Hi there,
how do I hedge two currencies against each other? I can only buy or sell and use limit orders.
Thx!
Regards,
Andy
You have two threads on the same topic.
As you are cheating for school, I don’t expect that you will go through the documentation on this site. And as I cheated as well, it would be unfair now not to help you…
You place an equal order in opposite direction that equals in lotsize.
If you have a sell EURSD order 5 lots, you place a buy order EURUSD with equal size. This mitigates profits or losses from the moment the counter trade is initiated. When you want to do it at the price as is now you do that with a Market order BUY or SELL. If you want to counter at a certain pricelevel, you place a Pending order (Limit order).
It doesn’t fully mitigate, because you still have to pay rollover costs and the broker takes some as well. But this may be too much detail for your assignment, considering your initial question…
Now go and enjoy the glory on the university as a master FX meister!
Some brokers do not offer hedging … about how can you hedge … if you sold 1 lot of any pair … and you want to hedge your position just buy another lot of the same pair … check this When to use Hedging Strategy? I always do…
Read more: 301 Moved Permanently
Hold on, hold on…
What I said in my previous post is correct, if you have an open trade that you like to hedge. But as professors can be cheaky, you also have to consider to hedge the whole account or even off account money. In this case (No open trade) you need to buy EURUSD only for an amount that mitigates the losses of the total euro amount (on and off account).
Let’s say it is limited to EUR 1000. If the dollar would rise 0.01 cent (this is 100 pip for us traders) this means that you would make a loss of:
Current value of account: EUR 1000 * 1.23456 = $ 1234,56 (with EUR 1000 you can buy $ 1234,56)
Future value (unhedged): EUR 1000 * 1.23356 (100 pip) = $ 1233,56
So you loss would be $ 1 or ($1 / 1.23356) EUR 0,81
To mitigate this you need a trade that mitigates that EUR 0,81 over 100 pip. That would be a trade with a lot size of: $1234,56 (which is not possible as the minimum incremental is $1000, but you get the point).
This is the basic theory. As trades are leveraged in fx up to 200:1 the counter trade may only require an investment of
($ 1234,56/200). And you could exclude that from the original account size, but I don’t know how cheaky your professor is.
The basis principle is to counter an open trade with a trade with equal lotsize and to counter the account or off account money with a trade with an equal amount to mitigate actual profits and losses made per pip (EUR amount times EURUSD pricelevel at which you want to counter).
I would like to gain insight and add to this topic. Hedging can be utilized in a positive way to minimize loss potential while gaining profits on both sides of the coin. I am a firm believer of holding positions until your limits are filled. I prefer not to make this a guessing game and enjoy the relief of any hedged trade. Please keep in mind, due to recent regulation in the US, you are no longer aloud to do this in a single account and therefore your buys will cancel out your sells and vice versa – therefore NOT a true hedge strategy. Happy Pipn’
dear idefx,
thank you for your answer! So I buy a currency like the US-$ from my EURO-account (per example 1,3 $). Then I put a limit order with the same price (1,29803 $) in the opposite direction. I think it works following, but correct me if I’m wrong!
As long as the US-$ rises (per example on 1,2 $ per Euro), there is no problem, everything is fine. But if it goes down again and hits the price level of the limit order (1,3 $), it will be changed back. If it goes down right after you bought it, then you get a problem!
Is that right? And the other question with the put option is a bit trickier! But I will write something about it in the other thread!
Regards, Andy
You are almost there.
You place an order equal to the value that the euros are in dollarvalue at the level where you want to hedge it. If you want to hedge it at the current market price, you do as the example given Q euro x value. If you want to hedge at a fixed future value, you place a pending order to buy a trade with the size of Q euro x fixed future value. So the price is not essential here, the tradesize is. You have to question yourself how much the euros you are having are worth in dollars right now and place a trade with that size. (or a value in future at which you want to hedge it).
I think the “hedging” answers provided don’t actually address the question asked.
If you want to hedge two currencies against each other (as opposed to hedging a currency pair), you need to know in which direction your exposure lies. Do you have USD that will need to be converted to EUR at some point, for example? If so, you can hedge that by going long EUR/USD today so you will effectively lock in today’s exchange rate.
Negative. This form of “hedging” is nothing more than an accounting trick which can have no positive impact on your trading performance. Anything you can do as a hedge you can do as a non-hedge.
Rhody,
Do you actually read the answers? You keep on doing this and it is annoying.
You gave the same answer as I did.
take it easy … every one can answer … even if its same answer … :22:
rhodytrader’s posts are always worth the while … he has forgotten more about forex trading than most people on this (or any other forum) will ever learn.
This is not addressed to anybody in particular, but rather a general observation.
Cheers,
P.
You are right… It is just a forum.
Anyway, Andy, read his answer carefully and make you own judgement. It is the same principal used.
Yeah, but my answer was only 3 sentences long. 
Yes, that is one of the problems with your answers.
And a great accounting trick at that. Help me understand how I could loose on a trade if I bought and sold the same pair, while holding my loosing pair and getting in and out of the positive gain (to secure profit) and buying more of the initial loser as it works my way. . There of course will be a break even point, but very little chance for loss and a great chance for a significant gain. Two things one most take under consideration while trading with this method:
- mid-long term trade
- requires larger bank roll to cover margin
This method allows me to sleep at night given there is a spike in the market while I am not monitoring my account. All too often I see people on the wrong side of the trade and get out before the trade goes in their favor and thus take a loss. Rid yourself of these losses by patiently waiting for your deals to close on a hedge while profiting on a short and long at the same time. You would have to be a pretty darn good accountant to maintain this type of recording if you didn’t hedge and it is too easy to slip up on our modern day trading platforms.
-Speaking of hedging how about that Euro?!?! 
You’re kidding, right?
Basically what you’re doing is putting on a position, closing at a loss (putting a “hedge” on is exactly the same from a P/L perspective as closing the trade), and re-entering a larger position later on when the market has gone further against you. Essentially it’s a mean-reversion approach which increases position size as the market goes further away away from the mean, which works fine when the markets range but blows up rather nastily when the market goes into trend mode.
You aren’t making any money when the market is going against your initial trade. Sure, you’re adding to your cash balance by making gains on the “hedges”, but your base position keeps going further in the red, offsetting those cash gains, meaning your account equity is holding level. Actually, that equity could be getting lower if between “hedges” the market works further against you, especially if you are adding to that original position as you go along. Basically, you’re averaging down (or up in the case of a short starting position).
This is exactly the type of trading which has caused FXCM to now require margin on hedge trades because traders were inadvertently triggering margin calls when they took off the “profitable” leg of their hedges.
Very insightful and you have a lot of great points. I can certainly see why anyone would be hesitant to hedge IF they bought and sold at the same time and never strategically placed their positions (you would always be at BE + commissions – not a winning strategy.
Just to clarify though, I would buy in more of the winning position if it started to trend against my initial position (not more of the initial position). I am currently under this scenario with the EU/USD. The market went about 150 points against me on my short and I made back about 100 pips on the long (buy and selling to secure profit). Now here is what is going to happen:
- EU goes up- I increase my lot size > my initial loosing trade to offset the loss on the downside and wait till it comes back in (days, weeks, months)
- EU plummets - I reduce my hedge or cancel the trade on the long side and begin to profit on the short.
I am confident that the currency will stay within its standard deviation, but if it happens to break out, I am way up since I added to my long EU lot size.
This strategy requires a great deal of discipline and persistence. I again would not recommend this for your typical day trader as they will naturally want to place more positions. But from a conservative standpoint, this strategy works really well. Don’t knock it till you try it 
I would be happy to answer any questions anyone may have regarding this strategy, but please don’t attempt to execute any trades without further clarification on my end cuz it can get ugly real quick if you don’t know what you are doing.
Unless you went net long after being initially net short, you didn’t actually make any pips back. You may have taken some cash out of the market, but so long as your long and short positions offset all or partly (if they more than offset in a long fashion then certainly say so) your account equity didn’t change or perhaps got worse.
Now here is what is going to happen:
- EU goes up- I increase my lot size > my initial loosing trade to offset the loss on the downside and wait till it comes back in (days, weeks, months)
Translation: I’m increasing my risk and hoping the market doesn’t go off on a lengthy bullish trend. If it does, I’m going to feel some real pain and will have to put on more “hedges” to stop the bleeding.
- EU plummets - I reduce my hedge or cancel the trade on the long side and begin to profit on the short.
Translation: I essentially enter a new short position as reducing or eliminating a long “hedge” against a short positoin is basically the same thing.
I am confident that the currency will stay within its standard deviation, but if it happens to break out, I am way up since I added to my long EU lot size.
When did you add to your long? In the first scenario you added to your short and in the second you reduced your long “hedge”.
Also, when you say “standard deviation” do you mean that in the actual statistical sense of the term?
Thank you for the information. You and I are not on the same page as far as how I am proposing a profitable hedging method. I understand where you are coming from, but lets say hypothetically my buys didn’t cancel my sells and I will not accept a loss because I am basing my standard deviation off the 10 and 200 day moving averages which paints a different picture for the longer term swings. I think the key to this game is of course leverage, but also holding power and not basing trades on the short term trend.
I am curious to hear about your trading style and preferences, but perhaps in a new post
Well, without more info then I cannot properly comment on what you’re doing. I can say for certain, however, that to the degree that “hedging” is a factor it has absolutely nothing to do with your performance.
Secondarily, be extremely careful using standard deviation in that fashion. It is based on the idea of a normal distribution. Prices are not normally distributed (period % changes are kind of close, but prices aren’t), so you cannot take the percentages provided for standard deviations (65% for 1 deviation, etc.) and apply them.
I am curious to hear about your trading style and preferences, but perhaps in a new post
Feel free to start one. I’m always up for a discussion.