Hedging in day trading

This is a discussion on Hedging in day trading within the Discretionary Trading forums, part of the Methods category; Hi, I day trade US index futures on margin and wonder how I may hedge my exposure. I was not ...

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Old Jun 4, 2004, 1:54pm   #1
 
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Hedging in day trading

Hi,

I day trade US index futures on margin and wonder how I may hedge my exposure.

I was not in the market on September 11st, but I take it that immediately after the attack the market was closely until the next day. When it was finally re-opened, the market collapsed.

Therefore, If I were long in the market intra-day and something like the September 11st happened, which I believe is not so unlikely, the market were closed immediately. When it re-opened, it collapsed, and I could lose all my trading capital or even more with leverage. Even if I had set stops, the stops could remain unfilled untill the market were much lower.

How can I prevent such >100% loss of capital from happening?

Many thanks indeed.
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Old Jun 4, 2004, 2:19pm   #2
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clybw - thats what options were designed for!!! Read Sheldon Natenburg.

Otherwise, you could use ETF's like spy, qqq, dia. but I doubt the returns would be as attractive using these due to the high correlation.
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Old Jun 4, 2004, 2:35pm   #3
 
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If you daytrade then you only need to worry about events that happen during market hours - 11/9 didn't. Just make sure you always have a stop in the market and hopefully you'll get a fill before the market goes limit down.

There's not much point in going long if you are going to hedge it so if you are really worried then only take the short trades. But then you need to worry about OBL being captured and sending the market limit up. Hmmm - with all these risks around perhaps sensible money management might be in order to prevent wipeout if the unthinkable happens.
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Old Jun 4, 2004, 2:36pm   #4
 
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clylbw started this thread Thanks to both of you.
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Old Jun 4, 2004, 3:16pm   #5
 
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I'm sure you do this already, but if not I would also recommend using STOP LIMIT orders instead of STOP orders as the former are native at the exchange and will be filled more quickly in the event of a catastrophe where every microsecond counts as everyone rushes for the exit at once. However be sure to set the limit a long way from the stop incase the market were to drop say 5 points in a split second, which could miss a narrower stop limit althogether.

Even the most dire of news will not reach every market participant simultaneously so I would imagine you would be filled before all bids were withdrawn, though not perhaps exactly at the level you chose. Still 3 points slippage is better than 50!

PS Did you short the morning's gap up? :-)
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Old Jun 4, 2004, 3:33pm   #6
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Whos to say the next 9/11 wont happen during market hours.

Most crashes have started the day with a rally.

Futures can lock limit up or down within minutes.
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Old Jun 4, 2004, 4:17pm   #7
 
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clylbw started this thread Thanks indeed.

Hi Frugi,

Yes I did, then longed again at the tweezer bottom.
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Old Jun 4, 2004, 4:36pm   #8
 
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..for a change

Tweezer bottoms: I always assumed they looked like the one on the attached 10 min chart (on the left), cause they look just like a pair of tweezers. But an example given on a candlestick site seems to look exactly like the 5 min (on the right). Do you treat them as both valid, or only one?

Thanks.

http://hotcandlestick.com/index.htm?...htm~hotcontent
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