The recent decision by the NFA in the US to ban "hedging" is arguably the most controversial measure put forward by this organization in an attempt to tighten regulation in a notoriously unregulated area of trading.
"Hedging" is defined in this context as having 2 open trades in opposite direction of a same instrument (i.e.buying and selling at the same time).
The argument put forward by the NFA after listening to some "commenters" is that "hedging" is not beneficial to the traders since "mathmatically" speaking, when you are hedged your chance of making any profits is zero, while the costs of the transactions and rollovers will gradually eat up your account.
If you visit various forums on the web, those arguments have been rehashed ad nauseam, with some posters gleefully deriding those who defend "hedging" as "noobies" and worse.
I think the NFA decision is wrong for several reasons.
First off, if the NFA is thinking that " traders do not know what they are doing, so we have to protect them from themselves", that attitude would be qualified as paternalistic at best and bordering on fascism at worse. After all, cigarette and alcohol are much more detrimental to some people and they are not banned, are they? Hedging is just a tool, like a kitchen knife, and would it be logical to ban its use to save a few from hurting themselves? There are of course those who argument the same result could be achieved with different tools, and so much the better, but in that case woudn't it be discriminatory to disallow the use of free choice? To illustrate further the absurdity of it all, should we ban the use of chopsticks in Chinatown since forks and spoons could be used for the same purpose (getting food into your mouth)?
The second reason is that the assertion that you can not gain when "hedged" is rather simplistic. Trading is not static in nature, and the ebb and flow is what make "hedging" an effective tool for those who know how to use it. Personally, I don't use hedging all the times, but when I do use it, I always end the trading session in profits. Isn't it what counts after all?
Thirdly, an (unintended?) consequence of the NFA decision is that it has pushed a number of traders who want to keep hedging into transferring their accounts offshore, possibly into the arms of non-regulated brokers and thus putting their money at risk. Those who want to stay have been offered some types of "workaround" by the brokers, like one using 2 different accounts, one to buy and one to sell, with possibility to transfer money back and forth between the accounts as needed. This method changes nothing to the fact the trader still has to pay the extra spread, rollovers and MARGIN (which usually did not apply under the old type hedging), and increased risk of BLOWING BOTH ACCOUNTS, which certainly is counter to what the NFA is aiming to achieve, i.e. protecting the traders from themselves and from the big, bad brokers.
"Hedging" is defined in this context as having 2 open trades in opposite direction of a same instrument (i.e.buying and selling at the same time).
The argument put forward by the NFA after listening to some "commenters" is that "hedging" is not beneficial to the traders since "mathmatically" speaking, when you are hedged your chance of making any profits is zero, while the costs of the transactions and rollovers will gradually eat up your account.
If you visit various forums on the web, those arguments have been rehashed ad nauseam, with some posters gleefully deriding those who defend "hedging" as "noobies" and worse.
I think the NFA decision is wrong for several reasons.
First off, if the NFA is thinking that " traders do not know what they are doing, so we have to protect them from themselves", that attitude would be qualified as paternalistic at best and bordering on fascism at worse. After all, cigarette and alcohol are much more detrimental to some people and they are not banned, are they? Hedging is just a tool, like a kitchen knife, and would it be logical to ban its use to save a few from hurting themselves? There are of course those who argument the same result could be achieved with different tools, and so much the better, but in that case woudn't it be discriminatory to disallow the use of free choice? To illustrate further the absurdity of it all, should we ban the use of chopsticks in Chinatown since forks and spoons could be used for the same purpose (getting food into your mouth)?
The second reason is that the assertion that you can not gain when "hedged" is rather simplistic. Trading is not static in nature, and the ebb and flow is what make "hedging" an effective tool for those who know how to use it. Personally, I don't use hedging all the times, but when I do use it, I always end the trading session in profits. Isn't it what counts after all?
Thirdly, an (unintended?) consequence of the NFA decision is that it has pushed a number of traders who want to keep hedging into transferring their accounts offshore, possibly into the arms of non-regulated brokers and thus putting their money at risk. Those who want to stay have been offered some types of "workaround" by the brokers, like one using 2 different accounts, one to buy and one to sell, with possibility to transfer money back and forth between the accounts as needed. This method changes nothing to the fact the trader still has to pay the extra spread, rollovers and MARGIN (which usually did not apply under the old type hedging), and increased risk of BLOWING BOTH ACCOUNTS, which certainly is counter to what the NFA is aiming to achieve, i.e. protecting the traders from themselves and from the big, bad brokers.
