Forex hedging journal
- Thread starter pbw
- Start date
Thurs March 6 --6:00pm
GBP/USD - 2.0113 =neg 263 pips
EUR/USD - 1.5394 = +179 pips
total= neg 84 pips
Still in the game --stop loss is 100 pips
and EUR/GBP--.7652 = neg 7 pips.
So for the previous posters, may you explain where is this correlation you were talking about. If hedging GBP/USD against the EUR/USD is equivalent to the EUR/ GBP (which is minus USD) --why do we have a neg 84 and neg 7 pip difference --why are they not more similar?
ALthough you are paying two spreads as opposed to one spread --you can see there is a big pip difference between the two methods.
With the EUR/GBP you are guessing one direction. With the hedge you are also guessing one direction but protecting your self against another currency pair for protection if you are wrong.
Hence why do some of you say hedging currencies do not work? My guess that GBP/USD was to go down was wrong -hence I in the neg 263 pip loss --however I protected myself with the EUR/USD by going long (though I thought it too looked like it was going short) -- and it is up +179 pips. This allows me to suffer a 84 pip loss as opposed to a 263 pip loss. The hedge is not over, it may still correct itself as the stop loss set is 100 pips.
So why does hedging currencies not work?
Please no smart ass responses...
GBP/USD - 2.0113 =neg 263 pips
EUR/USD - 1.5394 = +179 pips
total= neg 84 pips
Still in the game --stop loss is 100 pips
and EUR/GBP--.7652 = neg 7 pips.
So for the previous posters, may you explain where is this correlation you were talking about. If hedging GBP/USD against the EUR/USD is equivalent to the EUR/ GBP (which is minus USD) --why do we have a neg 84 and neg 7 pip difference --why are they not more similar?
ALthough you are paying two spreads as opposed to one spread --you can see there is a big pip difference between the two methods.
With the EUR/GBP you are guessing one direction. With the hedge you are also guessing one direction but protecting your self against another currency pair for protection if you are wrong.
Hence why do some of you say hedging currencies do not work? My guess that GBP/USD was to go down was wrong -hence I in the neg 263 pip loss --however I protected myself with the EUR/USD by going long (though I thought it too looked like it was going short) -- and it is up +179 pips. This allows me to suffer a 84 pip loss as opposed to a 263 pip loss. The hedge is not over, it may still correct itself as the stop loss set is 100 pips.
So why does hedging currencies not work?
Please no smart ass responses...
Not sure why the EUR/GBP pair only losing 7 pips versus your two separate trades resulting in a net neg 84 pips has not convinced you to trade the one pair directly and lose the slippage and extra costs. I think you proved that your so called hedge is nothing more than a directional bet on EUR viz a viz the Pound.
I disagree, I think you can hedge the $ by being say long EUR/USD and short GBP/USD.
However, the reason I have not done it in a very long time is that the GBP has stronger and longer range of movements in a short time frame than the EUR.
This is why using this strategy by itself does not work.
However, there are certain periods of time when this strategy does work and you can make money on both sides of the trade when you don't use a stop.
Obviously, I will not tell you when to use this strategy since I will not give away my edge even though I don't do it much anymore since those that I help manage trades for don't like me not using stops.
However, the reason I have not done it in a very long time is that the GBP has stronger and longer range of movements in a short time frame than the EUR.
This is why using this strategy by itself does not work.
However, there are certain periods of time when this strategy does work and you can make money on both sides of the trade when you don't use a stop.
Obviously, I will not tell you when to use this strategy since I will not give away my edge even though I don't do it much anymore since those that I help manage trades for don't like me not using stops.
The Eur/GBP only lost 7 pips b/c it barely moved in the last few days. Whereas there was lots of movement in the GBP/USD(moved 263 pips) and EUR/USD (moved 179 pips) --
so where is this correlation that was talked about? It was argued that EUR/GBP is the same as GBP/USD & EUR/USD but there is only one spread as opposed to the two spreads. Any clarifications appreciated.
Again why have some said hedging currencies do not work. What is the rational behind the statement. Eager to know your thoughtful views.
so where is this correlation that was talked about? It was argued that EUR/GBP is the same as GBP/USD & EUR/USD but there is only one spread as opposed to the two spreads. Any clarifications appreciated.
Again why have some said hedging currencies do not work. What is the rational behind the statement. Eager to know your thoughtful views.
No, this is exactly why the stratedgy does work imo. The goal is to take advantage of the difference between the range of movements betwen the currecny pairs
However, there are certain periods of time when this strategy does work and you can make money on both sides of the trade when you don't use a stop.[/QUOTE]
The goal is not to make money on both sides -- that rarely occurs -- the goal is to make more pips on one currency pair than the loss on the other currency pair.
Current Market Rates
EUR/USD = 1.5374
GBP/USD = 2.0108
EUR/GBP = .7645
If you are trading 100k lots then you are trading 100,000 units of EUR and 100,000 units of GBP. The dollar value of 100,000 units of EUR is $153,740. The dollar value of 100,000 units of GBP is $201,080.
If you buy one lot of EUR/USD and sell one lot of GBP/USD then you are net short $47,340 of the GBP. (153,740 - 201,080).
If the EUR/USD drops by 1% you lose $1,537.40 on your EUR/USD trade.
If the GBP/USD drops by 1% you make $2,010.80 on your short GBP/USD.
If you bought the EUR/GBP you would have broken even if both the EUR and GBP dropped 1% against the USD.
The profit of $473.40 is based purely on your position size.
This is the primary reason why your trades of EUR/USD plus GBP/USD are not the same P/L as your EUR/GBP trades.
Trading one lot of EUR/USD and one lot of GBP/USD is not the same as trading one lot of EUR/GBP. You would need to trade 1 lot of GBP/USD and 1.3079 lots of EUR/USD to be the same as one lot of EUR/GBP.
Hope this helps
The main reason to hedge a trade is that you want some protection if you are wrong assuming you don't already use a stop.
For example, lets say you want to go long GBP/USD but if the trade goes against you, it will activate your EUR/USD short position.
This way instead of having a hard stop, lets assume the $ strengthens in a sharp move that you were unprepared for, you lose less money than if you just went long GBP/USD.
However, the problem that I have seen is that the GBP moves a greater distance than the EUR/USD, so shorting the EUR/USD did not provide much if any benefit vs having a hard or mental stop.
For example, lets say you want to go long GBP/USD but if the trade goes against you, it will activate your EUR/USD short position.
This way instead of having a hard stop, lets assume the $ strengthens in a sharp move that you were unprepared for, you lose less money than if you just went long GBP/USD.
However, the problem that I have seen is that the GBP moves a greater distance than the EUR/USD, so shorting the EUR/USD did not provide much if any benefit vs having a hard or mental stop.