IMO you’re almost entirely right and wrong only in one little detail (and even that’s open to interpretation).
All of that’s definitely right.
I think that part may technically be slightly mistaken, in the sense that (arguably) the people doing it do know what they’re doing in a literal sense, at a mechanical level: they just misunderstand the essential issue of whether they’re benefiting from it, compared with the alternatives (they always imagine that they are, of course, and some of them will argue the point until they’re blue in the face about it, but that’s only because they misunderstand the alternatives, have been misled by almost everything they’ve ever read on the subject, and have come to cling to a fundamentally flawed - but actually fairly understandable - belief, in the face of all the evidence to the contrary (as people so often do, in everyday life and especially in trading, too!).
I would word it slightly but significantly differently, myself, Amy: I’d say they use it in an attempt to manage risk effectively.
Typically, they mistakenly imagine that they actually benefit from it, because they don’t quite know how to work it out (which, to be fair, is actually really difficult).
It is, for those people, yes - but it’s one based on misinformation, misunderstandings and mistaken beliefs.
There are hundreds of millions of people who believe in astrology, too, and they “know” that they benefit from it.
Some can even “prove” it (because they also tend not to have too solid a grasp on the difference between “proof”, “anecdotal evidence” and “belief”).
No, indeed: no uncertainty at all.
That’s the whole problem: they’re convinced they’re right. And in forum discussions, that’s what actually matters to them.
Two things are certain, though:-
There are no math graduates among them (or people with any other equivalent, high-level understanding of probability and statistics)
Not one of them has a sensible answer to the very simple question asked here by the pink bird, which he said he’s asked them hundreds of times, over the decades - and to say it politely there’s a reason for that.
I’ll explain the question, too, in case anyone reads this who doesn’t like following links and working things out for themselves (though that’s actually a better way): if a forex trader - I’m not talking about long-term investors, obviously: that’s a different scenario altogether - is “hedging” against an already-open position, just ask them “What do you gain, by doing that, that you couldn’t have achieved simply by closing or partially closing the original trade (and paying less commission as well)?”
But don’t expect a plausible or credible answer.
The best you’ll ever get is a misguided claim that hedging is an effective way to partially close a position, to mitigate the impact of whatever-the-concern-is, and that their broker doesn’t allow them to partially close, so they “have to hedge” to get round that problem.
Of course, that isn’t really an answer to the question at all: it’s just a sign that they need a better trading platform, broker or both. And that’s the very best, most sensible, most realistic answer you’ll ever hear.
Yeah, I see where you are coming from and appreciate your perspective. It is definitely not the best solution for all. Personally, I don’t prefer that either. Still, I do believe that behind every decision traders make and every strategy they use, they have thought about it deeply. Even if they lose, there is a lot to learn from it.
If you’re talking about hedging against anticipated market movements, it would be worthwhile to note that hedging is the primary reason of having derivatives in the market.
Derivatives weren’t introduced for the purpose of speculation, but for the purpose of hedging.
If you are hedging a position just with a motive of holding on to a position to the next day… it might become a vicious cycle. And in case of double down or Martingale strategies… the fear factor may come into play … and you might never want to open the hedge position willingly.
I used to do that a lot when i was a beginner…
the best bet is to close the position with a small loss, instead of sitting on a hedged position for days and paying swap fees … and contemplating a lot about the right moment to open the hedged position.
Always trade stressfree.
Yeah, I get it and I totally agree. Like I said before, there are barely any people who actually know what hedging is, why a trader should do it, or even how to hedge properly. But I’m talking about the 90% of traders who hedge without really knowing what they’re doing.
Oh my god, if I could, I would give 100 likes to your comment! Finally, someone gets what I’m saying. I had the same conversation with a friend recently, and I literally said the exact same thing you did. But he was just like, “No, I use a swap-free broker,” and I was like, “That’s not the main point, buddy.”
It depends on the market you are trading and the reason for the hedge.
For example, an options trader might delta hedge their position with futures.
Someone that is running a 60/40 might hedge with options. Pairs traders hedge with a corresponding security. These are all legit.
But if we’re talking strictly currencies especially forex, not futures. Hedging isnt necessary unless your doing it at the portfolio level to keep your net currency exposure in check. To me this is the only reason to hedge in forex because other wise you create a drag on potential profit not to mention the additional spread you have to pay. There are better ways to manage risk
