Hedging in day trading

[clylbw]

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.

 

[BBB]

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.

 

[sidinuk]

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.

 

[clylbw]

Thanks to both of you.

 

[frugi]

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news will not reach every market participant simultaneously so I would imagine you would be filled before all bids were withdrawn, though not perhaps exactly at the level you chose.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?

 

[BBB]

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.

 

[clylbw]

Thanks indeed.

Hi Frugi,

Yes I did, then longed again at the tweezer bottom.

 

[frugi]

..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...rectory/Bullish Tweezer Bottom.htm~hotcontent

 

[clylbw]

Hi Frugi,

I think they are actually the same thing. In the 5-minute chart, the doji and the next bar forms the second bar of the pattern in the 10-minute chart. So I would say the doji is the first signal, and the second 5-minute bar confirms the change of market direction.

Hope this helps.

 

[anley]

You can't hedge yourself from this kind of risk unless you take on a counter type position but then all you've done is to reduce the potential profits of the original trade.

If you buy puts as a hedge then there is a 100% chance that you'll lose all your money over time because of the costs involved. Selling short QQQ's against a long Nas futures position is a waste of time and effort, why not just take a smaller long position in the future.

Everyone wants the magical tool where they can enjoy open-ended profits but have limited losses (without time factor being an issue) but this will never be invented because there's nothing in it for the seller of such a contract.

If you're worried about being long and Sep 11 happening again then either stick your money in the bank or don't worry about it because you know the odds are on your side, ie there are only 3 possible positions to have, long, short or flat and long is the only one that can hurt you.

 

[BKuerbs]

One way to cope with this problem is to off set your position in another instrument traded on another exchange, but which is correlated to the one you have a position in.

This is done "after the fact" not when you open your position. Say you are long the ES, when another 9/11 happens (you still somehow have to get the news), Globex is limit down and closes. You could try to hedge by going short in another stock index future, e.g. Eurostoxx, or Nikkei or HSI. Of course you need access to these instruments. On 9/11 the European exchanges were open.

You need a little plan for this: you have to know the tickers and the opening times of the exchanges. It is far from perfect, but may be used to limit an otherwise devastating loss.

And it is useful in everyday trading too, not only for such events as 9/11. A few months back, someone forgot to close his position in the FGBL. Usually nothing bad should happen over night, but it is the very nature of surprise events to be a surprise. To protect against any surprise events, which could make the FGBL open against him., he took an offsetting position in the ZN. Nothing happened, so the position were closed next morning with a slight loss, but that is the price for an insurance. To make this hedge "better", a position in the Euro could have been included, but that would have added to the cost.

Have a nice weekend

Bernd Kuerbs

 

[clylbw]

Hi Bernd Kuerbs,

Many thanks really for your help.

 

[BBB]

Building on that, dont forget your SPUDS!

S&P Under Dow. Its a recognised spread trade between CBOT and CME new common clearing link.

You buy one contract, while selling the other. Although the returns MAY be less than an outright position, the margin efficiency of the spread will mean you can trade more spreads than you would be able to with outrights alone. Another benefit is that you also tame volatility thus having a more certain idea of your risk exposure.

 

[clylbw]

Hi BBB,

Thanks really.

Hi Bernd Kuerbs,

May I ask one thing? For the hedging method you have mentioned, should it be done in the same account, or in a second account? For example, if I used HSI for hedging, should I trade it in the same account with the US futures, or should I have a second account for that purpose?

Thanks really.

 

[owl1963]

Hedging the positions using futures

I would use CFDs to trade the indices with a guaranteed or a non-guaranteed stop, because the contract size is quite large I,d be inclined to have a much tighter stop ( which you can do using the non-guaranteed stop system) I happen to IG Markets but there are of course many providers.
The leverage factor can be 50 X using CFDs if the NG stop is set at 2% away from the entry price. The deposit required would be 10% of the contract value, but you are risking only 2% of your capital. Useful if you are long on a basket of US semi stocks for example to fully or partially hedge by selling short the index future for the NAS 100. I incidentally mainly use pairs trading with CFDs Long the strongest in the sub-industry group versus short the weakest. The two must correlate 80% or more within the last 3 months for me to pairs trade. I locate pairs via the 'competitor ' section of the menu on the free site www.stockconsultant.com
I like USA since I can watch in the evening after I return from work and the last 15 minutes of the USA trading day determines whether I do nothing/close/partially close or open new positions.
The advantage over plain futures is the better control of risk capital with CFDs..

Any use?

Best wishes

Andrew

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.[/QUOTE]

 

[BKuerbs]

Hi BBB,

Thanks really.

Hi Bernd Kuerbs,

May I ask one thing? For the hedging method you have mentioned, should it be done in the same account, or in a second account? For example, if I used HSI for hedging, should I trade it in the same account with the US futures, or should I have a second account for that purpose?

Thanks really.

Two accounts are not really needed, what you need anyway is enough money to be still able to open an off setting position.

In case you use IB, you have to be aware on which server your account is located and the maintenance shut down times of these servers. E.g. European and American servers shut down during Hongkong trading time for an hour.

If you want to go with two accounts, I suggest you open them with two different brokers. Which adds to the costs: minimum revenue per month, data cost, minimum amount etc.


Regards

Bernd Kuerbs

 

[clylbw]

Many thanks indeed, Bernd Kuerbs.

 

[clylbw]

Hi Andrew,

Thanks really.

I am currently using CFDs but am considering moving to a 'real' broker such as IB.

Yes the guaranteed stops are reassuring, but I am tired of the sometimes wild spreads. With CFDs I feel that I need to play the game against the broker on top of the market, and it is already hard enough to play the game against the market alone.

Maybe that explains why I am not a genius. :cheesy:

 

[Trader333]

Lynn,

The biggest single issue with CFDs is that you start every trade in a net losing position. Therefore anything that moves you closer to a more neutral position at the start of the trade has to help. Moving to a direct access broker will improve your situation with regard to this in a big way (in my view of course).


Paul

 

[clylbw]

Hi Paul,

Thanks indeed. Exactly my thought.