I think I want to clarify one very important thing with respect to hedging, and I don't think I emphasized this at all. My approach is guided by market structure. Time gets in the way. I have found that using a hedge on the same instrument is only beneficial at certain points after a motive wave is recognized and it is protecting existing profit at certain junctures of retracement but, specifically where time and the end of the day gets in the way of the trend. Replacing the stop loss with a hedge is temporary and is valuable when there is a known wave structure, strong indication of expected target zone, and, a known past wave structure that provides a very good stop-loss zone (e.g. previous high if a short) for resuming the trend when the hedge is taken off.
Someone mentioned flash crashes. Most of the time, from my experience with all of the ones that I have seen, (May 6, 2010, Brexit, Trump Election, and a few other FOMC/ or other news driven events) I have either seen the potential coming and didn't trade (e.g. US elections) or I was with the primary trend because it was already heading in that direction. In the case of a black swan event, there are some certain circumstances where having the hedge (vs. holding a stop loss) can be of great advantage when it comes to a black swan event:
1) Protection of profit in a motive THIRD wave move (GIVEN) because of an expected news event (e.g. French Elections) and not wanting to rely upon a stop loss to protect the trade, but the expectation is a resumption of the trade after re-opening of the markets or the next day session.
2) Being part of an existing profitable position in a motive THIRD wave and coming up to an expected retracement zone with the idea that (a) stop loss at the previous high (assuming a short trend) is where you want to keep the stop loss, but you don't want to give up the profit from the potential retracement zone to the stop point AND (b) there is an end-of-day coming up and the market is stuck in a moment of indecision doing nothing before the end of market and the next expected trend down after the retracement zone has completed.
In this case, (a) put in the hedge, remove the stop loss at the previous high spot and (b) wait for the resumption of trading and the end of the retracement zone. No worries about any sort of unexpected opening move from news events or miscalculation of the wave structure. If normal wave structure resumes (which is most of the time) then, with each "edge off the hedge" after it is determined the type of retracement or the breakout zone back into the trend. Whatever is taken off of the hedge, that SAME amount of contracts is added back to the PREVIOUS high stop area in order to never have the trade exposed.
This keeps all the profit locked in place at the bottom of the retracement zone---with the end of day noise, evening noise AND eliminates the unexpected. Once the retracement wave is recognized, (e.g. narrow range of compression, flat corrective, zig zag, etc. and that it fits into the expected wave structure) the hedge can begin to be taken out at the peak points or at the breakout spot. The whole of the existing profit is stall intact and the stop is back to where it was ready to be brought down into the next previous high OR at the top of the retracement zone that just completed.
Since the market often doesn't move in US time perfectly, and cutoff times for the overnight bring the markets either to a crawl or provide great trend resumption, the ability to take off the stop loss and replace it with a hedge eliminates the black swan situation of earnings events or buyouts (e.g. Amazon/Wholefoods) and gives time for the resumption of trading with motive (versus the market just having no volume after resuming overnight).
