Using a hedge instead of a stop

[oldtime]

the point is, he's thinking about trade management and money mangement and not pinning all his hopes on guessing which way it is going based on some secret market reading technique.

True, no money management technique can save you from bad guessing, and in most cases hedging and spreading is always worse than just taking the loss, but at times it can be a game of inches, and a diversified approach, even though it keeps you out of the big move you are going to eventually need, may make you trade small enough to protect you fom the big move that would have wiped you out.

What was it that Winston Churchill said? "After having exhausted all other possibilities, people will eventually do what is right."

 

[galvinlee888]

Quote from Visaria:

I can't see how you make money from this, all you would do is lock in loads of losses.

Say you sell crude at 10000. It goes up instead and you buy at 10100. The market now goes to 10200. You exit the long position, making 100 ticks on that. The market now goes to 103. You are losing 300 t on the short. What do you do now? Wait for the market to go down? Suppose it doesn't and goes to 11000?

I agreed. He will eventually realised the gap between the loser and the new opening position become larger and larger. This approach only work when the instrument is perfectly revert to mean each time, which in realistic, it never happen.

The worst of this approach is that you will miss out the largest move due to the BS hedge position.- Look at what had happened on Wed. If you are in the right side ( long in SPY), you make a fortune; if you are in wrong side (short of SPY with tight stop), you only been kicked out from the market and so what ? - just have to wait for another opportunity. But if you are using "hedge", you end up with one long position that up by 40 handles and another one down by 40 handles, you close the one that up by 40 handles, and begin to "hope" revert to mean will happen eventually and the market will let your loser turn out to be a break even or winner ?

 

[oraclewizard77]

I don't think you can do a perfect hedge, but lets say you are unsure of the direction, so 1st you go long one market. Its not really moving, you go short another market. So one of these positions starts to move, you close the losing trade, and hopefully make more on the winner.

I have also had small stops, reversed, and made money, but also in a choppy market get stopped out again, so I then look to pick the right direction and hold for a longer target.

 

[oldtime]

Quote from oraclewizard77:

I don't think you can do a perfect hedge, but lets say you are unsure of the direction, so 1st you go long one market. Its not really moving, you go short another market. So one of these positions starts to move, you close the losing trade, and hopefully make more on the winner.

I have also had small stops, reversed, and made money, but also in a choppy market get stopped out again, so I then look to pick the right direction and hold for a longer target.

yeah, I think they already have a thread about that with 100,000 posts about why it doesn't work called "Long Straddles"

 

[SimpleTrades]

Quote from oraclewizard77:

I don't think you can do a perfect hedge, but lets say you are unsure of the direction, so 1st you go long one market. Its not really moving, you go short another market. So one of these positions starts to move, you close the losing trade, and hopefully make more on the winner.

I have also had small stops, reversed, and made money, but also in a choppy market get stopped out again, so I then look to pick the right direction and hold for a longer target.

I think you guys are really missing the point.

The hedge that I am talking about is no different than a stop or limit. By going long at price, p, when you are currently short at p, you are simply stopped or limited at p. The difference however is that you haven't closed the trade. As a result, the short and the long float, locking in your loss or profit at p. When you release one branch at some later point, minutes, hours, days later, you still have that profit or loss. Nothing has changed. Releasing the branch simply opens up a new trade that you can trade independantly. However, instead of starting at 0 you start at the price of the open branch, b. Therefore, your profit is the change in the price with b as your base profit rather than 0.

For example: if you start at -25 and it move to -15, you have earned a profit of -15 - (-25) = 10.

I'm surprised that people can't see this, and keep searching for reasons why you are losing money this way or are charged more fees.

For now, the only advantage that I see is that it reduces slippage and avoids the black swan situation where there is a sudden abrupt change of price.

 

[oldtime]

Quote from bhardy307:

I think you guys are really missing the point.

The hedge that I am talking about is no different than a stop or limit. By going long at price, p, when you are currently short at p, you are simply stopped or limited at p. The difference however is that you haven't closed the trade. As a result, the short and the long float, locking in your loss or profit at p. When you release one branch at some later point, minutes, hours, days later, you still have that profit or loss. Nothing has changed. Releasing the branch simply opens up a new trade that you can trade independantly. However, instead of starting at 0 you start at the price of the open branch, b. Therefore, your profit is the change in the price with b as your base profit rather than 0.

I'm surprised that people can't see this, and keep searching for reasons why you are losing money this way or are charged more fees.

For now, the only advantage that I see is that it reduces slippage and avoids the black swan situation where there is a sudden abrupt change of price.

that's nothing short of brilliant. I don't know why we didn't see it before. Now that you explain it it is so obvious. We should have a party every year to celebrate the club in the know. I'm in. Are you in?

 

[falcon]

I can see it and it makes so much sense. Another way to explain it could be:

your simply taking off the winning branch (lets say it's the long one) when you think it's ready to go against you thus locking in the profit then as it goes down you can buy back the losing side even if it hasn't gone back to it's orginal shorted price. The profit is the difference between the profit of the long minus that of the short you bought it back for.

Now if the long was to continue going up after you took it off thats the trade at risk as short is now losing more than the profit amount you got for your long, thats where short options come into play.

 

[SimpleTrades]

Quote from oldtime:

that's nothing short of brilliant. I don't know why we didn't see it before. Now that you explain it it is so obvious. We should have a party every year to celebrate the club in the know. I'm in. Are you in?

I never claimed it was brilliant. It is just a different way of looking at a stop or limit.

No need for sarcasm.

 

[Pekelo]

Quote from ScoobyStoo:

You cannot hedge using the same instrument.

With CFDs you can. Glad to help you..

Also, if you have 2 broker accounts.... Of course you need double the margin...

Now back to the original question. The 2 approaches are pretty much the same, except margin and money tied down considerations. When you get stopped out, you have your money back and you can enter another instruments etc. If you are both long and short, double your money is tied down until you remove at least one side...

Not to mention "hedging" is really a bullshit word. With hedging you remove the risk, but you remove the reward too, and you need to time anyhow the exits to make a profit, so you might as well just use a stop...

 

[SimpleTrades]

Quote from falcon:

I can see it and it makes so much sense. Another way to explain it could be:

your simply taking off the winning branch (lets say it's the long one) when you think it's ready to go against you thus locking in the profit then as it goes down you can buy back the losing side even if it hasn't gone back to it's orginal shorted price. The profit is the difference between the profit of the long minus that of the short you bought it back for.

Now if the long was to continue going up after you took it off thats the trade at risk as short is now losing more than the profit amount you got for your long, thats where short options come into play.

That's what I (You and I) tried to explain earlier but we got a bunch of arguments about losses and more fees, but there are no losses or additional fees unless you close both branches at the same time.