Hedging

[honeb]

a while ago i was asking about a way to capture interest through using this technique with two brokers but i want to know of a stratagy for using Hedging as a protective measure. some brokers offer hedging in the same account without using up more margin. the only drawback is that you have to pay for the for the spread of the opposite order. now is it just better to exit a bad trade and wait to get back in or is it worth it to try to hedge and hope for the market to turn around? how would you use the hedging option? would you use this option?

personally i would rather exit and enter again but i was used interested to know what everyone here thinks.

[topchess]

Hello,

Happy new year.

a while ago i was asking about a way to capture interest through using this technique with two brokers

I love this method. You can capture interest from GBPJPY long in a broker that pays interest, and hedge it by GBPJPY short in a broker that does not involve interest.

but i want to know of a stratagy for using Hedging as a protective measure. some brokers offer hedging in the same account without using up more margin. the only drawback is that you have to pay for the for the spread of the opposite order. now is it just better to exit a bad trade and wait to get back in or is it worth it to try to hedge and hope for the market to turn around? how would you use the hedging option? would you use this option?

personally i would rather exit and enter again but i was used interested to know what everyone here thinks.

I will tell you from my own experience with hedging cause I’ve used it.

You would need a broker that gives you hedging without using more margin, and without using sub accounts. Yes, you will only pay the spread, but that’s nothing in large turn around in the market.

Hedging has increased my profits clearly when I used it. It worked best for ranging markets on EURUSD.

Another drawback for hedging it is very risky in trending markets and if you tried to exit and reenter in a better place. Why?

Here is why.

I go long EURUSD at 1.2500 and short at 1.2500.
If market goes to 1.2600, I closed my 100+ to re enter with a better price and benefit from distance. The market however is trending and moved straight to 1.2700 making 200pip loss against 100pip loss (against trend)

Also, some trends last 1000, or 2000 pips. before the market turns, and the market rarely turn to the first entry point. lets say:

Market goes to 1.3500. You can’t expect that it will turn back to 1.2500 anytime soon.

The best bet, according to my study is:
Opening long & short at same price.
If you are certain at some point that market will retrace against your winning trade. Close the winning trade. If the market retraced 50 pips, that will be your profit. and get out of both positions. repeat.

But the only condition for the model to work:
YOU MUST BE SURE THAT MARKET WILL RETRACE AGAINST YOUR WINNING TRADE

Something that might help you to identify these potential retracements:
Overbought/Oversold in daily studies
Key reversal candlestick pattern

Or other technical aid.

[llh]

Hi Trader:

I concur with your thoughts on hedging. I find myself hedging when I fear I’ll suffer a margin call. The problem with using it in this manner is that I find I have no free margin, so I cannot initiate the hedging trade, by the time I realize I’m in trouble.

Of course now that I’ve forced myself to adhere to some self discipline and not put any more than 1% of my account balance into any one trade - I don’t encounter that problem any more - SURPRISE! SURPRISE!!

For me it reverts back to the old problem of where I should’ve placed my SL. Had I used one I wouldn’t have been worried about hedging. I normally don’t use a SL for the simple reason I never seem to be able to figure out where I should place it. The 1% rule saves me, but the lack of a SL puts me right back into gambling instead of investing/trading.

I’ve also tried placing a long and short trade for the same pair at the same prices. Every time I do this it seems to make so much sense. However, every time I lose money one way or the other. Perhaps my failure lies in that I don’t wait out the return of the traded pair that goes negative.

The simply solution to figure out where to pull the plug on the trade that’s gone into positive money is to implement a trailing stop. However, that doesn’t always save a person’s back side either, unless the pair has gone positive with so many pips that you to have a lot of room to work.

I just want to be rich - geesh!

[forexcranium]

just one a side note, I don’t believe Oanda allows hedging.

[topchess]

You can hedge, ofcourse!
You just need a sub-account to open the opposite position which requires margin on two accounts.

[rhodytrader]

Ok. This talking of hedging drives me completely nuts. :mad:

[B]What is being talked about here is NOT HEDGING![/B]

Hedging implies that some risk remains in a trade. For example, if I buy Google shares and buy a put option on the NASDAQ, I am hedging my exposure to a general market decline, but still have Google-specific risks.

Going long 100,000 EUR/USD and simultaneously short 100,000 EUR/USD is not a hedge because you’ve eliminated [U]all risk[/U]. This is an offset. As long as you have both positions on your have zero net risk. You cannot profit or lose regardless of where prices go.

My question for those who use this so-called hedging in place of a stop-loss is what exactly do you think you are achieving? Sure, you may not be able to lose any more. If the market does move back in your original position’s favor, though, you don’t benefit from it at all. You essentially just locked in your loss just as if you had exited the trade.

[llh]

Hi RhodyTrader:

All I’ve ever heard from anyone else, individual or company, is that what has been discussed here is called hedging. My dictionary has two definitions.

The first use of the word is not relative to our FOREX conversation, however here it is…

1. an intentionally noncommittal or ambiguous statement (when you say ‘maybe’ you are just hedging.)

The second listed use of the word IS relative to our conversation…

2. any technique designed to reduce or ELIMINATE financial risk; for example, taking two positions that will offset each other if prices change.

With that said, I use hedging for only one reason. When I make too large of a trade and it goes in the opposite direction that I had anticipated, then in lieu of experiencing a margin call I implement hedging. I agree with you 100% in that all hedging does is essentially freeze everything in place. Meaning you cannot lose any money nor is it possible to make any money.

However, when I use it that is exactly what I want to have happen - freeze everything. I want to put my self inflicted problem in suspended animation. The act of hedging allows me to stop the possibility of a margin call until the pair I entered into a ‘too large’ of a trade on has completed the furthest out portion of it’s orbit and is returning to an amount that my account can handle, thus providing me with the opportunity to side step a margin call. Hopefully the FOREX Gods smile upon my wretched trade and allow me to exit at least one with no more than the cost of it’s spread.

[hedge]

My question for those who use this so-called hedging in place of a stop-loss is what exactly do you think you are achieving? Sure, you may not be able to lose any more. If the market does move back in your original position’s favor, though, you don’t benefit from it at all. You essentially just locked in your loss just as if you had exited the trade

Because not only do you freeze margin, but you can take a profit on your
hedge trade at a turning point in the market and wait for it to come back to your original trade. If it does not, you place another trade in the same direction as the original thus lowering your average. Keep taking those hedge trades to boost balance and keep averaging down. Eventually when price retraces you make a killing. It happens all of the time by some stout traders and banks alike. You just have to make sure you don’t place the hedge too close to market reversal or may have to hedge the hedge. But it works the same way. Plus stop hunting is out of the question.

Brokers love to malign this technique as Martingale but it is not even close. What it is, is managing your equity until the market turns favorable. With Martingale your first bet that you lose is a dead horse. Not so with hedging.

If you are a beginner, study hedging.

[topchess]

I think what’s discussed called Hedging, at least that I have learnt.
I used Hedging to benefit from market swings, assuming I can identify a clear reversal point for my trades.

I also used Hedging to stoploss until I see market reaction and give myself the room to think about solving my loss.

[rhodytrader]

My dictionary has two definitions.
…
2) any technique designed to reduce or ELIMINATE financial risk; for example, taking two positions that will offset each other if prices change.

That definiation is fine, but somewhat general. It falls short.

The fact of the matter is that nowhere but in forex does the term “hedging” even come close to suggesting taking an opposing position in the same instrument. No stock trader would ever short Google to hedge a long position in the stock. No futures trader would buy February Gold to hedge a short position in February Gold.

Maybe this is just my university finance education coming in to play here, but I look at hedging in terms of the intent. A hedge is meant to isolate a certain risk involved in a position (or a transaction to be made at a future time) and either reduce or eliminate it.

With that said, I use hedging for only one reason. When I make too large of a trade and it goes in the opposite direction that I had anticipated, then in lieu of experiencing a margin call I implement hedging.

All I can say here is Yikes! Seems to me like you need to trade smaller.

Avoiding a margin call should never be the basis for any kind trading. The fact that you are even putting yourself at risk of one means you’re trading too big. I have never had a margin call in all the years I’ve traded forex for the simple reason that I don’t put my portfolio in that kind of risk. It takes a lot to come back from losing that percentage of your portfolio, both financially and psychologically.

[rhodytrader]

Because not only do you freeze margin, but you can take a profit on your hedge trade at a turning point in the market and wait for it to come back to your original trade. If it does not, you place another trade in the same direction as the original thus lowering your average. Keep taking those hedge trades to boost balance and keep averaging down.

Somewhere folks seem to have forgotten that spot forex trading is like futures. Your account is marked-to-market. That means it’s current value takes in to account the current open gains or losses of the positions you have on. To say that taking profits from these so called hedges boosts your balance is incorrect. Sure, it increases the realized p/l, but since you still have an open loss in the original position, there is no change in your total account value.

Eventually when price retraces you make a killing.

And when the market goes into a runaway trend you either miss out because you are all tied up in a net neutral position or you get slaughtered by being on the wrong side. Oh, but then you just put on another hedge, right? And lock in yet more losses.

Brokers love to malign this technique …

Actually, I should think that brokers love this stuff. It creates extra transaction volume and they are happily grabbing the spreads and/or commissions from you.

[vmcd62]

That definiation is fine, but somewhat general. It falls short.

The fact of the matter is that nowhere but in forex does the term “hedging” even come close to suggesting taking an opposing position in the same instrument. No stock trader would ever short Google to hedge a long position in the stock. No futures trader would buy February Gold to hedge a short position in February Gold.

Maybe this is just my university finance education coming in to play here, but I look at hedging in terms of the intent. A hedge is meant to isolate a certain risk involved in a position (or a transaction to be made at a future time) and either reduce or eliminate it.

All I can say here is Yikes! Seems to me like you need to trade smaller.

Avoiding a margin call should never be the basis for any kind trading. The fact that you are even putting yourself at risk of one means you’re trading too big. I have never had a margin call in all the years I’ve traded forex for the simple reason that I don’t put my portfolio in that kind of risk. It takes a lot to come back from losing that percentage of your portfolio, both financially and psychologically.

Never say never…no disrepect though…but there are all kinds of “hedges” out there that involve just that…taking an opposite position from an outright futures postion, e.g., long Feb Gold at 620, and long a Feb 615 Put Option…it’s two opposing positions…not exactly as you stated…but this is used quite often in lieu of a stop loss in order to protect the long position…if Gold takes off to the upside…you just let the option expire worthless.

As far as the example of two futures contract though…true…you can never even execute long one Feb Gold and short one Feb Gold without offsetting…unless you crazily wanted to use two accounts…

But as far as hedging futures contracts…it’s not a crazy thing to be long Feb Gold and short April…in case you wanted to hold on to your position overnight but you expected some large move against you and didn’t wanted to use an option put or a stop loss…there is the issue, however, of which leg to drop and when…

Another “hedge” is spread trading…such as buying one contract and selling another in related markets…such as Britsh Pound and Canadian Dollar…the spead value between the two will either increase or decrease…and you can profit from that.

[rhodytrader]

Never say never…no disrepect though…but there are all kinds of “hedges” out there that involve just that…taking an opposite position from an outright futures postion, e.g., long Feb Gold at 620, and long a Feb 615 Put Option…it’s two opposing positions…not exactly as you stated…but this is used quite often in lieu of a stop loss in order to protect the long position…if Gold takes off to the upside…you just let the option expire worthless.

As you say, that isn’t a directly opposite position, and it’s not a hedge. You said it yourself. It’s a stop.

As far as the example of two futures contract though…true…you can never even execute long one Feb Gold and short one Feb Gold without offsetting…unless you crazily wanted to use two accounts…

Hmmm. It’s not crazy to use seperate accounts (or sub-accounts) to take opposing long and short positions in forex, but it is in gold?

But as far as hedging futures contracts…it’s not a crazy thing to be long Feb Gold and short April…in case you wanted to hold on to your position overnight but you expected some large move against you and didn’t wanted to use an option put or a stop loss…there is the issue, however, of which leg to drop and when…

That’s called a calendar spread, not a hedge. You’re exposure is to changes in the price difference between the two contracts.

Another “hedge” is spread trading…such as buying one contract and selling another in related markets…such as Britsh Pound and Canadian Dollar…the spead value between the two will either increase or decrease…and you can profit from that.

Spread trading is NOT hedging. It’s spread trading. It’s attempting to profit from changes in the price difference between two things. Your upside and downside are both unlimited.

As for “spreading” the Pound against the $C, you do realize that’s GBP/CAD, a cross rate, right? You can trade that outright - not easily via futures, but certainly in spot.

[vmcd62]

As you say, that isn’t a directly opposite position, and it’s not a hedge. You said it yourself. It’s a stop.

Hmmm. It’s not crazy to use seperate accounts (or sub-accounts) to take opposing long and short positions in forex, but it is in gold?

That’s called a calendar spread, not a hedge. You’re exposure is to changes in the price difference between the two contracts.

Spread trading is NOT hedging. It’s spread trading. It’s attempting to profit from changes in the price difference between two things. Your upside and downside are both unlimited.

As for “spreading” the Pound against the $C, you do realize that’s GBP/CAD, a cross rate, right? You can trade that outright - not easily via futures, but certainly in spot.

Thanks for the point-by-point analysis…my goal wasn’t to get into a huge debate…

Spread trading is a “form” of hedging, in that you are indeed deflecting some of the risk of an outright long or short position by taking an opposing position…this is all just semantics…but I do think that this type of trade does fit under the general heading of “hedging”…how that “hedge” is executed is variable…imho…

[rhodytrader]

…you are indeed deflecting some of the risk of an outright long or short position by taking an opposing position…

That word “some” is the point I’m making in differentiating what I consider hedging vs an offset. The hedge leaves some risk, which allows for profit or loss on the trade. The offset eliminates all risk, meaning no gain or loss can be made while the two positions are both one.

[vmcd62]

That word “some” is the point I’m making in differentiating what I consider hedging vs an offset. The hedge leaves some risk, which allows for profit or loss on the trade. The offset eliminates all risk, meaning no gain or loss can be made while the two positions are both one.

Point made my friend…I think you were making that point to someone else that maybe was not understanding what hedging is…and not to beat a dead horse…the other examples I gave are examples of hedges…although one would question the motives of the person doing a long Feb Gold, short April…the two contracts are not equal, and so do have a spread difference…and thus one is actually “hedging” the risk of the outright long…either to wait out an adverse move, or to profit from an increasing spread…and the other example of long Feb Gold and Long Feb Put is, imo, a “hedge” also, since you have two active opposing positions, both going up or down in value…an offset, or SL is not active in the market(at least from a futures viewpoint) until it’s executed…and then, the position is gone altogether…

“Hedging” in forex, the way I’m reading about in this thread…where one is trying to buy and sell the same instrument in two accounts is an offset also…true dat…although the two positions are still active…

[colin]

One other form of supposed ‘hedging’ I see around at the moment is the use of correlated pairs, where the aim is to make money off the daily interest. FreedomRocks and ForexForSmarties are two such programs that I’ve come across that go down this route.

If you’re going to use this sort of system know what you’re getting into!

Using multiple forex pairs for correlation purposes does not result in a perfect hedge, and you would be well advised to learn what factors that will impact on the resulting cross rate(s).

Other than that I just gotta say that there’s some good info in this thread about hedging in forex land. When you’re ‘hedging’ on the same forex pair all you’re really doing in effect is just reducing your exposure/open lot size.

I will occasionaly use it but find that it just makes things more complex than I would like. If a position is going against me and I think it’s going to continue going against me, I’d rather just get out, instead of hedging it and then having to deal with when to close the hedge as well.

[rhodytrader]

One other form of supposed ‘hedging’ I see around at the moment is the use of correlated pairs, where the aim is to make money off the daily interest. FreedomRocks and ForexForSmarties are two such programs that I’ve come across that go down this route.

If you’re going to use this sort of system know what you’re getting into!

Using multiple forex pairs for correlation purposes does not result in a perfect hedge, and you would be well advised to learn what factors that will impact on the resulting cross rate(s).

So true. It goes back to the old statment “there’s no free lunch”. To make money in the markets (and elsewhere) you must take some risk.

Correlated pairs do not move in tandem 100% of the time. All it takes is one terrorist incident or something like that for scared money looking for a safe haven to flow in to the Swissy (EUR and CHF most often used in these kinds of trades) and completely blow apart the correlation - and lots of people’s positions!

Other than that I just gotta say that there’s some good info in this thread about hedging in forex land. When you’re ‘hedging’ on the same forex pair all you’re really doing in effect is just reducing your exposure/open lot size.

I will occasionaly use it but find that it just makes things more complex than I would like. If a position is going against me and I think it’s going to continue going against me, I’d rather just get out, instead of hedging it and then having to deal with when to close the hedge as well.

Amen, brother!

[srg100]

Forex traders assume risk to turn a profit. To eliminate risk is to eliminate profit. I see no place for hedging in our business. I cant even think of a situation where hedging would increase my profits or cut my losses.

[vmcd62]

One other form of supposed ‘hedging’ I see around at the moment is the use of correlated pairs, where the aim is to make money off the daily interest. FreedomRocks and ForexForSmarties are two such programs that I’ve come across that go down this route.

If you’re going to use this sort of system know what you’re getting into!

Using multiple forex pairs for correlation purposes does not result in a perfect hedge, and you would be well advised to learn what factors that will impact on the resulting cross rate(s).

Other than that I just gotta say that there’s some good info in this thread about hedging in forex land. When you’re ‘hedging’ on the same forex pair all you’re really doing in effect is just reducing your exposure/open lot size.

I will occasionaly use it but find that it just makes things more complex than I would like. If a position is going against me and I think it’s going to continue going against me, I’d rather just get out, instead of hedging it and then having to deal with when to close the hedge as well.

I’m not familiar with that type of hedge…but when you mentioned ‘correlated pairs’, that brings me back to spread trading…which when done correctly, you buy one instrument and sell another because they have a ‘correlation factor’ that is very positive…meaning that on most days when one is moving up, the other one is too, and vice versa for down moves…but that doesn’t mean that they always move together 100 percent of the time…in fact, when it appears that they aren’t moving together, someone might buy the spread or sell the spread between the two…and they would do so with the knowledge that eventually the spread will come back inline with the norm for the two instruments…

Anyway…that’s my two cents…so, to Rhodytrader…you may be correct in saying that spread trading is not a ‘hedge’ at all if the correlation goes haywire for some reason or another…and it just becomes two open positions with no stop loss on either…which would be nightmarish if it happened…