I was just wondering for those out there…(if any) had any views on three topics that many traders don’t talk about too much. If anyone would like to share their views on hedging, optimization and pyramiding, I would really appreciate the feedback. I have my own views, that I am in fact comfortable with, but I was hoping this thread could help those out who are interested in more than just technicals, but rather in other subjects in trading. Thanks for the time. If you wish to share techniques, by all means go ahead, and if not there is no pressure, views on the subject will suffice. For me, I feel that the less optimization in the system, the better when dealing with mechanical systems. In fact the more you have the less your likely to open a trade. Thus, your system’s failure rate goes up. As for Hedging, since I’m long term I like to use it when covering my position. Especially when news comes out, it keeps you in a profit, and in your position and you can ride out the news, and based on what happens when all is said and done, you can do as you see fit with your position. I don’t like using it when I’m not in a profit, but sometimes, to widen my stop I use it, especially when it’s around S/R. I don’t like to use it too much though, because if I’m unsure of a position it is best to get out. Next for pyramiding, this I think is quite crucial when long term. However I have strict rules when adding and never reverse pyramid(adding a position larger then the original). Anyways, more responses could make this thread helpful. Have a good one eh.
I’m glad you posted this thread, it covers topics not as frequently discussed.
[B]Optimization[/B]: I’m not a mechanical trader, so optimization isn’t my thing, nor is messing with something that currently works well.
[B]Hedging[/B]: Hedging the same instrument in the same market is generally pointless. At the point of which you’re ready to hedge, you might as well just close out your position and then re-enter when the direction of the market is clearer. There’s a few reasons why I say this. Hedging two positions who ultimately end up ranging and don’t show a clear direction quickly will, depending on your margin, tie up your available money preventing you from making better trades on other currency pairs. You’ll waste your time checking and stressing over two positions that cancel each other out. You will pay the spread twice.
For fx traders, the useful applications of hedging are very limited in my opinion. If your account was denominated in a different currency than your domestic currency, it would make sense to protect your purchasing power at home by hedging the balance of your account. Also, if you have opposing trades when you’re trading both a long term and a short term system.
[B]Pyramiding[/B]: I agree, it is a valid strategy for longer term traders. I would not recommend a martingale strategy, however pressing your trade is something I will do at times. One must be wary when pyramiding though, it requires a strong continuing trend with little to no retraces. If there was a large enough retrace, you could be forced to cover at breakeven…knowing if you didn’t scale up you would have turned a profit. Pyramiding is not something to do with every trade in every situation. It depends on the time frame you’re using, and also that currencies typical behavior. Does the currency tend to range over time, or has it exhibited a strong up or down trend over many months. It is one way to have an incredible risk to reward ratio, but you will have a very low success rate if used constantly without considering if it is an applicable strategy to your specific trade.
[U]Optimization[/U]: Your trades are long term, so missing a few pips on the entry is less important than avoiding an entry on the wrong side in the first place. We can probably agree that a long term trend following system that employs simple indicators is best. If your �system� is currently profitable and back-tested profitable, then we can say that it is already �fitted� to the market. Problems I have encountered with optimizing are that too perfect a �fit� may cause a failure going forward if there is the slightest deviation in market dynamics in the future. Concisely stated: You don�t need to reinvent the wheel.
Something to consider: Why do I feel my system needs to perform better? Am I capturing a reasonable return for the amount invested relative to general move? Don�t worry about being in first or about getting the last dollar. Also, know that markets are not always tradable for speculators.
[U]Hedging[/U]: I don�t think there is a true hedge in forex. It is not a good way to keep your account liquid if you are in a bad trade. Just take your lumps. You said it best: If you�re unsure of a position, get out.
[U]Pyramiding[/U]: You mean using additional margin created by unrealized gains to open new positions in the same direction of your current profitable trade? This is a popular technique for �position traders� in futures. I used it in rare circumstances in grain trading. The dynamics of those markets are radically different, so I don�t think that experience applies here. As I see it, what you are doing is further leveraging an already over-leveraged instrument.
I can’t thank both of you enough, these responses have given me more insight, knowledge and wisdom. I am very grateful for the comments. I also appreciate the time taken to answer the feedback was more than I could have hoped for. Have a great one eh!