So basically, you hold out a position which you bought for a price that will never come back and sell it 3 or 5 months later? This is also given that you KNOW how the market will move. Did I get that right?
Also, hedging doesn't apply to short term trades?
Well, firstly as already mentioned, it isn't hedging.
You DON'T know anything. That's the point.
It's a tool that's there (though no longer in the US) that can be used or not. Its reason for existence probably twofold. One is that when used short term it makes brokers more money and two some traders found that during high volatility news times that exit orders were being honoured more than entry orders so asked brokers to implement it. Brokers seeing there was more money to be made, went ahead and implemented it.
I was just talking about another way of using them that could actually be of benefit, workable and useable (yes it does 'work'). There are dangers with it the same as anything else. Did I hear anyone shout 'margin call'?
You don't KNOW if price will come back to the entry or not but the further away from the market the position is the more chance it has of surviving. In the example I gave if the trader entered short, closed, entered long then entered short again the short position is very close to the market therefore has less chance of surviving. The more you look at the FX markets the more you'll understand this. + from how that person is trading they'll close the second short again anyway. For the position trader, if it comes back to position then, hey, guess what, there is a long position being built anyway.
There's another reason for doing it as one of the charts posted shows. Look at USDCHF monthly as an example. Assume you've got a nice short position established you've been holding for some time and are WELL in profit. Price does not trend in straight lines. Even though it's going down on the monthly it could trend up for weeks in the interim. Are you going to close your shorts because of this? TBH if you closed them ALL, unless you needed the money out for some reason you'd be nuts to do it as your position is likely so far from current price as to as safe as it can reasonably be. First you need to know how close your average price is to current market price, if it's close then you'd think about closing out part position of a near-term down leg that's very close to the market. This will also give you the capital to enter long for the up-leg, also of psychological importance you're booking some profits and making your unrealised draw-down smaller (you'll always get this as you have more trades short then long, market is coming up, you have draw-down whether you realise it or not). If the up leg fails, it fails. If it trends up for a few weeks you start adding longs until it the market starts showing shorting opportunities, again noting average price etc for the long leg. If the first of the new longs start surviving for more than a month or so and you see a price formation on the monthly chart 'signalling' a possible trend change' then it's perhaps time to close out some 'nearer to' short legs altogether.
The whole point I guess of trading in that way is that you DO NOT know. It's hard enough trying to fathom where the market is going to go within the next half an hour, never mind the next 12 months...but you don't need to.
Purely mathematically 'hedging' is not the optimum way to trade but the maths does not take position, building position and length of hold into account. It also does not take into account the high probability that the in and out trader will NOT be capturing every pip of each swing and that by the nature of that type of trading s\he will likely be trying to enter more often and getting stopped out more often. Imagine for a moment the in and out trader who is entering for the second time on that short, has a stop reasonably close to. It gets spiked out for a loss. The trader actually loses out twice, firstly loss of capital and also missing out on the down move. Now the trader who already had the short established from before need not actually have a stop in the market at all when establishing the next part of the position short, shock horror. The trader will know where the average price is (further away from the market than the other trader's stop) and need not close out unless prices closes beyond average price, the resulting spike does not take the trader out of the market as price did not close beyond average price.
All I'd add is that all the optimum stuff etc as far as a retail discretionary trader is concerned is not necc. the way to go at all. Nothing is optimum, the markets are infinitely variable, the only constant can be you, all the R:R stuff and everything else, it's all just theory. All that matters at the end of the day is making money, it doesn't matter if it's not the 'optimum' way of doing it.
I can think of a few more reasons but it's 9AM and I need coffee. I think all I'd add is that on nearly every forum you can find almost everyone will scoff at because of the maths but then you have to remember that supposedly 95% or retail traders fail and 95% of the people doing the scoffing will be failing also...
For short term trading using it in the way I've described isn't going to be so useful. Why? Again because of the maths. With long term trading things like spread for instance tend to 0 whereas short term they are a big deal and you've just doubled your costs.
My posts are getting so long I'm going to change my name by deed poll and call myself JoeTraderR7. Need to get some more names in there though. Does it make sense? I'm not going to read it. What a load of old @rse dribble.
Bill has been holding a short on Swissy for some time. his friend Mathilda, after making himn a lovely cup of ground coffee suggests he starts building a long position because the fast TCD has crossed over the slow TCD on the 1 minute chart...
Ya got me b4 I finished editing