Hedging strategy - buy and sell same currency simultaneously

[kwanann]

Just wondering, has anyone heard of such a system? Seems like a zero risk strategy since with a buy and sell, you totally net out the risk. But can't figure what is the best way to make it profitable though

[garyfritz]

There are many hedging strategies, and you can find quite a few of them described on this board. People often use hedging to "freeze" a position that's going against them.

I don't think you can use hedging to create a profitable strategy. Hedging is essentially the same as having no position (but worse, see below), and you can't make money when you're flat.

In my never-humble opinion, hedging is a Bad Idea. If you want to "freeze" a position, then EXIT it. When you want to un-freeze the position, instead of lifting the hedge, just buy in again.

Reasons I don't like hedging:
* A hedged position is a slow loser, because the sum of your long/short swap is always negative.
* I'm not certain but I suspect a hedged position uses up margin on both sides.
* Managing a bunch of open hedged positions, vs. just closing them out, is a pain.
* People tend to use hedging to delay dealing with a losing position. Then you're still married to that position, which can cloud your judgement. I think it's much better to clear the slate and start anew with a fresh perspective.

As a US citizen I'm not allowed to use hedging. That's a pain because you might want to trade multiple independent strategies that happen to take opposite positions, and you have to deal with that. But that's the only reason the US hedging limitation is a problem. I would not hedge a position intentionally even if I could.

[niepce]

Get an edge with an hedge

Seriously, look here : http://www.stevehopwoodforex.com/phpBB3 ... f=5&t=1362
Latest hedge toy to date.

[garyfritz]

BTW my response referred to hedging one pair with itself, e.g. long EURUSD and short EURUSD. I have never seen a good reason to do that. The thread that niepce linked to takes long and short positions in different pairs, and that can work well -- though I don't really consider that hedging. You generally end up with a net position of some kind or another. You might use that approach to isolate a specific currency -- e.g. by being long USDCAD/USDCHF/USDJPY and short AUDUSD/EURUSD/GBPUSD/NZDUSD you are effectively long the USD.

There are ways to build hedged "rings" or other structures, e.g. long EURUSD / long USDJPY / short EURJPY. That ring is basically hedged and in theory shouldn't change much in value. In reality it does change (though frankly I'm not sure why) but I don't know how to squeeze profit out of it.

[Jemook]

There's always arbitrage where you go long say AUDUSD on one broker and short AUDUSD on the other broker. You'll make the difference in swap - so if the broker you are long with pays $10 swap and the broker you are short with charges $5 swap you'll make $5 a day.

[garyfritz]

But can you really find crims like that, Jem? Who pays that much or charges that little for the same pair? E.g. Cowboy IBFX pays $7.36 but charges $9.18.

I would assume that nobody would offer swap rates like that, or arbs would swamp them.

[Jemook]

I just pulled the numbers out of my butt. But say you have a 10 lot position LONG on broker X and 10 lot position short on broker Y then you are effectively hedged from any price swings. If broker X pays $10 swap and broker Y is swap free (these accounts exist in arab countries where their religion says the can't charge interest) then you can make lots of $$

It's not something I've done but I know of a trader that has done this successfully until he got busted (didn't get in trouble they just closed his account).

[SteveHopwood]

Reasons I don't like hedging:
* A hedged position is a slow loser, because the sum of your long/short swap is always negative.
* I'm not certain but I suspect a hedged position uses up margin on both sides.
* Managing a bunch of open hedged positions, vs. just closing them out, is a pain.
* People tend to use hedging to delay dealing with a losing position. Then you're still married to that position, which can cloud your judgement. I think it's much better to clear the slate and start anew with a fresh perspective.

Been there lots of times in the past and not going there again. I understand that there are successful 'hedgers' out there; I am not one of them.

For me these days, if a trade fails then cut it out. Eventually the move against my original trade will reverse and I will make the money back on the reverse. Having a hedge in place means I have to decide on when to close the hedge - always been rubbish at that. Hedges can remain in place for ages, and the negative swap accruing is a real killer.

Of course, your hedge trade can always be umpteen magnitudes of the original lot size. When this works, then great but you really have to know what you are doing when hedging thus. You are effectively shutting out the original trade and opening a new one at lots of lots higher than the original. Bit of a bugger if your first trade call was actually in the right direction and you were simply unlucky with your timing.

[nanningbob]

The only logic I see in hedging comes from two points.

1. A hedge is a time out so you can think. It allows you to protect a profit/loss if news suddenly turns against you and you want to protect a position. For example when I could hedge and i had to go out for hours. I would hedge the profit and come back to see if my trade was worth keeping later or not. The same thing with a losing position, I simply hedge the position to plan my exit strategy. It gives you time to think without a gun to your head. It simply is a time out. I have helped dozens of traders work their way through a bad trade by having them hedge until an exit strategy was worked out. We then undid the hedge and worked the strategy.

2. A hedge can also be looked at as two separate trades. One is a buy and one is a sell and you treat them as two separate trades that just happen to coincide for a period of time. this is especially true of traders who trade long term but want to go with a short term trade because they think it is possible to squeeze some quick money. There is nothing wrong with having two separate trades just because they hedge for a period of time.

Just my point of view.

[garyfritz]

Bob, I agree completely with your point #2.

But in #1, why hedge? Why not just exit, and decide later if you want to re-enter? It saves you margin and swap, and I think it would give you a clearer mind to see if this is really a trade you would take on its own merits now, vs. "I'm stuck in this trade and what's the best way out of it."