Hello i am very new and just started a demo account a few days ago and i am doing quite well and hopes it will continue to be as easy to not lose (yes i know with real money it is more scary)
ok the question my friends!
I have read the hedging doesn’t work or that some brokers will not allow you to…why wont they? Why do they care if you do it?
Also wouldn’t hedging work if you watch the charts and close the negative account as the unfavorable trend begins and then just enjoy the positive accounts growing or just place very thight orders that do it for you?
please correct me if I am wrong, or if this is considered illegal or something…
Its not that brokers really care if you hedge but in the USA in is not legal. Also IMO it is pointless just close the trade going against you and spare yourself the exposure to the markets. I perfer to just cut my losses and free up capital for a more profitable trade
If you always have stop losses and the like, couldn’t you just always put money in the market and walk away? Would you not make more money then you loose if you placed the stops correctly? I understand market exposure is risky but i just do not see how it would be a loosing venture. You wouldn’t have to do any research or even look at the trends because you just cut losses and allow the win…to well, keep wining…it can only go up or down.
Bad analogy: It is like going to the track and betting on all the horses and when one is about to win you can just cancel all the other bets as soon as you see the winner…
you can hedge other ways I think by considering correlated trades like USDJPY and CADJPY and going other ways???
I think it is better though to just figure out a system like bob says because you want to save your capital for those perfect trading opportunities you see and keep your exposure limited. (Most people set their limit at like 5-8% market exposure i believe)
Not necessarily true. Unless your money is in JPY then the pip values would be different and that would not work. Also I think the highest correlated pair is only 80% meaning yeah you could hedge maybe long the cable and short the fiber but when correlation does not match you will lose both trades and sustain twice the loss
So long as you have a hedge on you cannot make any money (or lose it either). It is only when you take one leg off that the prospect for gains comes back.
For example, let’s say you go long and short EUR/USD at 1.25 (assuming no bid/ask spread for the moment) with stops 50 pips against the trades and targets 100 pips in the money for each leg. That means the market would have to go at least 50 pips for anything to happen, and all that would be is closing a 50 pip loser (which obviously offset by a 50 pip open winner on the other side). If the market then keeps on going to the 100 pip target you net 50 pips.
Now, how is that any different than putting in orders to enter the long and short 50 pips in the money with targets 50 pips beyond that? The answer is it’s not.
There is no “hedge” trade which cannot be exactly replicated by a non-hedge approach.
Furthermore, because of the bid/ask spread you losing by doing the extra trade and you’re probably in a negative net carry situation as well if you’re holding overnight.
Hedging is tricky and mathematically it is difficult to make a case for it as you are paying the spread in both directions. Sometimes I am both long and short a market, but this is because (for example) I believe the market will be going up in the long term so I am in a long term position, but in the short term I believe it is going down, so I am short also short in the near term.
My response to that would be if you think the market is going down, and you want to be short, then instead of getting flat - as you are effectively doing by putting on the short against the long - why not swing the whole position short? By putting on the short you are effectively closing out your long position (or at least part of it), waiting for the move lower, then re-entering the long.
I understand what you are saying and it is a fair point and it is a judgment call as to whether I swing the whole position short but my time frames for the trades are different and I tend to treat them differently. e.g. I’m currently long GBPUSD at 1.5800. I took some off at the 61.8 Fib at 1.5905 but also scalped that and the 100% extension to the downside while still holding on to some of the GBPUSD long from 1.5800 - My thinking is I’m not as convinced as some others are that the USD is going to retrace its loses just yet post FOMC, and a close above the Fib level in the next few days could accelerate gains.
The reason given as to why USA customers have the FIFO rule and anti-hedging rule is
"Because you are really dumb and cant possibly understand the concept of having trades open in different directions at the same time"
I think it is perfectly acceptable to be both bullish and bearish a financial instrument. The reason that it is possible is because of the different timeframes you may be trading on. Just ask anybody that incorporates Elliot Wave Theory into their trading approach … I don’t really understand why USA customers are not able to hedge or are restricted by the FIFO rule? - would love to hear it if somebody has one.
No, the reason (or at least one of) is because hedging incentives the brokers to encourage behavior which can only benefit the broker.
Consider:
If you are “hedging” you are likely doing extra trades. That’s spreads or commissions to the broker, but so long as you have matching positions on you cannot actually make any profit.
While you are “hedged” you probably still have a margin requirement even though you have absolutely no risk, so the broker is locking up your funds to no purpose.
While you are “hedged” you will at best be net flat on the carry/rollover (where applicable), and most likely will be net negative because, just as in exchange rates, there is a bid/ask in the interest you pay/receive and the broker makes the spread.
It’s no wonder some brokers were actively promoting “hedge” strategies before the NFA/CFTC shut it down. It was free money to them with zero benefit for the trader.
I don’t think the US FIFO rules are about being dumb. :56:
If my understanding of the FIFO & hedging issue is correct the rules are in place because of IRS tax rules.
A short-term cap gains could be hedged with an opposite position and carried until it would qualify for the much lower long-term cap gains rate. (a tax play more likely to be used by high-wealth folks not retail FX traders)
PS I’m not 100% sure I’m correct about this so if you have better info please up-date me.
The only way I can see hedging to be profitable is to have a long term short position. But hedge off the retracements against you. This way as soon as the retrace unfold you made money on the long and if it was not a retrace but a full reversal you are not giveing profits back to the market by being wrong. Other than that I see no point in it.
When the NFA came out with the ruling I bookmarked the page, but it has been deleted.
It said that new retail customers did not understand the concept of having multiple orders open. (or something like that)
But as Rhodytrader said it was only of benefit to the broker to hedge.
The tax loophole sounds more plausible. As it does not make much sense that" retail customers do not understand".
You aren’t actually making any money if you trade counter to your base position. All you’re doing is avoiding losing it in the retracement because what you make on the reversal trade is lost on the initial one (yes, your account balance might increase, but your equity remains flat). You can only make money if the market then turns back in your favor when you take off the secondary position.
Sounds like exiting and then re-entering don’t it?
