I open a long position and want it to simmer for a bit (maybe a few days, weeks, etc). During the time that that position is open, I want to take advantage of a few short term trades (same-day) from the same pair. Is that hedging? Having more than one position open for the same currency pair? Both trades would be long.
no hedging is when canceling out your risk exposure by opening an inverse parallel position in a different currency, same currency or other inverse correlating derivative
Thanks.
I just tried my hypothetical scenario and got smacked with something called FIFO.
WTH? That sucks. Now I have to get a non-US broker just to trade the way I want.
yup First In First Out is a *****, cant be flexible like that , basically you are adding to your position, it works if you are are averaging down, but not in this scenario, the US is a communist nanny state that is filled with a bunch of politically correct putzis and legislature that believe they can regulate how you wipe your butt.
welcome to the land of the free and the home of the brave
No, you don’t. FIFO and “hedging” are just two accounting variations, meaning they are just different ways of tracking the opening and closing of positions. The bottom line is always the same, though. If you are long and then go short the same amount you have a net flat position - and thus can experience no account gains or losses - regardless of whether you’re accounting for it at FIFO or “hedging”.
Uhm… I think I do. I’m not hedging. Did you read my original post?
Yes, I did.
If you want to do “hedge” accounting the just use a spreadsheet to track your trades, while your broker uses FIFO to track your net position.
For example, let’s say you put on a long-term EUR/USD long at 1.4000. At 1.4100 you decide to do a short trade. We’ll assume it’s of the same size as the core position for simplicity. At 1.3950 you close the short. You then close the long-term hold at 1.4500.
Here’s what that looks like under “hedge” accounting: When you sell at 1.4100 you have a long with a 100 pip gain and a new short. When buy at 1.3950 you close the short and book a 150 profit, but your existing long shows a 50 pip loss, so you’re net P/L at that point is only +50. When you eventually close the long at 1.4500 you book 500 pips. Total gain is 650 pips.
Now here’s what it looks like under FIFO accounting. When you sell at 1.4100 you book a 100 pip profit from the long and are now flat. When you buy at 1.3950 you are still showing a 100 pip profit and are now back to being long again. When you then sell at 1.4500 you book a 550 pip profit. Total gain is 650 pips.
Like I said before, the bottom line is exactly the same. It’s just a question of how you do the accounting. The FIFO account rule requires your broker to show your net exposure and doesn’t allow them to do things like hit you with carry interest when you don’t actually have any position in the market.
What about this scenario:
I buy at 1.4000 because my magic 8ball says it’ll hit 1.4500 in a week.
What my 8ball fails to tell me is that the rate will drop first. (bastard)
The next day it drops to 1.3700, and I can see a strong downtrend. I want to go short now and take advantage of the price fall before it rebounds. Under FiFO, if I open a short trade of the same size, I’m in the hole 300 pips and have no trades open.
Let’s say I didn’t know about FIFO, which I actually didn’t until I tried trading with a US broker—I tried a demo with a non-US broker and was able to open and close more than one position in any order under the same pair and I assumed all brokers allowed that—anyway, let’s say that 300 pip loss just wiped my account. Now what? I have no original long trade, no short trade, and no account balance. All thanks to FIFO.
And please don’t lecture on risk management, that’s irrelevant here. I’m talking about plain ol’ trading because no matter how much risk management I take it doesn’t negate the 300 pip loss, which in this case ate my account.
Am I correct or am I missing something and just not getting it?
You do seem to be missing something.
First, as soon as the market goes down 300 pips you’ve got a 300 pip loss. Doesn’t matter whether the position is still open or not. Your account is marked-to-market. There really isn’t any such thing as a paper loss in forex because the money is coming out of your account right away and being credited to the person on the other side. If 300 pips down is going to wipe out your account, it’s wiped out whether you close the position or not. The broker has margined called you and you’re done.
Putting that bit aside, though, no matter whether you “hedge” or “close” your trade, it’s the same thing. You lock in the 300 pip loss as soon as you sell that opposing position. Under FIFO, you’re completely out with no remaining position. Under “hedge” accounting you’ve obviously got both long and short positions on, but so long as you have both in place you might as well be out of the market because you can neither make nor lose any pips. Any gains made by the short will be losses on the long, and vice versa. The only way you could recover from the loss is to have a single directional exposure that goes in your favor - meaning you’d either have to hold the long for a reversal higher or exit the long and go short and have the market keep going south.
All tough rhody is already explained (probaply many times before) what “hedgin” means and of course is on track. still wanted to bring in psycholocigal point of view, meaning when you put in “hedge” many times, insted of admit you´r wrong, you try to keep your original point of wiev (its just temporary deviation rite) and you are ultimately corect. but maby you are not, and market keeps going against you, what you do? close your “hedge” and original order and admit that you were completely wrong, or just keep both positions and realise (after some time) that i just pay swaps and extra spread (for opening the “hedge”) and this isn´t goin to make me any money. or just keep it un til the end.(meaning put head in sand). just tryin to simulate “hedgers” mind set no offence meaned to any one.