I understand that hedging is used to reduce losses but overall what is the point?
In a way it’s like betting on both outcomes of a situation.
Let’s put it to practice.
Someone buys and sells on one fx pair. Price moves up his buy entry makes money while his sell entry is in the red. Price then goes down. His buy entry loses money while his sell starts to become green. At the end of the day he doesn’t actually make a profit. Yes sure his losses are reduced but don’t you feel that it is simply bad trading? If you would just simply hedge which is to bet on both sides of the coin then it shows that your trading skills are bad. Unless when price goes up and and he closes his buy quickly and then when it goes down he quickly closes his sell when it hits but then again price might just shoot up for example then he could close his sell but that is if price shoots upwards non stop. Still not easy.
I know that some brokers don’t allow opposite trades on the same pair unless it’s in a sub account and some do let’s get that out of the way.
Could someone explain to me the best use of hedging.
some use it as SL in cases of unexpected market changes.
it is not bad trading if you can manage it properly as very often when the market is pointing strongly to one direction an idiot from some central bank makes an unexpected statement out of the blue and messes things up (most possibly because himself has traded that direction)
Hedging is intended to reduce possible risks if price moves against you. Know that not every trader allow hedging, but those which permit put some restrictions on it, cuz this trick move trading odds in your favour, which is unwanted for a broker.
Some brokers allow it some don’t but on the same account. Like for oanda you could simply take some of your money open a new account and trade off that sub account and open an opposite position.
Anyway most traders hedge off different products. Like they will be long on a currency’s futures and using the fx pair to hedge.
I am so glad someone else asked this question. It’s been troubling me for a while now… I was thinking either it is really bad trading or a really good strategy… Suppose the answer is somewhere in between :45:
Obviously there’s no point hedging so that you don’t make a win either way, but done well it massively reduces your exposure to losses. If you’ve analyzed the risk and see think that it’s high but still worth a punt then putting a hedge on it just makes it a bit less risky.
AFAIK there is absolutely no reason to ‘hedge’, or open a trade in the opposite direction. Closing a trade does the same thing e.g. if you open a long, closing it is the same thing as opening a short. In fact, closing an open trade avoids the cost of opening a second trade, so it’s cheaper.
The only ‘use’ I can see in hedging is if you’re trading a grid system.
No sense in hedging two currencies. Typical hedge Will be to buy a call option with a premium of $50 on EUR/USD on a short trade with a $100 Stop and a $300 profit potential on the spot trade. If the trade went in your favour you gain $250 minus your option hedge. If it went against then your call option should trigger and offset any potential loss.
Your call option may offer a $200 gain and offset your $100 Stop meaning you gain $100. This is a simplified explanation. Hedging strategies can be complex and across several asset classes. This is a great tool for large investments.
Hedging is a way for a company to minimize or eliminate foreign exchange risk. Hedging can also be a technique not by which you make money but by which you can reduce a potential loss. Though in forex not all brokers allow hedging.
Hedging in practice does not mean taking a position and the complete reverse of it. Hedging can be utilized as a trader in two main ways:
to take a position in a different instrument which is historically correlated in some manner to your initial position, so as to offset some of the potential risks of your position, while not necessarily depriving you of your profit potential. A classic example would be to go long on say an airline company, while also taking a long position on the price of oil. In this situation, a hike in oil prices will likely cause your airline long to suffer some significant losses, but your oil long helps offset part or all of that loss. If the prices of oil remain steady however, you may profit from the airline long based on other business factors, while breaking even on your oil position. If the price of oil goes down, the oil long will lose you money, but the airline stock will probably rise and help you out. So, as you can see, this hedging basically helped to eliminate some of the risks involved in investing in an airline company (in this instance: the price of oil).
To buy and/or sell futures of some sort in order to reduce your portfolio’s risk as well as reward exposure, as opposed to liquidating some your current positions. This can be used in cases where you want to hide your portfolio for a while due to some market risks or uncertainties, but you rather not liquidate part or all of it for other reasons (for example: commissions). In this type of hedging, the hedge is straightforward and can be calculated mathematically and precisely.
Traders that take offsetting positions simply increase their operating costs while decreasing their income. That is stupid.
If you are a forex trader, you are not a hedger. Hedgers offset currency risk incurred by multicurrency business operations. Example: A U.S. firm that invoices €100 million to Eurozone customers on net 30 terms has put a long EUR/USD position on their recievables. Taking an equivalent short position with a financial institution will offset that risk. Traders are those that take on that risk.
In that example, when the Euro falls from 1.2950 to 1.2513 (as it did in the last 30 days) the USD value of those Euro denominated recievables falls from $129.5 million to $125.3 million: a $4.2 million loss. Taking a $125.3 million short position in the EUR/USD during that time yields a $4.2 million win for the firm, offsetting the loss on the recievables. That is hedging. The pricing, the fundamentals, the trends, statements from central bankers, none of that matters to the hedging firm. They employ no strategy whatsoever to win in forex, they simply prevent wins and losses with offsetting positions and pay the small fees the financial institution charges to put on the hedge. The hedging firm makes profits selling whatever it is it sells.
Traders take on unhedged positions precisely to extract the losses of the hedgers from the forex market.
If a trader is taking offsetting positions, he is not risking a loss or exposing his account to possible gains, he is simply paying his broker more in fees. If you are confused by traders proclaiming that taking offsetting positions will earn profits in forex, it is because they are losing traders or not really traders at all. Don’t fall for that stupidity.
Get high, make love, and may the goddess of forex pleasure you NAV with a blessing of her fertility.
As you rightly said, hedging is a trading strategy used to protect losses and if applied correctly can help a trader change a loosing trade to profit. For instance, after making your fundamental and technical analysis, you got the got ahead indication to go long on USD/EUR, after you placed your trade, employment news made the prize of USD take a dive down; you can place a counter trade by going short with USD/JPY, to recover loss and make some profits if the prize of USD keeps going down.
There are some traders who used hedging as risk management strategy, so hedging is used to lock loss position and wait for better condition in the market to reduce loss or maybe change loss to profit condition if it is possible. But some traders could use it as strategy in the beginning, so they will open 2 positions since the beginning they were entry into the market. And some traders could use hedging strategy similiar like cut and switch strategy.
Trading is the skill which traders should develop and likewise hedging is one form of trading skill which is not everyones cup of coffee. Thus, traders should hedge only when they want to save their trading account and are sure of the right market price action in case of the wrong trade being taken other way round.
Hedging is not the only one way to save your trading account and hedging is not only used for saving your account. It is possible to use hedging strategy to change loss condition to profit condition with opening and closing position in the right time for locking and unlocking position. But hedging could be used as your strategy in order to make profit too.
“Take care of the pennies and the dollars will take of themselves”. An old time friend once told me. His cousin, a big global investors said something similar: " take care of the losses, and the profits will take care of themselves.
Everyone has his/her own strategy. Hedging is a two edge sword, just as it minimizes your risk, it also minimizes your profits. As many already said, a hedge is a replacement of a Stop loss. Instead of taking that loss, you hedge it and once you feel the correction has reached its end, you close the hedge with a profit.
Personally, Hedging (swing hedge/scalp hedge/ basic hedge/ two and three pair hedge) is pretty much all i do (90% of the time). I m satisfied with a small 1% daily profit with a reduced risk. The only time i use a long term swing strategy (more of a buy and hold value investing) is with the equity portfolio (sometimes hedged but rarely).
So there you have it. Hedging works, (at least for me) but you must have a clear opinion on the market (chart reading) and somehow determine the major turning points and scenario. Last but not least, hedging needs more risk reduction than swing trades ( 1 swing trade of 2% per cap trade = 10 hedge trades of 0.2% of cap per trade).
This scenario would be valid only if
1- markets moved in straight lines not in zigzags
2- if money/investments were managed passively (not active)
Fortunately this is not the case. The Zigzag moves is what makes a hedge work (basic hedge) and active money/investment management is what makes a hedge work. Isn’t that what trading is all about?.
Passive management is valid for a long term buy and hold strategy or a monthly accumulation strategy for building your pension.
If traders can use hedging strategy well so they could limit loss and gain profit effectively because hedging strategy can lock floating condition when the analysis is not same with the reality and it can be used to gain another profit when the condition has been stable. But you must capable to determine the right time to use the strategy. Hedging shouldn’t be used when condition is moving up and down in high number of range. And traders must realize that hedging strategy is not strategy which is free of risk.
