Hedging, what it means?

waelmg,

I copied this post from another forum. The "who and the where" is not important and I removed all identification, so that I do not offend the author.

I wanted you to see another traders perspective on how he deals with emotions, eventhough some think the method may be mathematically wasteful and an illussion.


..if you leave the sl open, naked and just put a tp on each part a part b trade, and then use some of the wisdom discussed here for maximizing profits..you can build something the best of both worlds...it can be performed ranging or trending..

hedging a pattern is a diff way to trade...it solves the "pick a direction any direction..pick a price, any price" problems most traders encounter. It introduces NO new decisions...you must still make a decision about exit under any method...

How many traders have a 50% of better probability of success? How many traders acknoledge they have an average double digit pip drawdown in their performance, but choose not to cover that?

Mostly late, early, or just wrong on direction totally, descibes...hedging seems to help solve this for a trader, who is not accurate on short term direction.

I think most traders could at least learn much more without the pip by pip type of stress they ride through each trade...

I would rather yank a profit on a hedge..after a 200-500 pip range and call that a top or a bottom than at 60 pips intraday, and start looking for reversal.

All discussions here register the import of time and volatility ....you can hold a hedge as long as that takes! I cannot see many traders suffering through a -500 pip disaster in hopes of a return? After pattern completes for a hedges, at 500 pips, there is an entirely diff perspective on fear...you are still breakeven..there is no stress to do anything silly.

I think it is the MOST undervalued method of trading...mostly way understood and neglected...and definitely overtested to death...o wel...maybe that is why it works so well? I dunno

Without hedging, it is clear I would never trade spot instruments...period.





Quote from waelmg:

i wonder if someone can explain to me what hedging,having a trade in opposite direction, is used for?
assuming that the gain in one direction will balance the loss on the other, where is the benfit her?

thanks
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Quote from clemt:

You're right, long EUR/USD and short GBP/USD would essentially give you a long with EUR/GBP. That's why I called it a "partial-hedge" (maybe that's a misleading term). The reason I said that is because EUR/USD and GBP/USD are generally correlated to each other by a factor approximately between 0.65 and 0.95 for the past two years. So having known that, one can size the positions of the two pairs to do a "partial hedge".
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Yeap if you go long/short the same pair you have no position or your are just reducing exposure and paying the spread twice.

If you're long and short a correlated pair you have just brought a synthetic position is something else...

I believe the only way to hedge fx is with options or perhaps using euro with gold. (??)

good luck!
 
Quote from acronym:

I ...

They said "but-but-we dont allow it , so you cant and its silly" and promptly changed the topic.

...
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big clue right there. :cool:
 
Quote from Batman28:

that's ridiclous. you don't hedge by holding position in opposite direction of the same asset.

hedging is about hedging the risks involoved in holding the underlying asset, and if u hold the same asset in opposite direction, you don't even have a position.

a general hedge is hedge against the market so that you cut away the market risk involoved in ur trading, i.e. go long on the instrument u are trading and go short on S&P500 or Nasdaq100 (as if they are the 'market' and if they change greatly it can pose a risk to ur trading - of course this depends on the correlations).

anothe example is hedging credit risk, so you buy bonds and at the same time u enter credit default swap contract that protect u against the bond defaulting.

other examples you go long on a stock, at same time buying put options to hedge ur bet. or u want to sell call options and u hedge by buying the underling asset.

one good way of hedging is pairs-trading, finding two very similar companies in the same industry, going long in the dominant one, and shorting the 2nd one.. if market news is good, ull gain more, and if its bad, u should gain more again (again if u're pickings are right). this is called market neutral or stat-arbitrage strategy.

sometimes investing in other countries exposes u to FX risk, so you might need to hedge against $ or the local currency against the underlying asset (again this depends on correlation between the two).

in short, heding is about getting rid of the risks involoved in ur trading as much as u can. holding positions in the same way in opposite direction is not heding. u're basically closing ur position.


JUST TO ADD: as much as hedging is a great way to minimize ur risk - it will also minimize returns, and some major traders don't hedge at all for this reason - but it some have blown up pretty quickly. it really depends on ur approach and how important hedging is to you. some hedge funds are very succesfuly heding all their positions.. hope that helps.
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Batman28,

Thanks for saving me the 30 miutes I would have taken to type exactly the same sort of response... right on the money mate, well said.

And my 2 cents for overkill here: those "hedging" gadgets are designed for the mathematicaly chalenged. 1 long eur/usd + 1 short eur/usd = 0 eur/usd ... so why give your dealer 4 spreads instead of 2 ?... feeling charitable maybe ?
 
Quote from Jackjones:

Yeap if you go long/short the same pair you have no position or your are just reducing exposure and paying the spread twice.

If you're long and short a correlated pair you have just brought a synthetic position is something else...

I believe the only way to hedge fx is with options or perhaps using euro with gold. (??)

good luck!
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Right on the money there too. Wow, a thread with some sharp guys here (sadly rare)

Because FX pairs containing the same numerator or denominator, 3 pairs (ex; eur/usd, gbp/usd, & eur/gbp) will always have a perfect triangular relation. This makes FX one of the most difficult markets to hedge (unless using options... but even there, you are just playing on deltas).

In FX, in the end, outright positions with solid risk management is definitely the way to go.
 
The term "hedging" makes no sense when applied to spot fx. If you are long EURUSD, for example, and you want to reduce your exposure, you just sell some of your EURUSD. Selling GBPUSD to "hedge" long EURUSD is not a hedge...all you have then is a long EURGBP position.

Hedging in the context that makes sense for fx usually involves options. Let's say you have a EURUSD call option with 4 weeks remaining. You are generally bullish Euro but a strong CPI number takes $ higher, and you think the $ will generally be strong over the next couple of days. You don't want to sell your option (would get killed by the spread) but you want to lessen your expoure. So, you "hedge" your option by selling some spot EURUSD. When you want to be fully long EURUSD again (through your option), you just unwind the spot hedge.
 
there are all sorts of ways to hedge. by the way, most hedge funds are not hedged at all, in the sense the term was defined when the term "hedge funds" were invented.

here's an example of a hedged trade.

if i make a spread trade, say...

long YM, short ES. that's a hedged trade.

i am hoping the divergence between index performance will be such that the YM will outperform the ES.

which direction they take is irrelevant. and if the market tanks, i'm hedged, because i'm both long and short, relatively similar instruments.

if the YM goes up more than ES, this trade would make money.

even if BOTH go down, if the YM goes down LESS than ES, this would make money.

that's hedging.

if i am doing calendar spreads on a contango market in oil.

that's hedging. cause i am simultaneously long and short. hedged trades TEND to have little market risk.

if i own 1000 shares of ABC in my B&H account and have realized a 70% gain in a week. i know earnings are a week from now. i don't want to sell (tax reasons or whatever). so, I buy some puts to lock in my price. the puts will go up correspondingly if the price drops, such that I am effectively locking in my current price/profit in ABC - that's hedging.

if i own a house, have realized X% gains, and want to lock in profit but don't want to sell, so i short housing futures in my market. that's hedging

if i have 100,000 bushels of corn to deliver in December, but I want to hedge against price drops in corn, i short the equivalent amount of corn futures.

that's hedging
 
Maybe theres a fine line between a "hedge" and just an aggressive bi-directional price fluctuation strategy.

If you ask, "am i going to lose ALL of this risk capital if this screws up", and the answer is no, then near as i can tell your hedged , it depends on definitions really.

:)
 
And...Dont forget to mention the 'Texas Hedge' which is achieved by the simultaneous purchase of the underlying asset and its respective call
 
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