
actually, hedging is very much stupid thing… the trader just seems he can buy some more time using hedging, but if we count the probability of success using this strategy - we will definitely see, that it is just illusion
rhodytrader,
I see. Thanks a lot! I never had a US broker. Short before the cftc came with that ugly leverage issue, I stopped looking for a US broker and chosed an offshore broker. I thought it would be not possible to have a buy and sell order open the same time. Anyways, it sounds then that you will not have problems at all if those orders are “merged”. You’re right, it’s just accounting then.
Din77,
in general I’d second that, but if you think of straddles or some other strats which might use hedging I wouldn’t say it is not good for all times. I don’t use it either, but there might be useful strats with hedging.
I don`t say it cannot work… but its somehow too much risky to make it the part of some strategy
There is no “hedging” or “grid” or “straddle” strategy which cannot be replicated in a non-hedging context. This has to be the case because, as noted previously, the whole hedging/non-hedging thing is purely accounting. It doesn’t change the ability to buy/sell at whatever price point you want.
For example, a straddle strategy would be to go long and short at the current price with a 20 pip stop on each trade so that if the market takes off in one direction and keeps going, the opposing position would be closed out at a 20 pip loss, leaving the winning one to keep going. This is identical to placing an order to buy 20 pips above the current price and to place a sell order 20 pips below it. In either case, you’ll make no gain or loss if the market stays between -20 pips and +20 pips from entry. In either case the profits come when the market goes more than 20 pips in one direction, but with the same risk that if the market turns back around you are subject to loss.
Hm, I am not a straddle trader, but I could think of a strat which opens sell orders on top of a range and buy orders at the bottom of that range. I know that you could also close that one short ride then, but it makes all more complicated for an easy system, depending on where your sl and target of those orders would be. In this case a buy order in parallel also would make sense afaik, because you don’t pay more spread if you anyways want open a new order. As I said just theoretical, I am no straddle trader.
Let me repeat - There is no strategy which involves having both long and short positions open at the same time, no matter how you get there (hedge, straddle, grid, etc.), that cannot be replicated in a way which does not have simultaneous longs and shorts open. There can’t be. It’s a basic math function.
100 - 100 + 90 - 90 is exactly the same as 100 - 90 - 100 + 90 or 90 + 100 - 90 -100, etc. They all add up to zero.
The accounting may show different paths, but the end result is always the same.
Yeah and I said I know that. Plus I added: It might be simpler for a trader to have two orders open. Depending on his strat. Just for him. Just that. So, what is wrong with that? Different traders have different needs and not every trader wants to calculate to the pip where he has to close one trade in order to open another. Because that can get very complicated if you trade with a strat where the sl and tp settings are not in the same row.
Regarding that grid, by the way: I use to buy more at cheaper prices and less at higher prices for example. I know that even this could be done by closing the old order and open another one with higher lot size. But it is more complicated and it takes time to close that other trade, where the price could change. Time is a factor, even in trading and even more if you trade intraday.
I love answers like these … they give the problem but no solution.
So…what is the probability of success?
And you may recall I said traders are perfectly able to use whatever accounting method they want in their own figuring.
Different traders have different needs and not every trader wants to calculate to the pip where he has to close one trade in order to open another. Because that can get very complicated if you trade with a strat where the sl and tp settings are not in the same row.
Why would he have to do this calculating you’re talking about? And what does this have to do with whether things are viewed in “hedging” or “non-hedging” terms?
Regarding that grid, by the way: I use to buy more at cheaper prices and less at higher prices for example. I know that even this could be done by closing the old order and open another one with higher lot size. But it is more complicated and it takes time to close that other trade, where the price could change. Time is a factor, even in trading and even more if you trade intraday.
I’m not following you here. Can you provide an example?
factor in forecast & stop-loss (to start with) and it is a WHOLE NEW equation. I love when people use simple math to ‘solve’ a more complicated problem.
Sure. Even one which is better with adding new trades, because you save commission and spread. Example:
You buy one lot at 1.0100. You buy another lot at 1.0000. You pay another spread and you pay another commission and you have two lots now. If you would close this first order and would have to buy a two lot trade, you would pay twice the spread and twice the commission here. Just adding a lot is much better.
Plus I am not convinced that there could not be a strat like this for hedging, too. Where you would have to pay more for spread and commission while merging trades instead of just adding one. I am just no hedger to have examples ready.
Accounting is one thing, time and trading is another and spread and commissions are a third thing. If you mingle that all in one pot, it might not suit every traders need.
No, it’s not. It all comes down to where you buy and where you sell. The math for your P&L and running position exposure is always simple.