When to use Hedging Strategy? I always do

[Bijoymj]

I too use hedging, but in a different style. I hedge a pair at the same rate(of course… there will be the difference of spread) by buying and selling during important news release (Exception is NFP) with an RR ratio of 1:2 or more. That means, I will be having stop losses in same number of pips for both the positions with double or triple number of pips TP. The theory behind this hedging is that, an important news event can move the price in a direction for a reasonable quantity of pips. In a massive movement related to that particular event, one position will be hitting stop loss and other position will be exiting by hitting TP in which I will be getting some pips by the difference between number of pips in SL and same in TP. If the news event doesn’t make any remarkable movements, then I will get out of the trade manually without any loss as the positions are hedged.

[rhodytrader]

I hedge a pair at the same rate(of course… there will be the difference of spread) by buying and selling during important news release (Exception is NFP) with an RR ratio of 1:2 or more. … If the news event doesn’t make any remarkable movements, then I will get out of the trade manually without any loss as the positions are hedged.

You can replicate this exact trading strategy in a non-hedge fashion without having to lock in that initial spread loss. Simply put a buy limit at the point where you would put your short stop, with a TP where you’d have your long TP, and vice versa with a short limit order. That way, if the release is a dud you don’t lose the spread.

[Bijoymj]

You can replicate this exact trading strategy in a non-hedge fashion without having to lock in that initial spread loss. Simply put a buy limit at the point where you would put your short stop, with a TP where you’d have your long TP, and vice versa with a short limit order. That way, if the release is a dud you don’t lose the spread.

Nice input. Thanks for the insight. I will take a note of it.

[PaladinFX]

This is the crux of the issue for so many people I see talking about using “hedging” strategies. It’s an emotional crutch because either they cannot make a decision or can’t handle taking losses (or both). Whether they are paying extra spread or net negative carry, aside, this is my bigger concern. The development of the mental side of trading is being stunted.

It also can badly mask the trader’s true performance and the effectiveness of their analysis/strategy. I have had people swear up and down that is was only once they started “hedging” that they began making money. That, of course, is in no way correct because “hedging” is nothing more than an alternative way of accounting and any “hedge” trade one puts on can be exactly replicated in a non-hedge way. These traders who thought “hedging” made them better traders completely missed the point that their profitability was coming from better buy/sell decisions. Likewise, as I noted before, traders can be misguided by seeing their cash balance rise through “hedging” when in fact their overall equity is falling, and probably won’t realize the problem until it’s too late.

Everybody should read this again.

Then think about it, especially in regard of [I]‘masking true performance’[/I] and [I]‘alternative way of accounting’[/I].

When you’ve finished reflecting on it … read it again.

Cheers,
P.