100% very very low risk hedging. Almost 0 risk

This is a discussion on 100% very very low risk hedging. Almost 0 risk within the Forex forums, part of the Markets category; Hedging is defined as holding two or more positions at the same time, where the purpose is to offset the ...

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Old Feb 24, 2007, 7:32pm   #1
Joined Nov 2006
100% very very low risk hedging. Almost 0 risk

Hedging is defined as holding two or more positions at the same time, where the purpose is to offset the losses in the first position by the gains received from the other position.

Usual hedging is to open a position for a currency A, then opening a reverse for this position on the same currency A. This type of hedging protects the trader from getting a margin call, as the second position will gain if the first loses, and vice versa.

However, traders developed more hedging techniques in order to try to benefit form hedging and make profits instead of just to offset losses.

In this page, we will discuss, some of the hedging techniques.

1. 100% Hedging.

This technique is the safest ever, and the most profitable of all hedging techniques while keeping minimal risks. This technique uses the arbitrage of interest rates (roll over rates) between brokers. In this type of hedging you will need to use two brokers. One broker which pays or charges interest at end of day, and the other should not charge or pay interest. However, in such cases the trader should try to maximize your profits, or in other words to benefit the utmost of this type of hedging.

The main idea about this type of hedging is to open a position of currency X at a broker which will pay you a high interest for every night the position is carried, and to open a reverse of that position for the same currency X with the broker that does not charge interest for carrying the trade. This way you will gain the interest or rollover that is credited to your account.

However there are many factors that you should take into consideration.

a. The currency to use. The best pair to use is the GBPJPY, because at the time of writing this article, the interest credited to your account will be 24 usd for every 1 regular long lot you have. However you should check with your broker because each broker credits a different amount. The range can be from $10 to $26.

b. The interest free broker. This is the hardest part. Before you open your account with such a broker, you should check the following: i. Does the broker allow opening the position for an unlimited time? ii. Does the broker charge commissions?

Some brokers charge $5 flat every night for each lot held, this is a good thing, although it seems not. Because, when the broker charges you money for keeping your position, the your broker will likely let you hold your position indefinitely.

c. Equity of your account. Hedging requires lots of money. For example, if you want to use the GBPJPY, you will need 20,000USD in each account. This is very necessary because the max monthly range for GBPJPY in the last few years was 2000 pips. You do not want one of your accounts to get a margin call. Do not forget that when you open your 2 positions at the 2 brokers, you will pay the spread, which is around 16 pips together. If you are using 1 regular lot, then this is around 145 usd. So you will enter the trades, losing 145 usd. So you will need the first 6 days just to cover the spread cost. Thus if you get a margin call again, you will need to close your other position, and then transfer money to your other account, and then re-open the positions. Every time this happens, you will lose 145 usd!

It is very important not to get a margin call. This can be maintained by a large equity, or a fast efficient way to transfer money between brokers.

d. Money management. One of the best ways to manage such an account is to monthly withdraw profits and balancing your positions. This can be done by withdrawing the excess from one account, take out the profits, and depositing the excess into the losing account to balance them. However, this can be costly. You should also check with your broker if he allows withdrawals while your position is still open. One efficient way of doing this is using the brokerage service withdrawals which is provided by third party companies.
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Old Feb 24, 2007, 8:55pm   #2
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I agree with the statement "It is very important not to get a margin call. This can be maintained by a large equity, or a fast efficient way to transfer money between brokers." thats about all that I could subscribe to.This strategy seems to be 100% loosing some equity, to cover spreads, transfers and the antideprescents. However, this strad works in options, especially as an insurance in order not to loose the whole trading capital. One buys the puts and calls in ratio related to the market condition and price performance. The worst scenario is when the market is not moving fast and far enough. If there is a movement in the desired direction the profits are sweet, if the market moves against your greater number of your held positions, thats not that good, yet if it moves far enough the cost of of the whole strad can be recovered with a possible profit. The reason is that the "in money" options gain value at a faster pace that the losing options loose their value. Options are very complicated but experienced option traders are able to generate a good income, with the rest loosing a great deal. Nobody is waiting there with the eager desire to part with their equity just because a given trader wants to put a trade or two, even if they are in the opposite direction. I would be very cautious trading the way you have proposed, but I am cautious anyway. I wish you the very best.
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Old Feb 24, 2007, 11:13pm   #3
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Originally Posted by 2be
I agree with the statement "It is very important not to get a margin call. This can be maintained by a large equity, or a fast efficient way to transfer money between brokers." thats about all that I could subscribe to.This strategy seems to be 100% loosing some equity, to cover spreads, transfers and the antideprescents. However, this strad works in options, especially as an insurance in order not to loose the whole trading capital. One buys the puts and calls in ratio related to the market condition and price performance. The worst scenario is when the market is not moving fast and far enough. If there is a movement in the desired direction the profits are sweet, if the market moves against your greater number of your held positions, thats not that good, yet if it moves far enough the cost of of the whole strad can be recovered with a possible profit. The reason is that the "in money" options gain value at a faster pace that the losing options loose their value. Options are very complicated but experienced option traders are able to generate a good income, with the rest loosing a great deal. Nobody is waiting there with the eager desire to part with their equity just because a given trader wants to put a trade or two, even if they are in the opposite direction. I would be very cautious trading the way you have proposed, but I am cautious anyway. I wish you the very best.
It seems that you did not read what I wrote! How could you lose your capital and you are hedging!!!! Please re-read.
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Old Feb 25, 2007, 12:46am   #4
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Originally Posted by jgerousis
It seems that you did not read what I wrote! How could you lose your capital and you are hedging!!!! Please re-read.
I am not saying one would loose all trading capital. It looks to me like an expansive way of trading, when one trade balances the other the only winners are the two brokers who charge the spreads. Have I missed something obvious. If so I apologise.
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Old Feb 25, 2007, 12:49am   #5
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All you're trying to state above is called a "carry trade" , it's a well known strategy in fx market. My only concern is the "broker that doesn't charge interest" !! even though attractive , i'll be cautious with such a broker cause it's simply against the natural flow of interbank fx trading . Happy trading
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Old Feb 25, 2007, 12:52pm   #6
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The basic hedging strategy is not very usable in forex market,isn't it ? I know only that option traders use it very well......
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Old Feb 25, 2007, 2:12pm   #7
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Originally Posted by VOLTRON
All you're trying to state above is called a "carry trade" , it's a well known strategy in fx market. My only concern is the "broker that doesn't charge interest" !! even though attractive , i'll be cautious with such a broker cause it's simply against the natural flow of interbank fx trading . Happy trading
Yes there are brokers who do not charge interest, but will charge you instead a $5 for every lot every night regardless whether you are long or short. This way you can make 24 usd at the regular broker and pay 5 at the interest free broker. If a broker charges u 5 usd every night, then this broker won't alarm me a lot. Because he is making money from everyone.
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