Hedging

[nunrgguy]

Whoa, this is getting interesting but I'm getting confused. Anyway, I'd just leave hedging now as it is obviously not for beginners. Thanks for the input guys.

Absolutely, if you're just starting out don''t touch it with a barge pole

 

[Joey25]

All that that hedging means in the FX context is that unless you explicitly close an existing position a fresh order will be opened. To have two open positions when you could be flat is inefficient since both orders now have to be separately closed, hence increasing spread costs.

In practical terms, however, it is very feasible to have a long-run system and a short-term system giving conflicting signals and in different notionals. It might be convenient to run them separately and think of the extra spread as the price paid for less hassle.

 

[scose-no-doubt]

All that that hedging means in the FX context is that unless you explicitly close an existing position a fresh order will be opened. To have two open positions when you could be flat is inefficient since both orders now have to be separately closed, hence increasing spread costs.

In practical terms, however, it is very feasible to have a long-run system and a short-term system giving conflicting signals and in different notionals. It might be convenient to run them separately and think of the extra spread as the price paid for less hassle.

what if you hedge against another cross or using options?

 

[Joey25]

what if you hedge against another cross or using options?

I would say that in the first you still end up with, for example:

+200 million Yen
-2 million US
+ 5 million GBP

so it just creates a portfolio of directional positions.


The last one is a true economic hedge - removing some of the risk of one position by taking an offsetting position in an asset that shares some, but not all, of the characteristics of the original.

 

[Rhody Trader]

what if you hedge against another cross or using options?

Options can create interesting hedging situations with all sorts of different possibilities.

Hedging with an other pair, though, generally just creates a different position. For example, if you are long EUR/USD and want to hedge that by going long USD/CHF what you've essentially created is a long EUR/CHF position.

 

[BILLV]

Hi Guys
I thought I'll bring this thread back to life.
What about this scenario where you took a long position on EUR/USD (after you read some +ve news on Euro) but unfortunately the price keeps falling.

Looking at the daily EUR/USD chart the price should recover in an hour or so
but what are you going to do now?

Are you going to hold the trade till the price comes back?
Are you going to set a stop loss and exit the trade?
or is it better to hedge your position by taking an opposite trade going short?

Assuming that the price does recover, your short trade would have made a bit of money and when the direction changes we can close the short position and watch our long position come back to +ve ground.

If the price keeps falling we can exit the trade and suffer the small (managed loss)
What do you think?

 

[Rhody Trader]

Putting on an opposing position is the same as exiting the trade - full stop.

So long as both positions are active you can neither make nor lose. It's only when one leg is taken off that you can again see market moves impact your P&L. Meanwhile, doing the extra trade will have cost you the spread again.

 

[BILLV]

Putting on an opposing position is the same as exiting the trade - full stop.

So long as both positions are active you can neither make nor lose. It's only when one leg is taken off that you can again see market moves impact your P&L. Meanwhile, doing the extra trade will have cost you the spread again.

Hi John

Sorry for the late reply, I didn't get a notification of your post.

Yes you are right about the double spread but the first spead is gone anyway due to our incorrect entry. I just thought of using this strategy at times (as an option). I've used it succesfully so far a few times but I can't use it in such a bullish market.

The risk is when we have a VERY bullish or VERY bearish market when a price keeps going and doesn't look up, if the price cycles the strategy should work

 

[tarrentino]

Putting on an opposing position is the same as exiting the trade - full stop.

So long as both positions are active you can neither make nor lose. It's only when one leg is taken off that you can again see market moves impact your P&L. Meanwhile, doing the extra trade will have cost you the spread again.

Not sure I agree with this. Having a fully hedged position is hardly the same as being flat - sure.... you're account equity won't be affected by the hedged positions assuming swaps cancel each other out..... BUT..... you have the option to close down one leg of the hedge at any time you want.

Practically this can be applied in all sorts of circumstances eg:
-protecting large profits in a long term position trade from short term negative price action
-protecting short term trades which didn't go to plan initially. Why get stopped out if you can sit and wait for the market?
-Arbitrageurs - who hedge the spread during decoupling from the mean - eg Metatrader Advanced Statistical Arbitrage products.
- inter and intra market hedges using positively and negatively correlated assets.

Managing hedged positions is tricky and takes a lot of skill, nerve and judgement. Basically hedging is an advanced trading strategy which is used extensively by commercial traders all over the world to protect equity during adverse market conditions.

 

[Rhody Trader]

Not sure I agree with this. Having a fully hedged position is hardly the same as being flat - sure.... you're account equity won't be affected by the hedged positions assuming swaps cancel each other out..... BUT..... you have the option to close down one leg of the hedge at any time you want.

And how is this different from opening a new position any time you want?

Practically this can be applied in all sorts of circumstances eg:
-protecting large profits in a long term position trade from short term negative price action
-protecting short term trades which didn't go to plan initially. Why get stopped out if you can sit and wait for the market?
-Arbitrageurs - who hedge the spread during decoupling from the mean - eg Metatrader Advanced Statistical Arbitrage products.
- inter and intra market hedges using positively and negatively correlated assets.

Managing hedged positions is tricky and takes a lot of skill, nerve and judgement. Basically hedging is an advanced trading strategy which is used extensively by commercial traders all over the world to protect equity during adverse market conditions.

Do not conflate the offsetting retail forex traders call "hedging" with the type of hedging commercials, etc. do. An institutional trader would never call taking an opposing trade in the same security a hedge. That's closing the position and eliminating all market exposure. The type of hedging they use keeps at least some kind of market exposure (we're not talking arbitrage here, as that looks to capture mispricing, which isn't the same thing as hedging).

 

[tarrentino]

And how is this different from opening a new position any time you want?



Do not conflate the offsetting retail forex traders call "hedging" with the type of hedging commercials, etc. do. An institutional trader would never call taking an opposing trade in the same security a hedge. That's closing the position and eliminating all market exposure. The type of hedging they use keeps at least some kind of market exposure (we're not talking arbitrage here, as that looks to capture mispricing, which isn't the same thing as hedging).

Technically speaking you are correct - a hedge would normally be executed using another correlated asset class or a derivative of the original asset. However, opposing positions in the market (opened at different levels) opens up opportunities to trade out of each leg profitably depending on price action. I think this is what the original poster was trying to get at. Obviously opening long and short positions at the same price is completely pointless but I don't think this is what the guy meant.

 

[Rhody Trader]

However, opposing positions in the market (opened at different levels) opens up opportunities to trade out of each leg profitably depending on price action. I think this is what the original poster was trying to get at. Obviously opening long and short positions at the same price is completely pointless but I don't think this is what the guy meant.

I realize that's not what he meant. My point is that there is absolutely no difference between exiting an open position at price X and putting on an opposing position ("hedge") at price X, nor is there any difference between opening a new position and taking off one leg of a hedge. In the first case you're zeroing out your exposure and locking in a gain/loss. In the second case you're re-establishing a directional exposure after having been flat.