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Profitable hedging strategies?

  • Post #1
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  • First Post: Edited Dec 16, 2012 4:09am Dec 14, 2012 5:44am | Edited Dec 16, 2012 4:09am
There is many traders out there that use ... hedge strategy ... each have his own ... they are making lots of money ... never lose ... how is that even possible ... is there one of these traders in here -forexfactory- ... please share your strategy ... I have tried to make some money out of hedging ... in the beggining it was fun and profitable ... but there was a night that in a sudden seconds ... boooooooooooom ... equity droped 95% down to zero .... ....
let the chart to be your chauffeur ... -Forexmnstr-
Quoting forexmnstr
There is many traders out there that use ... hedge strategy ... each have his own ... they are making lots of money ... never lose ... how is that even possible ... is there one of these traders in here -forexfactory- ... please share your strategy ... I have tried to make some money out of hedging ... in the beggining it was fun and profitable ... but there was a night that in a sudden seconds ... boooooooooooom ... equity droped 95% down to zero .... ....

Same here mate. I also tried hedging and didn't work for me well. But still I like to do hedging. So if you guys have any profitable strategy please share.
I did not use hedge trading strategy so far because I don't have sufficient information about it. I am also highly excited to test it if someone share detailed information regarding this.
I believe is not that easy that someone will just post their serious work in here.
Any good thing cost a lot of time and money... But who knows.

I take advantage to place a bit of "help wanted" for this topic.
If a qualified mathematician (with some trading knowledge) in the house, please pm.
Been working a hedge concept with excellent results but in need of high math to sort
out some details and complete the coding. (no need for coders unless experienced
in Jforex multi-pairs backtesting).

Would get the right to unlimited use of end product for personal use. (mt4 and/or Jforex)

We are already in the neighborhood of 3%-7% per month in back-tests for last 8 years and
a few real accounts running 6 months with matched results. DD are reasonable small with a goal
of max dd "never" higher of twice the average monthly profit . We believe we can squeeze a lot
more from the concept.

The system will not be for sale. Team of 4 working full time in this project.. but none of us has
high and applied math knowledge.

Thanks
J.
No advantage can be created by hedging. Not trying to be a party pooper, but that is a fact. I will explain...

1 lot long + 1 lot short = no position

2 lots long + 1 lot short = 1 lot long

1 lot long + 3 lots short = 2 lots short

etc...


No matter what, the net effect is the same as just going in one direction (or taking no position in the case of equal hedge). It may actually be costlier if you hold the positions on rollover cause you will pay the difference in swap. My best advice is do not waste your time trying to figure out a way to beat the market by hedging. It does not exist. That is simple math.
Quoting 2+2=4ex
No advantage can be created by hedging. Not trying to be a party pooper, but that is a fact. I will explain...

1 lot long + 1 lot short = no position

2 lots long + 1 lot short = 1 lot long

1 lot long + 3 lots short = 2 lots short

etc...


No matter what, the net effect is the same as just going in one direction (or taking no position in the case of equal hedge). It may actually be costlier if you hold the positions on rollover cause you will pay the difference in swap. My best advice is do not waste your time trying to figure out...
This.

Not only costlier if you hold over rollover, but you pay the spread on your hedge as well, so unless the hedge had its own directional edge (that is, something you wanted to trade separately, and just happened to be 'hedged' but the trade signals, plan, and edge are entirely independent from each other) you'd just be paying more overall.

That's why so many people here call it "nedging", or Newbie Hedging. It makes little sense to build a trade plan around it and not being able to hedge should have zero impact on your overall ability to trade. Always think of your trades as a net 'exposure' and you'll see there's little need to hedge.
FXGears.com
.

Hedging in forex need to be treated exactly as hedging in the regulated markets/stocks.
No one that hedge in any other market buys and sell same symbol.. that would be
non-sense as stated by 2+2 and Jack in the previous posts.

J.
  • Post #8
  • Quote
  • Edited Dec 15, 2012 1:52am Dec 14, 2012 11:52am | Edited Dec 15, 2012 1:52am
Quoting jeuro
.

Hedging in forex need to be treated exactly as hedging in the regulated markets/stocks.
No one that hedge in any other market buys and sell same symbol.. that would be
non-sense as stated by 2+2 and Jack in the previous posts.

J.
Hedging through diversification is a different approach. I personally don't like to diversify too much, but I sometimes try to find separate instruments that can protect each other to the downside while at the same time not limiting each other as much to the upside. In other words, each instrument is self sustaining and has the potential to appreciate on it's own. It's almost like trying to find a synthetic arbitrage (but not really an arbitrage). Ultimately, one must ask themselves if the risk is worth the potential reward before putting money at risk. In some cases not "hedging" an instrument with something else and taking on the risk head on is worth it. Then there are times where it may seem better to diversify. It's all speculation haha.
I found two interesting thing ...

---1---
when you hedge ... for example ... if you have 1000$ in your account ... and you bought one lot EUR/USD @ 1.3050 and sold 1 lot @ 1.3000 ... you now holding a loss of 500$ ... equity 500$ ... you have a full hedge position ... now market went even lower to 1.2950 ... you decided to close your sell position @ profit 500$ ... becarefull equity are still 500$ ... the only thing that changed when you closed your sell position is your balance ... its now 1500$ ... now there is 2 cases ... case no. 1) if market retraces now to 1.3000 .... and you hedged your position by selling again ... you went back to break even point ... 1000$ equity - 1500$ balance- ... case no. 2) if market went against you when you closed your sell position @ 1.2950 that you sold @ 1.3000 and kept moving down ... here your losing alot of your account ... so before closing that sell position you should analyse market carefully ... you should know the exact time that price will retrace ... if not just keep your position hedged ... and start trading again ... as if that hedged position is closed ... untill your ready ( when you have analysed the market carefully ) ...

---2---
when you hedge ... keep scalping ... for example ... bought 1 lot eur/usd @ 1.3000 and sold one @ 1.2995 ... you close the sell position @ 1.2990 ... and when market retraces close the buy position @ 1.3005 ... and keep doing that ... but if market went down to 1.2980 ... and price didnt retrace when you closed the sell position @ 1.2990 ... just sell another lot there ... and keep doing that ...


-----------------------very funny--------------------
I know its not that easy ... price dont retrace all the time ... but do you have another way of hedging ... I think thats it ... ... thats hedge ... I know guys that you already know that ... but the missing puzzle is not with me ... lets just search for that puzzle ... and beat these guys that keep posting - there is no way you can profit from hedging - ... these guys that says so ... them are the ones that actually are making money out of it ( hedging ) and they dont want others to benefit from it ... so they post against hedging to minimize the number of traders that knows the missing puzzle ...
let the chart to be your chauffeur ... -Forexmnstr-
  • Post #10
  • Quote
  • Edited 1:54am Dec 15, 2012 1:25am | Edited 1:54am
Quoting forexmnstr
-----------------------very funny--------------------
I know its not that easy ... price dont retrace all the time ... but do you have another way of hedging ... I think thats it ... ... thats hedge ... I know guys that you already know that ... but the missing puzzle is not with me ... lets just search for that puzzle ... and beat these guys that keep posting - there is no way you can profit from hedging - ... these guys that says so ... them are the ones that actually are making money out of it ( hedging ) and they dont want others...
Here we go again. When someone like myself points out the uselessness of hedging, someone else claims it's a big conspiracy to keep others from hedging and profiting. Absolute nonsense. I NEVER hedge within same instrument. Please read my post again where I explain in a very simple fashion why hedging the same instrument is useless and actually costlier. It's simple math and common sense. If you don't understand it, then I'm afraid your totally lost. My suggestion is to stop trading until you understand why hedging is detrimental and not beneficial.

Quoting forexmnstr
I found two interesting thing ...

---1---
when you hedge ... for example ... if you have 1000$ in your account ... and you bought one lot EUR/USD @ 1.3050 and sold 1 lot @ 1.3000 ... you now holding a loss of 500$ ... equity 500$ ... you have a full hedge position ... now market went even lower to 1.2950 ... you decided to close your sell position @ profit 500$ ... becarefull equity are still 500$ ... the only thing that changed when you closed your sell position is your balance ... its now 1500$ ... now there is 2 cases ... case no....
You might think this example of hedging you wrote is clever, but it is far from it. This is exactly what your broker would love for you to do. Hold a net zero position while paying them extra swap and spread. Here's a better idea on how to handle the example you provide. Buy one lot at 1.3050 (without hedging). Cut your loss on the buy trade at 1.3000 (-50 pips) and immediately enter one lot short. Close short at 1.2950 for 50 pips profit. It actually has the same net effect while also paying less swap and spread. The sooner your mind can grasp this concept the better a trader you will be.
Quoting forexmnstr
There is many traders out there that use ... hedge strategy ... each have his own ... they are making lots of money ... never lose ... how is that even possible ... is there one of these traders in here -forexfactory- ... please share your strategy ... I have tried to make some money out of hedging ... in the beggining it was fun and profitable ... but there was a night that in a sudden seconds ... boooooooooooom ... equity droped 95% down to zero .... ....
May i know where did you get the idea of many traders out there use hedge and make lots of money? Which website/article etc?
I do not know why is so difficult for some to understand the real meaning of hedging but it is obvious that none that has posted knows
a "hedging strategy" profitable or not. And all the examples given are terrible, and not strategies at all. Sadly that is very common in the forex world.

Hedging is defined as an investment position to offset/minimize potential losses/gains. Big hedge funds do it all the time, wall street brokerage
firms do it all the time, and most of the time profitable. But always involve different instrument and/or symbols.

Now, it is true that if someone buys Euros in dollars (buy eur/usd) and later buys Dollars in euros (sell eur/usd) you are holding
2 currencies euros and dollars, but because your loans are also in 2 currencies that keep offsetting each other as the rates changes, then basically you stop your loss and that's it, but this act is far from being a "hedging strategy".

Now, nothing wrong if someone wants to do so, .. meaning cut your losses by buying the other currency instead
of selling the one you are holding immediately at a loss. Contrary to general believe it does not cost you extra money ( I guess there is an insignificant amount in swap that you want consider if wanting to do it with other currencies different then the Eur/usd )... but please, lets not confused this with an "hedging strategy".

So far no one has posted a "hedging strategy" here... and all the comments and opinions have been about non-strategies, but wrongly
called so due to little thoughts and study by themselves.

The true is that hedging strategies are the most guarded secret of hedge funds and Brokerage firms... that is why they hire Economists,
Mathematician, Programers, accountants, Sociologists and whathaveyou... to study thousand of instrument's, their behaviors in relation to each
to arrive to a logistic buying and selling sequence of multiple instruments that after a cycle end up in profits while being "hedged" or covered at all time.


Is that possible with forex pairs alone??? I think it is. But goes way behind of just buying the other currency of one pair.

J.
Quoting 2+2=4ex
You might think this example of hedging you wrote is clever, but it is far from it. This is exactly what your broker would love for you to do. Hold a net zero position while paying them extra swap and spread. Here's a better idea on how to handle the example you provide. Buy one lot at 1.3050 (without hedging). Cut your loss on the buy trade at 1.3000 (-50 pips) and immediately enter one lot short. Close short at 1.2950 for 50 pips profit. It actually has the same net effect while also paying less swap and spread. The sooner your mind can grasp this concept the better a trader you will be. __________________....
Lets do some calculation if really end up paying more spreads by buying the other currency instead of selling the one you hold immediately.
Lets calculate with a fixed 2 pips spread for simple calculations..


Buy 1 lot of euros at 1.3050 paid 2 pips
Sold the euros at 1.3000 paid 2 pips
Buy Dollars at 1.3000 paids 2 pips
Sold the dollars at 1.2950 paid 2 pips total paid 8 pips


Buy 1 lot of euros ..paids 2 pips
Buy dollars, paid 2 pips
sell dollars, paid 2 pips
sell the euros, paids 2 pips total payed 8 pips.

No difference isnt? Obviously, it is your ability to know when to enter and exit that would produce profits
or losses for you ... but that goes for the 2 methods.

Regarding the swap.. yes, you could end up paying some of your positions stay overnight.
But in the personal I do not worry much about it.. I mean if I did, and I never wanted to pay any,
I would have to close all my positions before midnite and re-open them after... but that would cost me a lot
more then the swap itself. I doubt you do that to save swap. But maybe you do have an strategy that "never"
required to keep positions overnight. That I do not know.

J.
Quoting 2+2=4ex
Hedging through diversification is a different approach. I personally don't like to diversify too much, but I sometimes try to find separate instruments that can protect each other to the downside while at the same time not limiting each other as much to the upside. In other words, each instrument is self sustaining and has the potential to appreciate on it's own. It's almost like trying to find a synthetic arbitrage (but not really an arbitrage). Ultimately, one must ask themselves if the risk is worth the potential reward before putting money...
Can you explain further?

My understanding is that all baskets ultimately resolve themselves into simpler positions, negating any advantage provided by the basket itself.
For example, if I'm long EU, long UJ and short GJ, then E/U x U/J / G/J = E/U x U/J x J/G = E/G, hence it's effectively no different to simply being net long EG (assuming suitably sized positions to balance everything; any imbalance could be replicated by trading a small second position).

Quoting forexmnstr
There is many traders out there that use ... hedge strategy ... each have his own ... they are making lots of money ... never lose ... how is that even possible ...
I don't believe that it is possible....... at least not for the retail trader, for the reason I just gave. Any opportunity for triangular/circular arbitrage would be fleeting, and more than likely outweighed by the spread.

2+2 and Jack have confirmed my views in posts #5 and #6. Also explained more fully in these threads, if you want to read them:
http://www.forexfactory.com/showthread.php?t=163814
http://www.forexfactory.com/showthread.php?t=137836
http://www.forexfactory.com/showthread.php?t=163467
http://www.forexfactory.com/showthread.php?t=264690
http://www.forexfactory.com/showthread.php?t=174626

Where did you get your info from?
Quoting hanover
Can you explain further?

My understanding is that all baskets ultimately resolve themselves into simpler positions, negating any advantage provided by the basket itself.
For example, if I'm long EU, long UJ and short GJ, then E/U x U/J / G/J = E/U x U/J x J/G = E/G, hence it's effectively no different to simply being net long EG (assuming suitably sized positions to balance everything; any imbalance could be replicated by trading a small second position).


I don't believe that it is possible....... at least not for the retail trader, for the reason...
i think you are mixing 'baskets' with 'hedges'. can't be arsed reading the links so perhaps i've misunderstood your post.

some people here are trying.... key word is 'trying'.... to explain here that NEDGING is NOT hedging, and that there is a very clear concept of what hedging is, and it is NOT what is essentially just closing a position (despite however many open 'tickets' MuppetT4 shows on the screen).

a basket is a basket and is it's own other thing. a hedge, as some are trying to explain it, is like expecting there to be a drought so you invest in water saving companies that appear to be solid expecting their business to become more profitable during the drought and therefore their stocks to also rise as a result. at the same time you also invest in what appears to be solid companies that manufacture a particular type of plastic because the water saving companies use this plastic to make their water storage products, but at the same time this same plastic is also used to create raincoats and umbrellas.

so, if there is a drought the water saving companies should turn bullish, and possibly the same with the plastics company. but if the drought doesn't happen and it becomes a rainy season then you lose on the water storage companies but still possibly break-even or come out ahead on the plastics companies.

or some shit like that. i'm just a nubcake.... watch me nedge my way to guaranteed profits hrughalguhagluah11!!1!

i should add that this is just a general rant and not really a reply to hanover who i'm sure knows what a hedge is. as for the rest of you who don't know what a hedge is, please go back to the rookie section where you belong and stop talking shit.
Congratulations ScalaFX for coming out of the closet!
Quoting nubcake
i think you are mixing 'baskets' with 'hedges'. can't be arsed reading the links so perhaps i've misunderstood your post.

some people here are trying.... key word is 'trying'.... to explain here that NEDGING is NOT hedging, and that there is a very clear concept of what hedging is, and it is NOT what is essentially just closing a position (despite however many open 'tickets' MuppetT4 shows on the screen).

a basket is a basket and is it's own other thing. a hedge, as some are trying to explain it, is like expecting there to be a drought so you...
Yes, that's pretty much the way I understand it, too.

Re mixing baskets and hedges: what is a basket, if it's not a collection of simultaneously open positions? And if the currencies in those positions cancel or overlap, then doesn't the algebra (as illustrated in my example) hold good?
Quoting hanover
Yes, that's pretty much the way I understand it, too.

Re mixing baskets and hedges: what is a basket, if it's not a collection of simultaneously open positions? And if the currencies in those positions cancel or overlap, then doesn't the algebra (as illustrated in my example) hold good?
yes, i assume so. i don't proof your stuff because in general there's no need.

my understanding of a basket is that it can be used to synthetically create a type of position that is otherwise not possible. jack_larkin explained it well in the pepperstone thread where leverage settings for certain pairs can be overcome by a basket of other currencies that don't have this same leverage restriction. and, of course, you have baskets that are an attempt at arbitrage... but good luck with that whoever tries it.

damnit, now i need to go and re-read your post and the links to see exactly where you are coming from.

all of this shit is like cracking and hacking. two terms that at some point basically swapped meanings with each other. with anyone who knows the difference you actually have to specify which version you mean, the original meaning or the current meaning. it's the same with this hedging bullshit. it's become so mainstream now to refer to 'closing a position with a new opposite bullshit market maker ticket in MuppetT4' as hedging and brokers also refer to it like that now as well. now you have to differentiate between hedging in the actual sense versus the bullshit mainstream idiot sense. lame.
Congratulations ScalaFX for coming out of the closet!
Quoting nubcake
yes, i assume so. i don't proof your stuff because in general there's no need.

my understanding of a basket is that it can be used to synthetically create a type of position that is otherwise not possible. jack_larkin explained it well in the pepperstone thread where leverage settings for certain pairs can be overcome by a basket of other currencies that don't have this same leverage restriction. and, of course, you have baskets that are an attempt at arbitrage... but good luck with that whoever tries it.

damnit, now i need to go and re-read...
Before you do a lot of (possibly) unnecessary reading....... The links aren't specifically about baskets, in fact more about the futility of nedging.
Quoting jeuro
I do not know why is so difficult for some to understand the real meaning of hedging but it is obvious that none that has posted knows
a "hedging strategy" profitable or not. And all the examples given are terrible, and not strategies at all. Sadly that is very common in the forex world.

Hedging is defined as an investment position to offset/minimize potential losses/gains. Big hedge funds do it all the time, wall street brokerage
firms do it all the time, and most of the time profitable. But always involve different instrument and/or symbols....

That meaning of ( hedging ) is the exact meaning that banks and forex whales wants you to know .... but the real meaning of profitable hedging is kept with the whales ...
let the chart to be your chauffeur ... -Forexmnstr-
Quoting forexmnstr
That meaning of ( hedging ) is the exact meaning that banks and forex whales wants you to know .... but the real meaning of profitable hedging is kept with the whales ...
oh here we go... another one to add to the list.

/thread
Congratulations ScalaFX for coming out of the closet!
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