I am interested in hedging to improve my trading.....Can you give an example of hedging vs stops to increase my education in this arena. I mainly trade indices ftse and ASX, WTI and a couple of currencies. My own limited efforts at "hedging" have mainly involved (sometimes) correlated markets to Ftse 100 - cable and WTI.
If you don't want to thats fine and understandable.
Cheers, Swiss
The simplest hedge is entering an opposite position of the same instrument. the next level is to do the same but with different lot sized, this is useful to recover a position that is already at a loss. the 3rd level is a correlation, less direct and results not always as expected (as you probably experienced)- for US index use the VIX, Europeans use the VSTOX, for nikk225 use the USD/JPY, ect.
an example of the simplest form:
say you long the dow at 21,000 with a target of 21,250
normally a 20,900 stop might be placed. Instead of the stop you place an SE STOP (in effect a short) at 20,900 initially with a 20,950 stop on that
Doing this fixes the potential loss at 100pts but with no urgency to do anything- now go have a beer, come back in ½ hour to decide what to do.
You have several choices that can be done at any time.
a)wait for a recovery, the short will be stopped at 50pt loss but the original position will go as originally planned
b)if there is no recovery then marry the 2 positions and you lost the 100pts regardless the price but you had a chance to recover (In this circumstance I would enter a new long at the lower price)
c)manually manage the short... change the stop to a trailing stop or close the short when you think the recovery has started, you then get a profit on the short as well as profit on the original position.
Refining the technique using levels appropriate to circumstances and/or different size lots will allow you to recover from almost any bad position with minimal loss or indeed a profit.
I once recovered from a direct shares position that I let go to half its value by entering an opposite 3 times the size of the original position. A $30k loss turned into a $2k profit. (I then bought again at a very low price, 6 months later I closed at $60k profit, total net +$62k v -$30k had I not hedged)
The discipline is to nurture every trade to a profit rather than just work on "win some, lose some" takes a bit of work but it's worth it. During the 24th August flash crash, I was looking at $380k loss on my longs but the 4,500units VIX hedge was $450k in profit. When the recovery started, I exited the VIX positions at $200k profit and went on to recover all the loss of the longs plus $80k profit. During BREXIT & TRUMP Election, much the same... had VIX hedges so I just let my longs ride, both events I didn't cut any position and went on to make 6 figure profits on the recovery
