Does anybody use a hedging strategy given the way most currencies are correlated? For example, ETH and BTC move in the same direction. Would going long one and short the other with stoplosses be an effective strategy? For example, if I have a 2% stop loss but catch a 4% move, then I lock in a guaranteed 2%. Does this make sense? Is there a reason why this might not work out? I could see getting stopped out of both if my stops are too tight and having a draw down that way.
Sit dwn, get a pencil out and work oyut the numbers - You would lose two lots of spreads (and they are wide on funny money), two lots of commissions, and if your stops were wide enough, plenty of opportunity to move in one direction, stop you out, then reverse and stop you out again. Plus of course, they donât move the same number of pips on different coins.
Perhaps it is easier to see if I ask - Why bother with different âCoinsâ why not just take an up-bet and a down bet on the same one ? That would be equally pointless IMO !
Iâm thinking a hedging strategy works best with two assets whose values are moving in the opposite directions. I think the correlations between the major cryptos, and maybe even a broad set of the largest cryptos, are highly positively correlated. Check this out. Not definitive, and doesnât cover all cryptos, but gives you an idea of recent correlation with many of the big dogs.
I was going to suggest maybe just diversifying across different cryptos, but even that wouldnât work too well given how correlated they are. Maybe moves into and out fiat. That could become a problem based on the exchange or broker youâre using, and whether they support fiat and certain pairs. Might require moves into and out of BTC/LTC/ETH just to get to fiat. Tether might help you here, if you donât think tether will up and disappear on you. 
Hedging is a approach to balance trading equity from losses. But according to me, it doesnât work completely.
I explored this kind of strategy before. By hedging 2 or 3 currency pairs that are close to a perfect hedge. The assumption here is that the correlation coefficient deviate from the mean value during the 3 different market sessions and will eventually return to the mean. When there is a net gain of 2% to 5%, all position are automatically closed or manually closed at the same time. When there is a net âfloatingâ loss, continue to leave all position open.
Theoretically, i find the logic workable. However, i was unable to find a way to backtest the system. Thus, i gave up eventually. If you can find a way to back test this system. Iâll be more than happy to discuss it with you.
I followed a huge thread over on Forex Factory shows the Three Pairs Hedging Strategy in great detail with results and variations over many yearsâŚ
Would a buy/sell-stop order as your stop loss be an advantage.?
Thanks for this chart man.
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I did some more reading and was able to verify what you said. It seems like hedging is not a strategy for investing but to avoid losses.
This is interesting, but I wouldnât have the balls to do it.
So many brokers donât allow scalping and hedging in their trading platform, so newcomers always fall a great trouble when choosing a broker.