Hedging strategy - buy and sell same currency simultaneously

[SteveHopwood]

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."

Just so you know, Gary, opposite direction equal lot size trades ('hedging') costs only the difference in swap as margin. There is no trading margin required, as the position is essentially at zero lots.

Of course, the crim is laughing all the way to the bank because of the negative swap the position that accrues. Eventually (in a lot of years) the accrued swap on an unclosed hedge would create a margin call.

Any member of this forum with a brain cell that fires once a week will have learned to trade properly looooonnnnngggg before swap would cause a margin call.

I hope.

[garyfritz]

OK, I wasn't sure if the margin canceled. I can't test it at my US brokers. (Guess I could have at my GP demo, duh. )

I still think, even if negative swap wasn't an issue, that clearing the slate and viewing the trade with a fresh perspective is better than locking yourself into the trade. If you go flat, then later review the position and say "Yes, this is a good trade now, I'll re-enter here," then great. But if you look at it with fresh eyes and say "No, this is not a trade I would enter here," then you just shouldn't re-enter it.

But if you hedged the bad position, you're stuck in it, and it's hard to take an unbiased fresh look at it. Your mindset is going to tend to be "Where's the best place to unhedge and unwind this mess." That might not be the best thing to do.

So I don't see ANY advantage to hedging, and at least one or two disadvantages. Going flat seems like a better option.

[phil_trade]

OK, I wasn't sure if the margin canceled

it depend broker ! Some of them consume 50% of required margin for both trade, some of then 0%

refer to MODE_MARGINHEDGED

[Durante]

I find hedging to be an extremely valuable tool. I use it often in place of a stop and know that it has saved me heaps over the last few years. You can use a hedge successfully once you become aware of market timings and by that I mean that certain moves intra-day last a certain amount of time. Consider a situation where the market makes a short hard drop and you decide it's a great place to make a buy. You place your buy trade with a pending hedge of 30 pips(That's what I use in the case of majors). It turns out you read things wrong, the drop continues and triggers your hedge. Now you could wait half an hour and if a position is in profit, close the losing trade and move a stop to BE on the winner and trail it by 20 or 30 pips. This might sound the same as just initially closing one trade and then opening a second but it has the advantage of occasionally allowing time for the market to make a decision on which way it will travel and possibly saving you from a second SL had you reversed your trade only to find the market immediately turn back in it's original direction. The second option you have which I believe is easier to stomach but perhaps not as profitable, is to keep the hedge open for about two hours and start to look for the ever so often change of session swing at which point you could close the sell order for a profit, place another pending sell 30 pips again below the market and trail that pending order up until BE. Now you could either close and be flat for the day or if the going is good you'd be able to profit off both positions. If in the case that the swing doesn't happen and the market continues once again against you and triggers the second pending hedge order, you would assume that the pair is trending and will likely continue for 2 and a half to three sessions. At this point you would once again wait until you order has gone 20-30 pips in profit,close the initial order and trail a stop on the hedge order after bringing it to BE. If after the two and a half sessions you were lucky enough to have your trail still not hit, you could then look for a technical exit.In the long run this method seems to be able to keep you out of a few extra loses and allows you to sometimes profit from either way trading. It's a bit difficult to get the hang of at first but really is a worthwhile technique if you can perfect it. One word of advice though is to be careful when the market is seriously dropping for days and weeks, and continuously holding low at the end of day without any reversal into a consolidation area. During these times it is very difficult to make money using the second option and you should consider cutting your initial order as soon as you can bring the hedge to BE.
As for US citizens having to hedge one pair against another, I'm not very well versed in that but I believe one should look for a counter pair that has made a net change equal to that of what your trading. In other words, it's no use hedging EU with USDCHF if the first is 50 pips from open and the latter only -4. One is moving and the other is not which would negate the whole purpose

[garyfritz]

Durante, obviously that works for you, so more power to you. But I still don't see any advantage to the hedge. "Trigger the hedge" is equivalent to "exit the original position." "Close one side of the hedge" is equivalent to "open a new trade in the other direction." You could do the exact same strategy without hedging.

People are probably getting sick of me harping on this, but there really are good reasons. E.g. it drives me crazy when people write EAs that use hedging, thus rendering them unusable for US citizens, and there is NO REASON to use those hedges. The IDENTICAL system logic could be implemented by closing and re-opening positions, rather than entering and exiting hedges, and then US traders could use it too.

[SteveHopwood]

Durante, obviously that works for you, so more power to you. But I still don't see any advantage to the hedge. "Trigger the hedge" is equivalent to "exit the original position." "Close one side of the hedge" is equivalent to "open a new trade in the other direction." You could do the exact same strategy without hedging.

People are probably getting sick of me harping on this, but there really are good reasons. E.g. it drives me crazy when people write EAs that use hedging, thus rendering them unusable for US citizens, and there is NO REASON to use those hedges. The IDENTICAL system logic could be implemented by closing and re-opening positions, rather than entering and exiting hedges, and then US traders could use it too.

Hehe Gary, you do have trouble getting your head around others working differently to you, and achieving their ends even though you think their methodology is wrong. We have enjoyed disagreements about my coding a number of times in the past. Where what you offered me helped me - CloseEnough() for example, I accepted with haste and enthusiasm. The stuff you were trying to make me do out of dogma on your part I ignored. This does not make you wrong; just inappropriate for the particular thingy. Nor does it make me right. We do thingies differently - you as a pro and me as an amateur. Mine works for me and you hate it.

Here, Durante has stated what he does. It matter not a jot whether you think it is a 'good idea' or not. Durante does it and finds it successful. It works for him.

For myself, I have never made hedging work and have usually done it on my way to a margin call, but that was because I was (still am?) a rubbish trader in a panic, not because nobody can make hedging work for them.

Just because you cannot see how something can work does not mean it cannot work. I do not have a clue how a piano actually works, but I can make a hell of a good sound on one.

[garyfritz]

Hehe Gary, you do have trouble getting your head around others working differently to you, and achieving their ends even though you think their methodology is wrong.

Nono, I don't think hedging is *wrong*. I just think it's demonstrably inferior to the equivalent non-hedged approach (due to swap, possibly margin, etc). If someone uses it successfully for themselves, good for them. But any EA that uses it is unusable in a US account, which is frustrating for those of us under the incompetent iron heel of the NFA.

Here, Durante has stated what he does. It matter not a jot whether you think it is a 'good idea' or not. Durante does it and finds it successful. It works for him.

Agree 100%. That's why I said "more power to you."

Just because you cannot see how something can work does not mean it cannot work. I do not have a clue how a piano actually works, but I can make a hell of a good sound on one.

Heh. I probably know how a piano works better than you do. I'm pretty sure I know how an electronic keyboard works better than you do. And yet you can make them do what they're intended for, far better than I can.

There are probably some disturbing parallels to my trading in there somewhere...

[Durante]

It does seem like US citizens are being used as a scapegoat and getting punished for the GFC, but I've no doubt they'll get back their right to hedge, it's just a matter of time. I remember hearing about former prohibitions on the hedging of financial instruments and how it has so far always been re-introduced after the politics calmed down. Can't for the life of me find where I read that or heard it though and I guess it's of little solace anyway.

Hopefully in this case, history will repeat sooner rather than later

[mak]

Hedging can be very useful from a psychological point of view.

When one enters a realm of consistent profitability, hedging looses it s usefulness, but as we now a road to consistent profitability is long and hard. Ability to take a loss without emotional pain is a skill that has to be learned. Hedging can help during that process, as it enables one to take more time to minimize his losses. It enables you to plan your exits from bad trades with more precision or even turn one bad trade in to double lot wining trade. Lots of options. Someone also mentioned hedging as "profit protection". In my opinion that is the most useful way to use it as it enables you to plan larger trades with scaling in as much of your equity as possible, turning your trades in massive winners.

Mathematically there is no real advantage to it. But psychologically it can be a difference between loosing and wining. As we all know, trading is 95 % psychological game.

[kwanann]

For those that are interested, i've been testing out the hedging strategy for the past 2 days and it seems to be working out quite well. Will be playing this strategy for a few more weeks and see how it goes.

Best thing about it is that even if i'm AFK, or away for long periods, it doesnt matter, all i'm paying for is swap. i wont ever be in a DD that i cannot control anymore

I know US citizens cannot hedge, not sure if it applies if you apply for a GP account, but for those that is interested in this method, please give me a few days to firm up the idea before i publish anything