Using a hedge instead of a stop

Quote from bhardy307:

Perfect negative correlation would produce a zero net result
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This is not true and asserting it is so betrays shocking ignorance of how Pearson product moment correlation is calculated.

You can prove this pretty easily in Excel. In the first column draw simulated returns from a normal distribution:

in a1 through a1000 --> = norm.inv(rand(),0.001,0.01)

In the second column enter this formula:

in b1 through b1000 --> = 0.002 - 0.1*a1

then calculate the correlation:

in d1 --> = correl(a1:a1000,b1:b1000)

You will get a correlation of -1, or perfect negative
correlation. Yet both have the same expected mean
return (0.0001). Trading the two together produces
a smoother rising equity curve than trading either
alone.
 
Quote from Kevin Schmit:

This is not true and asserting it is so betrays shocking ignorance of how Pearson product moment correlation is calculated.
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Gee, thanks for focusing on and ridiculing that part of my comments rather than focusing on my acknowledgement that I was uncertain:
"Anyway, maybe the experts will chime in and give you a better answer."

Tough to learn from you so called experts because you are overwhelmingly arrogant and full of yourselves.
 
Quote from bhardy307:

Gee, thanks for focusing on and ridiculing that part of my comments rather than focusing on my acknowledgement that I was uncertain:
"Anyway, maybe the experts will chime in and give you a better answer."

Tough to learn from you so called experts because you are overwhelmingly arrogant and full of yourselves.
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your response is pathetic.you have a feely good american education which results in an inability to accept or ignore criticism. instead of focusing on the personal part of his response focus on the part of his response that furthers your goal of understanding the solution better.
 
or you could have gotten off to a better start by simply asking, "Does anybody think it's a good idea to put on a hedge instead of using a stop?"

I think you've gotten so many replies becaause you remind a lot of us how it was when we were thinking, 'There's gotta be a better way!"

Funny thing about these hedges, they come and go in and out of fashion. They work, everybody uses them, then they don't work and nobody uses them anymore. But you never know when some young kid will come along claiming something works and everybody says no it quit working a long time ago only to find that it came back in fashion and is working again.

About every 20 years someone buys an old dusty book on point and figure and it gets revived again. There are times when everybody has to have the latest indicator, and then the pendulmn swings back to just plain old charts with nothing but support and resistence.

The big problems never go away and nobody has figured out an easy way to overcome them. But you never know, something may have changed when you weren't looking.
 
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.

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.
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I see you and totally agree. I think this deals more with time than anything. You enter a position, obviously you have to be sure on the direction. You lock in your loss with the hedge, but this allows for it to turn around within time. I like the idea of this, but your almost better off using options for this.

Another idea is if your really sure of the direction, when price goes against you you can enter another net zero position and take off the hedge when a piece of news comes out that starts the uptrend again. Not much different than a stop but gives you time on your side.
 
Quote from cyoungmark:

. You enter a position, obviously you have to be sure on the direction. You lock in your loss with the hedge, but this allows for it to turn around within time.
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Nevertheless, you STILL have to figure out the right direction, before you remove the hedge and try to make it back. Just because you temporarily removed the risk, it doesn't mean you are going to get reward when you put the risk back.

So in this regard, hedging doesn't give ANY edge. You still have to time the market correctly...
 
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