Stops or Hedges?

PennySnatch

PennySnatch

Team:

I know (or I think I know) the general goal of the game is: loose less/win more. So to accomplish this is it better/more professional to actively hedge a down position or use static stops? If you say hedge are you then hedging options to options or options to underlying or some combination of the two? Thanks
 
Uh-ohhhhh.
"Where does one trade end, and another begin?"

Using stops, each trade is explicit -- it's on, or it's off, 100%.
Even reverses are an instantaneous 2nd trade (in the other direction).

But with hedges? Say Trade1 (hedged by Trade2) is going poorly -- are you out of Trade1 entirely, or partially?
What about your hedge? If your hedge is doing well, and your expectation is that it will continue to do well, do you exit it and count your blessings? Do you ride it, and prepare a Trade3 hedge on this Trade2? Do you hedge 100% even? Or just halfway? "Oi!"
And what of those times when you wish to declare Trade1 a TFD, and wish to reverse entirely: do you do so via the hedge:Trade2? Or do you exit Trade2 while putting a full 180° on Trade2[x2!]???

Different beasties altogether.
One is clean, bifurcated, on/off.
The other -- is it a mirror hedge? A second-path-to-the-same-end hedge {e.g., "Belt & Suspenders"} or is it an uncorrelated hedge? "Yipes!"
And are you hedging 100%? 50%? 50% with a mirror, and 50% with something closely correlated? Ughhhhhh.

"Hope that helps!"
:D
 
ElectricSavant said:
But don't you need a catastrophic condom in case you can't pull out?

ES?
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Yes, you are right - there might be situations when one can not pull out from the market

But firstly, let me say that I am discussing intraday trading.

For the trading in the longer time-frame like days, weeks, months instead of mental stops real stops orders should be implemented and moved according with the situation, and hedging might be considered

As for the intraday, when the trader in and out of the market multiple times, I do not consider hedging as feasible option.

Nevertheless the situation when the trader can not get out of the position should be addressed.

There are a few options why/when the trader can not get out of the position:

1) The trading in the particular instrument halted due to some news, etc. It happens quite often in stocks for example. Solution - avoid trading stocks, and trade indices instead.

2) The trading in the whole market halted due to some catastrophic news, or sudden tremendous volatility, etc . Solution - avoid having position big enough that its drastic decrease in value (if trading is halted or your order to close it left unfulfilled) will be catastrophic to you. In other words there should be no catastrophes .. it maybe painful but should not be catastrophic. Also that happens, it happens quite rarely.

3) The trader lost control of the position due to the problems with his particular broker: broker's server failure or some force majeure. For the situation like that it make sense to maintain account with enough money in it with the different broker , so that you can immediately open the position there in the opposite direction.

4) Sudden problem with wireless communications. Internet /telephone shutdown... Shit happens. Solution - maintain the wired phone account, so you can reach your broker over the wired phone and give an order to close the open position.

5) The trader is suddenly incapacitated - heart attack in front of computer. For solution see number 2.
 
CrytpoTrading said:
I like to do both tbh.
Some trades I hedge and some I set TPs and SLs
More...

I am setting up a trend regime right now, wherein I long/short an index based on signals (so, no TPs, but Stops for sure) which will also use Stops for drops of 'a greater degree, but before the trend-based system might have time to react.' At the same time, a secondary assignment will be to inject a specific hedge trade (for example, a 2x or 3x index in the other direction) for a time-based counter-position (~<3days). Eyeballing this, it's worth some money, but it's a long way from live trades. 6-months to a year. LOTS of crunching. :D
 
tommcginnis said:
Uh-ohhhhh.
"Where does one trade end, and another begin?"

Using stops, each trade is explicit -- it's on, or it's off, 100%.
Even reverses are an instantaneous 2nd trade (in the other direction).

But with hedges? Say Trade1 (hedged by Trade2) is going poorly -- are you out of Trade1 entirely, or partially?
What about your hedge? If your hedge is doing well, and your expectation is that it will continue to do well, do you exit it and count your blessings? Do you ride it, and prepare a Trade3 hedge on this Trade2? Do you hedge 100% even? Or just halfway? "Oi!"
And what of those times when you wish to declare Trade1 a TFD, and wish to reverse entirely: do you do so via the hedge:Trade2? Or do you exit Trade2 while putting a full 180° on Trade2[x2!]???

Different beasties altogether.
One is clean, bifurcated, on/off.
The other -- is it a mirror hedge? A second-path-to-the-same-end hedge {e.g., "Belt & Suspenders"} or is it an uncorrelated hedge? "Yipes!"
And are you hedging 100%? 50%? 50% with a mirror, and 50% with something closely correlated? Ughhhhhh.

"Hope that helps!"
:D
More...

For 32 years, I use to think this way of being confused, and thankfully @tommcginnis wrote it exactly how I would think hedging to be. But it was a mixture of medical reasons and the challenge itself of taking confusion and "owning" it. The only sure thing in life we can count on is death, we all will die, we can say death = loss, this is absolute, cause we can not control life nor can we control profits. Spend enough time at almost any area of life that one concentrates their life, you can get pretty good ideas of overcoming challenges. And once you have spent many hours studying and back testing, you might be able to learn how to seldom lose. Think about it, most will take a 1 or 2% loss, but if you can most of the time, and no longer having losing trades but make money on what use to be a sure loss half of the time or more, you don't have to make same percentages of S&P Index to beat it cause drawdowns are much lower. Then you automate it, and never be "Ughhhhhh" again.

And I will use hedges for scalping when a report is coming out, stay even or ahead if wrong on the open position and reverse when coming back and make more. I love the challenge of overcoming my weaknesses. Knowledge is everything except what is in one's heart and you need to love what you do so it does not become a job.
 
Thank you everyone for your comments. I really appreciate it as I know it takes time and effort to craft a meaningful response to someone's question. On the same subject, Linda Bradford Raschke said something in a Money Show interview a while back that really hit a chord with me. She said something to the effect that: Even a random entry will have a positive expectancy with proper trade management. So what does that mean? To me it means you are managing both winners and losers beyond the dogma of stops and targets, and instead dynamically working with both outcomes with everything you have in your trading tool box (long list here/different for everyone). Moreover, the accepted wisdom of "Cut your losers short and let your winners run" sounds right, and I believe that it is, yet no one ever tells you exactly how to cut a looser short or a let a winner run. I'm finding in my own trading that the most effective method of applying this accepted wisdom is more complex than a simple and sometimes painful on/off approach, yet sometimes I can't help but feel like Vizzini.

 
Last edited:
Cut your losers short and let your winners run...use bracket orders and never widen your stop...

ES


PennySnatch said:
Thank you everyone for your comments. I really appreciate it as I know it takes time and effort to craft a meaningful response to someone's question. On the same subject, Linda Bradford Raschke said something in a Money Show interview a while back that really hit a chord with me. She said something to the effect that: Even a random entry will have a positive expectancy with proper trade management. So what does that mean? To me it means you are managing both winners and losers beyond the dogma of stops and targets, and instead dynamically working with both outcomes with everything you have in your trading tool box (long list here/different for everyone). Moreover, the accepted wisdom of "Cut your losers short and let your winners run" sounds right, and I believe that it is, yet no one ever tells you exactly how to cut a looser short or a let a winner run. I'm finding in my own trading that the most effective method of applying this accepted wisdom is more complex than a simple and sometimes painful on/off approach, yet sometimes I can't help but feel like Vizzini.

More...
 
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