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Why Hedging your positions ?

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  • Why Hedging your positions ?

    Hi,

    We all had positions going against us. Some traders like to put a hedge on same pair to protect themself.

    Example :
    Let say I buy EurUsd for 1.3800 and EU drop to 1.3700 then I'm down 100 pips. I read news and think EU will drop more so I open a Sell of EurUsd
    So my account is now

    Current price : 1.3700
    EurUsd buy at 1.3800 ( -100 pips )
    EurUsd sell at 1.3700 ( 0 pips)

    Total = -100 pips

    What I have done is closing my buy on the market in practice. Metatrader will show 2 trades. My broker see no trades on my account and also see a loss on my account.

    What will now happens is broker will charge me swap on positions that I do not own.

    Now I hear "Oh baby you are so wrong".


    Lets play with our example some more.

    Example price now is : 1.3650
    EurUsd buy at 1.3800 ( -150 pips )
    EurUsd sell at 1.3700 ( +50 pips)
    Total = -100 pips


    Example price now is : 1.3750
    EurUsd buy at 1.3800 ( -50 pips )
    EurUsd sell at 1.3700 ( -50 pips)
    Total = -100 pips

    So why do some traders hedge the positions ?
    Close your positions and reopen when you feel you would have "open your hedge".
    You will earn money because you will not be charged for the swap....

    Enjoy your trading !

  • #2
    I agree with you. Hedging on the same pair is insane. But you can hedge your position against other currencies and that's a strategy.
    Trade the market, not the trader

    Comment


    • #3
      @Smarttrader. Yes of course This post is only about hedging same pair.

      Hedge against other pairs is an other story and not as simple todo then "singel" pair hedging.

      Comment


      • #4
        Hedging can be good and very useful and there's a few reasons for that.. In the case of the Viper Draw Down in which he originally went long at 1.0973, lets say there was a hedged "short" position opened after the Usd/Cad pair broke the 1.09 level, the worst the draw down would have reached is about 1.5 % or -80 pips.. when the short hedged position reaches a few pips profit, you can then place your stop at +1 pip and no matter how far the Usd/Cad drops, the Draw Down will not get worse than 1.5 %... yes I understand that you can just close the original position for an -80pip loss, but if you feel that strongly about the currency pair reaching a much higher level than the original long position, then you can wait it out and trade other pairs while the Usd/Cad does its thing.. in my rules for hedging, I always open a larger lot size trade for my hedge position, so that if it really goes against me, then I will cover the loss of the original position as it drops, and if it turns up again and goes through the 1.09 level, then ill be stopped out for 1 pip profit and look forward to a push up to my original long trade.. it can work and it can be very useful, if that strategy was used in the current Viper Draw Down, there would have been no stress and no high draw downs involved and normal trading could have resumed for 2 months.. if the hedge position was bigger than the original long position in the Viper Draw Down, then with the Usd/Cad pair dropping down to 1.0620, we could have broken even a long time ago with no one stressing and sweating..
        .

        Another good use for that strategy is, if you wanna take profit from the hedged trade, you can, and you can use the profits from that hedge trade to buy again much lower and aim for a 40 pip profit target, lets say from 1.0630 to 1.0670, and if you achieve that 40 pip target, you can then close both trades for a break even on the Usd/Cad transactions.. if you wait it out longer, then you will start making profits at any price over 1.0670. This is my opinion, my thoughts and my strategy.. I am not a full time trader, and ive only been doing forex for just over a year, but I am looking to doing it fulltime one day. Im not as experienced and not as forex smart as most of you here, but I can see how hedging can work very well.
        .

        P.S. I was getting paid swaps for the Usd/Cad sell positions, so I didn't see a problem there

        Comment


        • #5
          In the case of Joel Krugers S&P disaster, a hedge position could have been placed after a 5%, 10% or 20% draw down or whatever, and he would never have reached the 30% draw down strategic closure for himself and his signals, and could have waited out a return to a profitable level, or, in the case of my strategy, a larger hedge trade, he would have been reducing his draw down as the S&P continued to go up towards the 2000 level, And thats another reason why hedging can be extremely useful and helpful.. Which is probably why some brokers don't allow it...

          Comment


          • #6
            Hi,

            @DanAce. Thank you for your answer. Well lets say Fx viper locks the DD to 1.5% with one hedge. Then U/Ca can do anything and you have still 1.5% DD. If U/Ca continue to drop then it is good todo so. If U/Ca start to go north then it is a bad strategy.
            During your hedge you have less positions on market but you pay full price on swap.

            Opening a larger position in your hedge is like closing all your trades on the market and open a trade that goes against your original trade.
            If price continues to fall ( ex if original is buy) then you earn money. If price go north you give away more money.

            You "bigger trade" hedge works well if your trade continue to fall but if it reverse when you open the trade then not to good.
            Market can also bounce an close your trade and drop again.

            Good luck with your trading



            Originally posted by Dan Ace View Post
            Hedging can be good and very useful and there's a few reasons for that.. In the case of the Viper Draw Down in which he originally went long at 1.0973, lets say there was a hedged "short" position opened after the Usd/Cad pair broke the 1.09 level, the worst the draw down would have reached is about 1.5 % or -80 pips.. when the short hedged position reaches a few pips profit, you can then place your stop at +1 pip and no matter how far the Usd/Cad drops, the Draw Down will not get worse than 1.5 %... yes I understand that you can just close the original position for an -80pip loss, but if you feel that strongly about the currency pair reaching a much higher level than the original long position, then you can wait it out and trade other pairs while the Usd/Cad does its thing.. in my rules for hedging, I always open a larger lot size trade for my hedge position, so that if it really goes against me, then I will cover the loss of the original position as it drops, and if it turns up again and goes through the 1.09 level, then ill be stopped out for 1 pip profit and look forward to a push up to my original long trade.. it can work and it can be very useful, if that strategy was used in the current Viper Draw Down, there would have been no stress and no high draw downs involved and normal trading could have resumed for 2 months.. if the hedge position was bigger than the original long position in the Viper Draw Down, then with the Usd/Cad pair dropping down to 1.0620, we could have broken even a long time ago with no one stressing and sweating..
            .

            Another good use for that strategy is, if you wanna take profit from the hedged trade, you can, and you can use the profits from that hedge trade to buy again much lower and aim for a 40 pip profit target, lets say from 1.0630 to 1.0670, and if you achieve that 40 pip target, you can then close both trades for a break even on the Usd/Cad transactions.. if you wait it out longer, then you will start making profits at any price over 1.0670. This is my opinion, my thoughts and my strategy.. I am not a full time trader, and ive only been doing forex for just over a year, but I am looking to doing it fulltime one day. Im not as experienced and not as forex smart as most of you here, but I can see how hedging can work very well.
            .

            P.S. I was getting paid swaps for the Usd/Cad sell positions, so I didn't see a problem there

            Comment


            • #7
              Well close the trades would also lock the DD.


              Originally posted by Dan Ace View Post
              In the case of Joel Krugers S&P disaster, a hedge position could have been placed after a 5%, 10% or 20% draw down or whatever, and he would never have reached the 30% draw down strategic closure for himself and his signals, and could have waited out a return to a profitable level, or, in the case of my strategy, a larger hedge trade, he would have been reducing his draw down as the S&P continued to go up towards the 2000 level, And thats another reason why hedging can be extremely useful and helpful.. Which is probably why some brokers don't allow it...

              Comment


              • #8
                Originally posted by Dan Ace View Post
                In the case of Joel Krugers S&P disaster, a hedge position could have been placed after a 5%, 10% or 20% draw down or whatever, and he would never have reached the 30% draw down strategic closure for himself and his signals, and could have waited out a return to a profitable level, or, in the case of my strategy, a larger hedge trade, he would have been reducing his draw down as the S&P continued to go up towards the 2000 level, And thats another reason why hedging can be extremely useful and helpful.. Which is probably why some brokers don't allow it...
                Dan thats not the reason why some brokers dont allow it. Opening a position on the other is literally meaning closing the position or vice versa.

                Also as you said in Joel's case, at what DD limit do you think he should have opened a hedge? 5%? what would have happened, if he had opened a hedge position at 5% and S&P, would have sore up again to go up? His DD will be at 5%, even though his first trade would be in profit by then. And dont tell me just because he opens a hedge, it still goes to 30% DD and give the second trade a huge profit. If he can predict that why take the first trade
                Trade the market, not the trader

                Comment


                • #9
                  Originally posted by spamme View Post
                  Hi,

                  @DanAce. Thank you for your answer. Well lets say Fx viper locks the DD to 1.5% with one hedge. Then U/Ca can do anything and you have still 1.5% DD. If U/Ca continue to drop then it is good todo so. If U/Ca start to go north then it is a bad strategy.
                  During your hedge you have less positions on market but you pay full price on swap.

                  Opening a larger position in your hedge is like closing all your trades on the market and open a trade that goes against your original trade.
                  If price continues to fall ( ex if original is buy) then you earn money. If price go north you give away more money.

                  You "bigger trade" hedge works well if your trade continue to fall but if it reverse when you open the trade then not to good.
                  Market can also bounce an close your trade and drop again.

                  Good luck with your trading
                  .
                  Thanks for your reply
                  .
                  I should have also mentioned that when im looking for a place to open my hedge position, I use a 7 pip stop loss to try and find the perfect place for a quick bounce like a support or resistance or a big level to have my hedge trade go into profit quickly so I can place my stop loss in 1 pip profit straight away.. it might take a couple of attempts to find a place to open a hedge position, but when you do, your DD wont get bigger, and if the currency pair continues to go against your original positions, then you will be reducing the draw down and possibly getting to a break even level, and if the market turns back to your original trades way, then you can look forward to seeing them get back in the green with your hedge trade being taken out with a 1 pip profit stop loss.. but I would never open a hedge trade without using a 7 pip stop loss.. for example I would try to sell the Usd/Cad at 1.09 or 1.08 with my stop loss a few pips over the big figure mark incase it breaks it...
                  .
                  With Joel Krugers S&P trades, he would have to find a good place to buy the S&P and put his stop loss in profit as soon as he can with a small stop loss in the search of the right place.. and as the S&P goes up, the Draw Down gets smaller.. if it goes down again, the hedge trade will be taken out for a 1 pip profit and the losses will get smaller with his original positions.. I would implement this hedging strategy after a 3% - 4% drawdown.. not when it gets too big..

                  Comment


                  • #10
                    @Dan Ace: Well close all trades and open a new trade with find the " looking for a place to open my hedge position" price would be the same.

                    Well You and I have different view on hedging on single pair. I just wrote this post to make a "watchup" and explain my view.
                    Looks like @SmartTrader is on my side.

                    I wish you good luck.

                    P.S I do not trade any signals here but have some contacts doing it so I post some comments here.


                    Originally posted by Dan Ace View Post
                    .
                    Thanks for your reply
                    .
                    I should have also mentioned that when im looking for a place to open my hedge position, I use a 7 pip stop loss to try and find the perfect place for a quick bounce like a support or resistance or a big level to have my hedge trade go into profit quickly so I can place my stop loss in 1 pip profit straight away.. it might take a couple of attempts to find a place to open a hedge position, but when you do, your DD wont get bigger, and if the currency pair continues to go against your original positions, then you will be reducing the draw down and possibly getting to a break even level, and if the market turns back to your original trades way, then you can look forward to seeing them get back in the green with your hedge trade being taken out with a 1 pip profit stop loss.. but I would never open a hedge trade without using a 7 pip stop loss.. for example I would try to sell the Usd/Cad at 1.09 or 1.08 with my stop loss a few pips over the big figure mark incase it breaks it...
                    .
                    With Joel Krugers S&P trades, he would have to find a good place to buy the S&P and put his stop loss in profit as soon as he can with a small stop loss in the search of the right place.. and as the S&P goes up, the Draw Down gets smaller.. if it goes down again, the hedge trade will be taken out for a 1 pip profit and the losses will get smaller with his original positions.. I would implement this hedging strategy after a 3% - 4% drawdown.. not when it gets too big..

                    Comment


                    • #11
                      Originally posted by SmartTrader View Post
                      Dan thats not the reason why some brokers dont allow it. Opening a position on the other is literally meaning closing the position or vice versa.

                      Also as you said in Joel's case, at what DD limit do you think he should have opened a hedge? 5%? what would have happened, if he had opened a hedge position at 5% and S&P, would have sore up again to go up? His DD will be at 5%, even though his first trade would be in profit by then. And dont tell me just because he opens a hedge, it still goes to 30% DD and give the second trade a huge profit. If he can predict that why take the first trade
                      All traders make mistakes in their trading, its times like that when you can use the 3% - 4% draw down hedge rule.. if youre original trade decision is right, then youre hedge wont be open for too long and you can take that measly pip.. but the hedge is there as a "Just Incase".. Joel would've been in roughly 50% drawdown now if he kept them open, a hedge at 5% would have stopped it at 5%.. a slightly bigger hedge would have seen him in profit now..

                      Comment


                      • #12
                        Originally posted by spamme View Post
                        @Dan Ace: Well close all trades and open a new trade with find the " looking for a place to open my hedge position" price would be the same.

                        Well You and I have different view on hedging on single pair. I just wrote this post to make a "watchup" and explain my view.
                        Looks like @SmartTrader is on my side.

                        I wish you good luck.

                        P.S I do not trade any signals here but have some contacts doing it so I post some comments here.
                        why close a trade at a loss when you can give them the chance at getting into profit again with a hedge that gets taken out at 1+ pip by a market that is turning back your original trades way?

                        just giving my views as to how hedging can help and be extremely useful.

                        Comment


                        • #13
                          One of my rules in trading is "When something doesn't go your way, sometimes the most reasonable course of action is to cut your losses and keep moving forward."

                          When you start to hedge you get the illusion that you can "save" your original trades. History show very often different results.
                          If you manage to trade with single "pair" hedge then fine. But in practice you close your trade when you hedge even if you do not like it.








                          Originally posted by Dan Ace View Post
                          why close a trade at a loss when you can give them the chance at getting into profit again with a hedge that gets taken out at 1+ pip by a market that is turning back your original trades way?

                          just giving my views as to how hedging can help and be extremely useful.

                          Comment


                          • #14
                            Originally posted by spamme View Post
                            One of my rules in trading is "When something doesn't go your way, sometimes the most reasonable course of action is to cut your losses and keep moving forward."

                            When you start to hedge you get the illusion that you can "save" your original trades. History show very often different results.
                            If you manage to trade with single "pair" hedge then fine. But in practice you close your trade when you hedge even if you do not like it.
                            Let's agree to disagree.. Every trader trades different and some traders hedge while others don't.. So far I've used my personal hedging strategy for only a few months, and It's worked out every time.. Gets me out of trouble time and time again.. Now I just gotta stop getting into troubling positions.. But I've got my get out of jail free card if I need it

                            Comment


                            • #15
                              Originally posted by Dan Ace View Post
                              All traders make mistakes in their trading
                              A losing trade is not necessarily a mistake. Nobody "knows" where the market is going, no matter what they tell you.
                              If you have traded according to your plan, and the trade goes against you too far, you are wrong and should close the trade, it was a losing trade, it is done and dusted, so what. This allows you to re-focus on the next opportunity.
                              I believe hedgeing the instrument in which you have an open trade is a loss aversion strategy,Traders hate taking losses and some will do anything not to take a loss. If you can't take a loss, you should not be trading.

                              Comment

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