Will this Hedging Strategy work consistently?

Beginner Questions
21

[QUOTE=“zsharry;577315”] I think you guys didnt really get what alex means. His method is theoritically possible if there is no slippage. For example, current price is 100, long and short at same price. long with stop at 99, short with stop at 101. when news released, price move to 110, short position will be closed by triggering the stop. So you lose 1 from short and gain 10 from long. However there is slippage in real life. The short position will not stop exactly at 101. The broker may excute the closing of short position at 110. And if the price drop immediately after reaching 110 and you dont have limit at 110 for long position or you didnt close it fast enough. You lose money. So correct way is using gtd stop if your broker provide this. And you have to take spread and gtd stop cost into consideration. Your bet is the price will move in any direction larger than the cost and you have time to close the position before price reverse (I suggest to set limit too).[/QUOTE]

Hi guys,

Just wanted to clear afew things up. Firstly, the strategy I was describing was an oco order as zsharry describes here. Obviously I was wrong to use the term, “hedging.”

I understand how slippage and spreads will be an issue but the reason I thought this may work is through some historical analysis of previous high volatility news announcements.

For this I have been using, Forex Peace Army’s(really good site) news calendar which shows you how large a spike any given news announcement produces one minute after the announcement.
For the obvious big announcements(NFP, CPI, Libor Rate etc.) a very liquid currency pair like USD/EUR can make a move of around 30 pips or more in one direction! I have noticed that often during the the European/American session while the pair is most liquid that a whipsaw of only afew pips could be apparent before the pair makes one strong move. This means that a stop can be placed as close as 3/4 pips to the current price before an announcement.
It is clear to see that even with slippage and transaction costs 3:30 produces a very very good risk to reward ratio!

Since I am a penultimate year Mathematics student studying in the UK I have not had much time over the past week between exams to trade recent news announcements. Albeit with a small number of yet trades, on a demo account this method makes money! With around a 75% success ratio. Obviously trading a live account is very different and after Christmas I will open one with a small lot and test this for a month or two before jumping to conclusions.

Thanks for all the comments though guys! It’s good to have some people I bounce ideas off.

22

Happy to help (assuming that i did). When you’ve done the trail I would be interested in hearing how it went.

23

Stop for long and short position do not have to be same distance. You can use binomial tree or stochastic model to calculate based on ur prediction of up down probability since u are math student:) But always keep in mind “buy the rumor, sell the news”. Current price may already contain market prediction of upcoming news. Good luck in real account!

24

Stochastics are so boring man I hate it haha. Cheers anyway guys! Will see how this goes

25

Perhaps it can work if you decide on a price level and set pending orders say 20 to 40 pips apart or decide to use a percentage of the ATR, say 20-30% of the pairs daily ATR.

26

This is 2019, I believe by now you have realised that strategy does not work.

Good luck

27

I think that you have certainly done a very good job. I support experimenting with different strategies, in order to see where you can get the best results. This strategy certainly had some potential. Keep in mind that in high market volatilities, slippage can be your highest risk