Hedging: looking for some feedback

[maverick7h]

I'm trying to gather some information on different traders' opinions regarding hedging in forex, any strategies and reasoning behind it in their opinion. Anyone who knows anything about it please let me know what you think. Thanks a lot.

 

[SAINT]

Haven't really used Hedging. Been looking at similar things lately.

Something that's been in view lately is 'carry trades' where you BUY the higher yielding
currency (to gain interest and any positive price move) and then BORROW the lower yielding to make profits on price action (against your higher yielding investment).

You could also use correlated pairs. For example:
If you SOLD USD/JPY and SOLD USD/CAD you would benefit on dollar weakness.
At the same time a high oil price would send JPY down but benefit CAD.

Hope this is of use.

 

[josbarr]

FLEXI-Leverage - Select Your Leverage: 50:1, 100:1, 200:1, 250:1, 300:1, 400:1
Full Hedge Capability

fx sol has hedging

 

[josbarr]

Full hedging capabilities is the ability to take a position opposite to one currently open without incurring additional margin requirements. This feature acts as an insurance policy for times of uncertainty; it allows the trader the ability to hedge positions until the market direction becomes clearer.

 

[JP1966]

So why not just close the position and re-open when the market is clearer? Sounds like a tool for people who don't like booking a loss and I bet very few people 'hedge' a winning trade!

 

[Roberto]

In fact sounds like actually CLOSING a position full stop to me. What have I (we) missed?

The ability to re-open subsequently at a different price without paying any spread, I suspect(?)

 

[maverick7h]

Normal, if you have say a short position in a given pair, and then you buy that currency, the positions will cancel eachother (by buying you would be effectively closing your short, and nothing more).

With hedging you can have a short and long position at the same time on the same pair. This can be a good advantage especially during times when you are expecting a big market move but with no way to tell which way a market will go. Examples are right before FAs or at the ends of contracting triangles. Right before the breakout, you could go long and short - and then, for example, set your stops for both at 50 pips and your targets at 75 pips. The odds are extremely high that one of the two positions will be filled. The trick is having the knowledge of how far a move is likely to go, to help you determine just how big your stops and limits should be, and how far apart (which also should vary by direction based on the probabilty of the currency to go up or down). So there it is in a nutshell. Even though your odds are great, obviously with hedging your risk/reward ratio suffers greatly as well. In the end it is just another trading technique to explore. Another weapon in your arsenal; there is NO system that is always "the best" to trade by all the time. It varies by market condition. And in some instances, hedging can be a great advantage. But it is a complicated technique. Thats why I was asking if anybody here has any (successful) experience with it.

 

[JP1966]

I suspect that no trader who is successful in the long term would adopt such a strategy, so think you would struggle.

In the above example if you are so sure that if a currency moves 51 pips then it will move 75 why not stay square with no position and go with the breakout at 51 pips and target 24 pips profit. If you do it the way you describe you seem to be making a possible 25 pip profit on a 50 pip loss and also it is perfectly possible that if say the currency moved 60 pips then snapped back in the range then both sides lose.

I am sure the reason most people hedge is in reality they are wrong. ie say long cable at 1.8800 and it has fallen to 1.8750. They are convinced their position is right in the medium term but not the short term. They therefore sell at 1.8750 a seperate position. Thye at some stage close the winning half of the position and run the losing. I also suspect that if someone averages a losing trade then it allows the person to close any winning part of the average at a profit.

In my mind all madness, but I could be wrong.

 

[sellputs]

here is a site which has information regarding forex hedging

http://www.forex-currency-hedging.com/

 

[c6ackp]

The retail brokers seem to define hedging as being able to hold long and short positions at the same time in the same account.

With FXCM you need to open two separate accounts to be able to do this.

ACM's new java platform allows long/short positions in the same pair, in the same account.

This can be useful when holding a longer term position whilst scalping in the other or both directions.

Steve

 

[c6ackp]

No it's not really hedging but that's the terminology being used by retail forex brokers for this capability, so it's as well to know about this.

Also, adjusting a position (scaling in/out) can be seen as different from trading parallel strategies in very different timeframes. The ability to go long/short in the same account allows these two strategies to be completely divorced as you are, effectively, maintaining the trade, not the position.

So, if you only trade 1 lot and you are +1 from a daily signal, you may need to hold a -1 scalp position for a short period without losing your +1 daily price.

Clearly, this is only a problem if you are trading at the minimum, 1 lot.

Most brokers can't support this without opening a separate account, but a few do. This is obviously important to some retail traders as the brokers who do offer this feature often mention it in their sales pitch.

I guess interbank and retail fx is probably a whole different ball game

Steve

 

[c6ackp]

The other way to handle simultaneous longer term and intraday positions is to use two brokers.

For example, FXCM for longer term positions: their spreads are wider, they are 24hr and their execution is very good.

For intraday positions use Capital Spreads as their spreads are tighter (but they close overnight!).

I think this approach is preferable, but ACM do offer accounts which support long/short trades in the same pair/account although it may get a bit confusing when reversing a short term position, etc.!

Steve

 

[ZDO]

Ditto on the comments on definition and usage of the word 'hedge'
True hedging is using derivatives to lock in a cash price regardless of future
changes in cash price. Example Soybeans prices are up. A farmer believes
they will come back down before he takes his cash crop to market so he shorts futures
against his crop now – ‘locking in’ an acceptable price (with no more upside btw)

In the beginning hedge funds (1970’s) were created to truly hedge large investors’
stock portfolios. Over the years, these funds have debased into pure speculation
funds that no longer even have a negative correlation with the indexes and do not
accomplish true hedges at all. They are simply relaxed regulation speculative
managed funds for qualified investors.

Now the FX'rs are spinning the word a little bit more. Let's use the word 'hegge' here instead of 'hedge'
and acknowledge that 'hejjing' = Pips from you, pips to bank...

In any market, if you are offsetting a long with a short really all you are doing is locking in your
current equity in the position ! If your equity in the position is small gain or loss, consider using a second pair to spread instead of an outright hejje in front of uncertainty you can't manage or even face (reports,etc) or just exit and re-enter later.
If you have a position deeper in the red, 'hejjing' will stop the bleeding and give you a respite from the inexplicable and vague discomforts of denial and may allow you to get new perspectives on the position and your position. Most inexperience traders looking at this technique are susceptile to or have already held losers too long and deep and didn't learn from it because they have serious issues with accepting a loss. "Hey, by hejjing I never have to BOOK loss." But the reality is all hejjes will cost you money, because one can never lift them perfectly and the market may NEVER come back to let you out at break even. Have you a clear picture of the utilility of carrying large enduring losses? It requires a lot of time ( and energy and money ) to withstand and manage large losses. I'd suggest that you familiarize yourself with the concept of exposure. Black swans are flying around just below the horizon just waiting to appear. I know. I was day trading the SP in front of a live FutureSource screen in Oct 1987 and in Nov 1989 and in ... In psychobabble it goes like this – the mind is more risk seeking with losses than it is with gains. Without intervention, we will tend to liquidate our winners and hold (in this topic - ie hegge) our losers. A position in the red is not a danger signal. Doubt is not a danger signal. A position in the red + hope + pain is an extreme danger signal of imminent and lasting financial, mental, and emotional damage – regardless of the position’s outcome. Learn from others' experiences – at the first tinge of hope or wishing, set a point and if it goes there, get out. Your system should be robust enough to get you back in if the market comes roaring back your way. And if the market doesn’t go to that drop dead point and it comes roaring back your way, don’t let that teach you the wrong lesson. For someone out there, this thread was no accident. We don’t know who you are but you will know who you are…

If your position is in the black, rather than lock in a profit, why not just take the profit and be prepared with a robust plan to get back in? You wouldn't be considering locking in what you got (ie hegging) unless your assessment of the probabilities of further profits have already reached a questionable threshold.

'hejjing' = Pips from you, pips to bank...