Using a hedge instead of a stop

The illogical nonsense in this thread is quite staggering. You cannot hedge using the same instrument. If you buy X units and then sell X units you are net flat. You have not hedged your position. You have exited your position. Please do not think you are hedging. You are simply entering, exiting and then reentering a position. It doesn't matter whether these execution decisions are based are multitimeframe analysis or not.

You are deluding yourself.
 
It absolutely IS better than using a stop. If your strategy is based solely on trying to time the market you're done. If you understand hedging properly you can put a position on indefinitely with very controled risk. There is still a timing element involved because you have to take the hedge off at some point in....time but just recognizing you have this option puts you well ahead of the curve.

Another thing you might want to look into is correlation studies among related instruments. Keep in mind, you're not the only one employing these strategies so you still have to have an edge over your competition. An edge can come in the form of a superior statistical algorithm that gives you the ins and outs.

Lots of ways to trade w/o stops. All stops guarantee is you'll get ruined by randomness.

Quote from bhardy307:

Recently, on my FXCM live account I have been experimenting with hedging. After studying this a while, it occured to me that this may actually be a better approach than a traditional stop.
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Oh Dear! Shame on me for not reading the rest of his post LOL. I stopped after the first paragraph :(

Quote from 76132:

OP look up 'Short against the Box"
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Quote from bhardy307:

Ok, that is definately a way to decide when to enter a trade. Now, you've gone long at 1200. It jumps to 1210, slides back to 1190 and hits your stop. Do you exit at 1190 and take your loss, or perhaps keep your long, and go short at 1190? At this point, you have locked in your 10pip loss + fees. Or have you? ES continues down to 1150, before gradually returning to let say 1180. You exit your short, take the 10pip profit. ES continues up to 1220. You exit your long and take another 20pip profit.

Your worst case scenario here is that you lose 10 pips + fee*2.

By the way, my profit expectation on these trades exceeds 100pips. The fee, which is the spread, of about 2 to 3 pips isn't excessive.
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man, things really have changed a lot. When did ES start trading in pips?

It's hard enough to make a living trying to guess if it will go up or down. Now I gotta make it go down, stop and then go back up like a trained dog?

When they stop charging commisions and the spread in ES goes to 2 or 3 pips I would consider yourself to be in either a very dangerous situation or a great opportunity.

otherwise, don't confuse the crap you can get away with in fx with the crap you will get nailed on in ES.
 
Quote from oldtime:

man, things really have changed a lot. When did ES start trading in pips?

It's hard enough to make a living trying to guess if it will go up or down. Now I gotta make it go down, stop and then go back up like a trained dog?

When they stop charging commisions and the spread in ES goes to 2 or 3 pips I would consider yourself to be in either a very dangerous situation or a great opportunity.

otherwise, don't confuse the crap you can get away with in fx with the crap you will get nailed on in ES.
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I think commission is the same. If you have a long term growth outlook but you get stopped out, you have to get back in at some point. So you buy twice and sell twice.

If you do what the OP says and short the stock while you are long, you also buy twice and sell twice.

Capital gains/losses should be the same either way. And in both scenarios, you are still trying to time the market at the exact same points.

Although there are some potential benefits from the OPs method. Tax benefits maybe although I think there are laws against that? Maybe you get to keep your voting rights since you are still long? Also, if you are also trading options, perhaps you need to be long for whatever reason. Perhaps you only want to stop part of the losses and short sell half your long position. For example, I'm long 100 shares, I have some sort of option position based on that long, but I short 50 shares to hedge half the losses. Maybe you can find an edge there, who knows? It's a lot of ifs and buts.
 
There is so much you can do if you start thinking outside the box and stop adhering to old school principles that everyone flocks to like lemmings.

OP, keep thinking like this and your edge will come.
 
Quote from falcon:

There is so much you can do if you start thinking outside the box and stop adhering to old school principles that everyone flocks to like lemmings.

OP, keep thinking like this and your edge will come.
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Exactly.

People, of course it is net zero! That is the whole point!

For example;

With a net zero you lock your losses on your stop without exiting the trade. TIME! Time to rethink your decision without realizing your loss or worsening your loss. Nobody, not a single one of you, no matter how expert you think you are, can know with certainty that your stop was correctly placed.

Example 2;

Your lock your profits over night. You come back the next morning and if there hasn't been a sudden move, you remove the lock.

etc.

This is just a couple of examples of where this can go.
 
You can't hedge with the same instrument..

However.... one of my plays is what I call the "hammer". This is a trade that I invented where I hedge with a correlated instrument. Basically, I scalp with the correlated instrument or what I call "market making".

This can work or it can hurt. The principle is to profit from the stop runs, the "surges", while maintaining a fundamental basis for a given position.

Today the "hedge" hurt me pretty bad... It turned a +$1,000 play into what might at best be break even now.

The whole concept of the play is that there is some momentum that will run you out of the play.. so you want to hedge against the negative momentum. If momentum doesn't lead to more price then you're just buying/sell the high/low though!!

You can also trade pairs like this... for example buy the weaker and sell the stronger. or buy the stronger and sell the weaker.

Does it work? It requires skill. I find it requires a lot more skill to "hedge" in this way then using a stop. You also tend to hold a larger open risk. And either side.. let's say you're trying to buy the stronger but you might actually end up buying the weaker... now you're in worse shape.

In either case.. I'm willing to share this because I don't think it represents a true edge. I have to time both sides or either side.. if you can't do that then no edge. It also requires a lot of "strength" if the hedge goes negative.. you have to really weigh if you can get out. A failed hammer trade may be unrecoverable if the market trends.

Again.. this type of trading requires serious skills. The easiest way to trade is just to use a very large stop. While sometimes, you can hedge out the momentum -- in other cases you will get "stuck". ... So as I say.. it can help or it can hurt. Today it hurt.

Keep experimenting.
 
Quote from falcon:

There is so much you can do if you start thinking outside the box and stop adhering to old school principles that everyone flocks to like lemmings.

OP, keep thinking like this and your edge will come.
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yeah, no kidding, learn the rules and understand why over time they work and then figure out how to break them.

Think outside the box to survive, then jump back in and act stupid and do what everybody else is doing to make your money.

Nobody but the lucky have ever made it trading outright. The rest of us are usually spread or hedged. But not all the time.
 
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