No More “Hedging” for Forex Traders


The National Futures Association (NFA) has a new ruling which goes into effect on May 15, 2009. It addresses the practice of “hedging” in forex trading, which is the act of holding both long and short positions in the same currency pair at the same time. Here is what the NFA had decided:

Offsetting Transactions

New Compliance Rule 2-43(b) requires an FDM to offset positions in a customer account on a first-in, first-out basis, thereby prohibiting a trading practice commonly referred to as “hedging.” A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size. Rule 2-43(b) is effective for any positions established after May 15, 2009. Offsetting positions that were established prior to the effective date do not have to be liquidated, but once either position is closed out after May 15, it may not be reestablished as a hedge.

From the NFA’s April 13 press release.

Basically, what this means if you attempt to go long and short the same pair at the same time you will be end up with no position – your broker will offset them against each other and you’ll have no trade left open. For those who trade with brokers like Oanda, this is no change at all as that’s always been the case. Traders with other brokers who have allowed “hedging” will see that change shortly.

If you’re not aware, NFA is the industry organization to which forex brokers in the U.S. belong now that the CFTC has been given regulatory authority over forex trading (FDM stands for Forex Dealer Merchant). It does things like setting the minimum capital requirements for the brokers. The bottom line is that between the CFTC and NFA forex brokers are no longer unregulated in the U.S.

I have long made my feelings about this so-called “hedging” known (see How do you hedge in the forex market?). It probably goes without saying that I am quite happy to see this rule put in place because I have always considered the allowing of this “hedging” by brokers to be nothing more than a way to bilk their customers out of extra pips with zero benefit to the traders.

Addendum
A forex (and futures) broker contact of mine says he made the following comment about the new rule:

Regarding hedging it is my understanding now that day traders can still hedge but cannot hold overnight yet if one opens a new position after the beginning of a new session that just happens to hedge an open position from the previous session…

Even so I don’t really care, what I do care about is the NFA wanting to convert spot to futures with their FIFO rule for getting out of orders – I have a huge problem with that.

I don’t know if the overnight thing is true or not.

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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
** See John’s full bio.

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  • Durka

    “hedging” is just an expensive way of being flat, used by muppets who dont really understand what they are doing, and by unscrupulous FX brokers who are happy to charge the muppet twice for the spread and interest on what are basically concurrent offsetting positions.

    • http://www.theessentialsoftrading.com John

      Durka, I couldn’t agree more.

  • Al

    Hedging is a prime way to keep money management at bay while waiting for break out positions. These people have probably never put a trade on in their life. If you are going to regulate then offer options in the same arena. Now you have to have two separate accounts to keep you positions safe.

    The whole world needs to be safe right? Give me a break!

    • http://www.theessentialsoftrading.com John

      Al – There is no such thing as “keeping money management at bay”. Do the math. It makes absolutely no sense to use a “hedge” to make a straddle play. You are always better off putting your trade entry orders as the point where you’d cut out the opposition position to let the winning one run. If you believe otherwise, please, provide an example of what you’re talking about.

  • Al

    John- Prime example is what I just did. I took a long position on a break out from a pennant formation. It goes against me, I take a short position on it until I clear the long or take profit on the short at the other end of the pennant. Hedging adds safety to my trade until i determine correct direction of the trade. It’s keeping money management at bay like I said.

    • http://www.theessentialsoftrading.com John

      Al – “Hedging” effectively closes out your trade. That, of course, is the ultimate safety, so your point is taken. That said, however, if you do the math you will see that you’re never better off doing a “hedge”.

  • http://www.theessentialsoftrading.com John

    I got a response from a former colleague on the NFA subject. He actually works for a forex broker now, though on the analysis side. He hadn’t heard about the ruling, but made the comment:

    “hard to imagine they need a rule, but it is a pretty shady market in many respects…”

  • fxretracer

    I know all the pro traders say “hedging” is no good. I have to agree for the most part…hedging has worked out good for this “muppet” trader less times than it has gone badly I have to admit.
    I try hard to not hedge, and only do it to lock profits when I dont want to exit a position but do have profits in it.
    That said it has helped me out of some binds also. I am also a real noob in trading really, only a few years. Hedging has been working out for me more than it has not in recent months. Could be I am learning how to trade better. Its too complex to explain I feel, sort of an individual thing and style imo.
    I still see it as just meddelsome gov regs getting in the way …I can learn better w/o government interferance thanks!

  • Max Robespierre

    Just another rip-off, from the rip-off society. You lose another “Spread” on top of whatever you’ve already lost. Thanks a lot

  • Todd

    I found something by someone that has traded the forex market for years that explains why hedging can be so useful:

    “Hi, Here is the e-mail you asked me to put together and send to you in reference to Hedging.

    I am a Forex Trader/Investor. I have 3 Live Accounts with 3 different Forex Brokers. I trade Full Time for a Living. Forex Trading is Our Only Income. I was extremely shocked to hear all the buzz in the Forex Community that you guys were trying to Ban Hedging. Then, I saw in one of your e-mails about it and almost passed out. I started to wonder, whose side are you guys on?

    If you Ban Hedging, you would essentially be giving the Forex Brokers/Market Makers a License to Steal from Us the Consumer. Here are the reasons you should Never Ever, Ever Ban Hedging, if, your purpose is to Protect the Consumer/Trader/Investor.

    The Forex Market is extremely volatile. When Trading, you Always have to Protect Your Account Balance either, with a Stop Loss (which the Brokers and the Market Love) or a Hedge Position (which the Brokers and the Market Hate) if the market turns against you. If you Do Not use one of the 2 above mentioned Protections, you could Lose, and probably will Lose, your Entire Account Balance, and be out of business.

    When you use a Stop Loss the Brokers know exactly where all the Stop Loss Orders are, and often, the price will magically reverse and go up through price areas where people would put, and do put stop losses. (This is called a stop run. This is done intentionally by the Brokers/Market makers) I have seen this happen daily for almost 4 years now.

    For 3 years I have taken a beating in the Forex Market due to being Stopped Out and taking loses. My loses STOPPED when I learned about Hedging!!! Up until recently, the Brokers had a field day with my Stop Losses. Now that I know about Hedging, all 3 of my Trading Accounts have grown instead of shrunk.

    Just yesterday I had a situation where I sold the EUR/JPY and it mysteriously started going the wrong way. I double checked all my reasoning for selling the pair and couldn’t figure out why it was going up. (This happens in the Forex, sometimes Mysterious, and Magical Moves Happen with No Explanation)

    After I was down over $2,000.00 per account (over $6,000.00 total) I bought the pair with the same amount of lots, Stopping My Loss without having to Close My Losing Position and Taking a Real Loss of over $6,000.00. (Or, in other words, I put on a Hedge) (If there was no Hedging, I would have had to use a Stop Loss and incur the Loss of over $6,000.00)

    After putting on my Hedge, I went to sleep, this was at about 4 am est. The next day I looked at the charts around 1 pm or so. I saw that the EUR/JPY had moved up substantially while I slept. (Boy was I glad I put the Hedge on when I did!!) Anyway, the Pair was showing clear signs that its move up was over, and that it was going to go down now. I closed out my Hedge and banked over $7,500.00 per Account or ($22,500.00 Total) Now I only had to wait for the price to move down to where my negative on my initial trade was at minus -$7,500.00 or less and close it out, thus giving me a break even or a profit depending a what price I was able to close out the losing end at.

    I ended up closing out my losses at minus -$6,000.00 thus making $1,500.00 per Account or ($4,500.00 Total) because I was able to Hedge, If not, I would have lost over $2,000.00 per Account or (over $6,000.00 total)

    This is not an isolated incident. Because of being able to Hedge, I am now a profitable Forex Trader able to beat the Brokers/Market Makers at their own game.

    PLEASE DO NOT TAKE AWAY HEDGING AND GIVE BROKERS A LICENCE TO STEAL!!!!!

    HEDGING PROTECTS THE CONSUMER FROM THE BROKER AND THE MARKET ITSELF!!!!!!!”

  • Al

    John- See Todds story, that is what I’m talking about. Hedging protects you not hurts you. With all the crap that is written out there, the dealers and market makers are making too hard to trade Forex. They rely on the glutton of advertising to draw new people in every day and take their money. Micro accounts, seriously! They want every dime and they will get it. Hedging keeps you in the game long enough without being exposed to the market makers, now you might make some real money. Again, I will go back to the idea, why don’t they offer Options in the same arena? Simple, they don’t want you to protect your assets and they don’t want you in their sandbox.

    • http://www.theessentialsoftrading.com John

      I have responded to Todd’s story with a new post entitled Forex “Hedging” Continued.

      As for options, there are platforms which offer options trading. Oanda, for example, does so with what are called “boxes”. Options trading, though, has some serious pricing and valuation issues for the brokers, so it doesn’t surprise me that it’s been slow to develop.

  • JM

    Does the rule only apply to fx futures or to rolling spot as well? Also, does it only apply to same size trades?

    We use an automated program that relies on being both long/short the same market at the same time but in differring lot sizes and is very profitable. We only trade rolling spot however and not futures.

    • http://www.theessentialsoftrading.com John

      JM – The rule applies to spot. Futures (and basically every other market) are already handled that way.

      • Brad

        Hi John set yourself up with offshore entity then use an aggregation platform that can combine the 2 feeeds with a (single prime broker or multiple prime brokers) and you can still legally do it.If you have a postion trade long for example Weekly,Daily time frame and a short term Swing trade short say 60 minute that would be the only non crazy approach I could think of to hedge but on the same time frame with 2 rolls and 2 spreads that makes as much sense to me as the Fed leaving interest rates too low for too long.

  • DB

    This anti-hedging rule is INSANE! I, for one, am sick and tired of big government playing nanny in the markets. Hedging can be a very useful tool under the right conditions, one of which is explained in Todd’s post above. Used badly, it’s a way for brokers to gouge customers with double spreads and carrying interest, BUT IT SHOULD BE THE DECISION OF THE INFORMED CUSTOMER WHETHER OR NOT TO HEDGE, NOT THE GOVERNMENT!

    I trade with a partner. We have spent several months developing a successful automated trading robot that relies on hedging to manage risk under certain market conditions. This new rule exposes our strategy to sufficient additional risk that we may now have to throw the whole damned thing out. Needless to say, I’m pissed! How can we get in front of this thing and stop it???! There has to be a way.

    A couple of other things:

    1.No, we have no intention of selling our robot like all the scammers. Ours really does make money and we intend to make money with it. not sell it. So I’m not bragging about our bot to get anyone to buy it. It’s not for sale.

    2. Hey, Jim Hensley! Yeah you, Durka, the muppet meister! Before you go spouting off about how anyone using hedging is a muppet, try crawling out of your dark little closed minded trading cave and consider that many idiodic things concocted by pea brained bureaucrats sometimes may, and many times do have unintended consequences.

  • steve

    That is BIG BROTHER telling all the Sheapl whats good for them, & to the ones that agree with this is stupid since they didnt hedge to begin with & should be non of their biz unless ofcourse they are PLANTS

  • GP

    ‘The Essentials of Trading’ mentions offsets, often referred to as ‘hedging’ – Offsets can be an important tool to freeze a losing trade at a fixed loss, with the possibility that the trade can recover, with the added advantage of the offset ‘offsetting’ the margin already used, as this ‘counter trade’ is in the opposite direction- an additional cost is of course the spread, but this is usually quite negligible. If the trade doesn’t recover, with this method the loss can essentially be frozen at a fixed level.
    I am a little confused about what the measure is really saying…If this new measure would somehow result in a trader being unable to place offset trades, I can imagine the consequences of these trades now being rejected, creating dangerous new situations by disabling traders’ ability to protect themselves- as well as a high cost of compliance from revisions to platforms and software developers’ products.

  • GP

    Just to clarify, the assessment about offsets is not taken verbatim from John’s great book, but is from my experience as a useful tool- Thanks. GP

  • http://www.theessentialsoftrading.com John

    GP – Glad you like the book.

    The measure would not prevent offset trades from happening. Quite the contrary. It would treat the going long when short and going short when long as exactly what they are – offsets.

    As you noted, this “hedging” locks in a loss (or gain) at a fixed point. That’s exactly the same as if you exited the position. Basically what the NFA is doing is forcing forex brokers to treat offsetting trades in fx the same way they are treated in all other markets.

  • Durka

    DB, please explain how being long and short at the same time is any different from being flat?

    If you are long and start to lose money, and open a concurrent sell to “hedge” – you become delta-neutral, you neither gain nor lose from the movement of the underlying – its the same as being flat, except you have paid an additional spread on the trade, and are also being charged double interest on margin for a long and a short trade.

    The exact same result (but cheaper, and therefore more profitable) could be acheived by closing the long instead of “hedging” it, and opening a new trade at the point you would have originally intended to exit the hedge.

  • Al

    Hedging has been used for years by banks and firms on the stock market, why is forex any different?!?! Banks and firms would not hedge if it didn’t work, hedging is different now because the investor is beating the broker. We are all grown up and know the risks involved, and don’t need “big brother” telling us how to trade. That’s bs, nobody can stop you from going to the casino and losing all our money. If anything a martingale strategy is a dangerous strategy one should be protected from. Do you know of any firms or banks that use martingale..NO!! but you don’t see anybody stopping us from it do we? because the broker wins in that deal. The NFA is not protecting the investor they’re protecting the members (brokers) of their association just like in a homeowners association. I have tried thousands of strategies, but the only ones that have worked our the ones that use hedging somewhere in the strategy. You could use all the indicators and expert advisors in the world, but nobody knows what the market is going to do. Hedging protects you from uncertainty and keeps you in the game longer per Todd’s example story above. I have been in that position many times, and have come out on top due to hedging. Anyone who says hedging doesn’t work has iether A) never used it or B) working for the NFA. The bs excuse the NFA gives is ridiculous!! Here is a quote from the compliance rule

    “the customer pays carrying charges that +++ALWAYS EXCEED THE FUNDS IT RECEIVES++++. In a normal transaction, a customer receives “interest” on the long position
    and pays “interest” on the short position . Since the two transactions are mirror images,
    you would expect the receipts and payments to zero out. In practice, however, the
    amount a customer receives on a long position is always less than the amount a
    customer pays on a short position . Since these transfers occur daily when the positions
    roll over, the loss increases continually over time…”

    Yes, of course, the carrying charges are always more than what you get paid on, but your strategy is not based on that. If taking an opposite position is going to make or protect you money then you’ll take it and that WILL EXCEED the charges. AND your don’t always pay swap unless you carry the tradeto the next day, SO this concern is not valid.

    I may have not explained everything clearly but you can read these two articles and decide for yourself.

    http://www.pipcop.com/forums/site-info-announcements/199-fyi-new-nfa-rule-no-more-hedging-may-15th-2009-a.html

    http://nondealingdesk.com/showthread.php?t=2529

    • http://www.theessentialsoftrading.com John

      Al – I appreciate the regulators shouldn’t protect us from ourselves angle.

      As for the banks, etc. hedging in stocks and whatnot, they do so across markets and/or with different instruments. The definition of hedging in every area of the financial markets except retail forex trading most definitely does not include going long and short the same instrument at the same time. It involves things like selling index futures to hedge a stock portfolio against an adverse moment in the market. That is hedging. When financial institutions do the long/short thing retail forex traders have dubbed “hedging” it is considered an offset in their systems just as the NFA is mandating.

      I would argue that your success trading with “hedging” has zero to do with the hedging and 100% to do with your ability to pick the right points to make your entries and exits. To use Todd’s example, he made money because he picked the right spot to be short (removing the long) the second time around and it made back more than he lost on his initial short.

  • DB

    Durka, hedging is more accurately a method of rendering a position inert (and therefore zeroing out additional risk, both up and downside) while market conditions are unfavorable to the position. If you want to call that flat, then call it flat.

    One key market condition where hedging is very useful is retracement. Elliott Wave Theory is built on retracement. If you know the market will retrace, and can detect the retracement event, It can be a very profitable strategy to hedge a position that is moving against you and then wait for the retracement. Hedging will renders a losing position inert through the wrong-way trend with no additional risk or loss. When the retracement is detected, the offset trade is removed for a profit. The original trade then moves favorably to recover earlier losses. If at the end of the day, the position nets out even with no gain and no loss, the only short term cost is the double spread cost. On a highly liquid pair with a 1 or 2 PIP spread, the cost of the hedge is 2 to 4 PIPS. I’ll take that every day against the 1 to 3 PERCENT! stop scenario that is promoted by most trading coaches.

    Here is an example. Take a look at USDCHF in December 2008. If you had gone long on 12/9 with a 100 PIP stop loss, you would have hit the loss, licked your wounds and moved on with a lower balance in your account. If instead you had hedged at the 100 PIP loss level, you would have ridden the trend down an additional 1662 PIPs to the bottom on 12/18 with no additional loss or margin consumption, detected the retrace, removed the hedge, taken the profits from ride to the basement, recovered your original 100 PIP loss and then taken a 613 PIP REAL PROFIT the next day. And all for the cost of double spread and a few days carrying interest.

    And you say: “I can do all that without a hedge!”. And I say: “Sure you can Forest, but you’ll do it all naked, take all the risk, and hold up a big neon sign for your broker that says “Here are my stops, come and get em, and when you’re tired of that, don’t forget to call my margin!”.”.

    If big brother is going to decree no hedging, then they should outlaw insurance all together. After all, insurance costs money and that’s unfair! Gimme a break. Big government interference in the liberties of the free market is tyranny! The good and proper role of government in the free markets is to ensure transparency. Full transparency to all market mechanisms and actions will dramatically increase the honesty coefficient and eliminate the need for big brother Gestapo regulations. But alas, that will never happen as long as the government’s goal is power acquisition to force equal outcome for all rather than the efficient operation of free markets.

  • Daniel Su

    Well, the stopping of hedging does not really affect me much because I don’t use it in my forex trading at all. I believe hedging is only good for institutions who know what they are doing and what they are dealing with. For uneducated traders who use hedging, I think they are just trying to be more ‘professional’ and thinking that hedging actually makes a lot of money.

    I personally encourage and advice people who use hedging before as their trading strategy to start a new ‘life’, using traditional, simple trading systems will be adequate to profit from the market.

    Regards,
    Dan

  • Al

    AMEN DB, there is no “stoploss hunting” or immediate margin calls by brokers. Two big money makers for brokers, which are being protected by banning hedging. Dan I wish you luck on your naked approach, but I believe you can use hedging to protect you from the two broker money makers. For example, I don’t have all the time in the world to baby sit my trades, so I will place a hedge to keep me locked at a set margin until I figure out what I want to do with a trade. Your less susceptible to the SL hunting or unexpected news event spikes that will take out your 1-3% stop loss without hesitation.

    The main point I would like to get across is that you have options and more time to analyze when you hedge.

  • Adrian

    And I say: “Sure you can Forest, but you’ll do it all naked, take all the risk, and hold up a big neon sign for your broker that says “Here are my stops, come and get em, and when you’re tired of that, don’t forget to call my margin!”.”.

    No one is forcing you to use broker-held orders, sheesh.

    The change won’t prevent you from executing orders any differently so maybe drop the hysterics. It’s just observing that what you call a “hedge” is in fact going flat and closing the position. If you do this with a broker-held stop order or you do it with a bot or discretionary, it doesn’t matter and doesn’t change anything. Your strategies will work exactly the same, you just won’t have two opposite positions in your blotter.

    The Man isn’t crushing the little guy, it’s a very simple, cosmetic change. Calm down and breathe or when a real change hits may explode.

  • fxretracer

    I find it facinating what a hub-bub hegdging always sparks in the forex world. There must be some mighty big interests involved is all I can figure.
    Last night I short eu and made 20 pips, I had to go to sleep so “hedged” still in the “hedged” trade with profits locked in.
    That someone thinks this is lousy trading on my part is the usual adhominum(did I spell that right) charecter debasing strategy all insane folks use to distract from the truth. They do this to turn the subject on you, rather than the subject at hand.

  • Adrian

    Last night I short eu and made 20 pips, I had to go to sleep so “hedged” still in the “hedged” trade with profits locked in.

    Will your trading be seriously affected if you have to say that you closed the trade for a 20 pip profit and are looking for a chance to re-enter?

  • fxretracer

    Adrian,
    Your point is valid, but I dont see what that has to do with my trading style, or how I chose to trade.
    Are you saying how I did what I did is not proper, and the Gov should ban me from it?
    Great I wish the Gov had stepped in yrs ago if they know so well how I should trade.

  • DB

    “All tyranny needs to gain a foothold is for people of good conscience to remain silent.” – Thomas Jefferson
    “I believe it is peace for our time . . . peace with honour.” – Neville Chamberlain
    “The Man isn’t crushing the little guy, it’s a very simple, cosmetic change.” -Adrian

    Psychology is a substantial component of market trading. Above, Al states: “I don’t have all the time in the world to baby sit my trades, so I will place a hedge to keep me locked at a set margin until I figure out what I want to do with a trade.” and “The main point I would like to get across is that you have options and more time to analyze when you hedge.”

    Every successful trader uses a trading system in which they are psychologically comfortable. Same pair offset positions are structurally inherent in the forex spot market. If a structurally inherent mechanism of a market leads a trader to believe they have reduced uncertainty and risk and makes them more comfortable in the market and hence a more successful trader, the government should not step in regulate the mechanism away because it poses a risk to those who know not how to properly use it. If the government wants to regulate away structural risk in one case, why not all cases? After all, clearly the objective is equal outcome, not equal opportunity.

  • Adrian

    Are you saying how I did what I did is not proper, and the Gov should ban me from it?
    Great I wish the Gov had stepped in yrs ago if they know so well how I should trade.

    How has the government changed anything about how you trade? Please let us know since that’s what this whole discussion has been about and no pro-hedge person has yet answered.

    Notice that the orders you use will be identical and have the same effect, there will just be some cosmetic differences for how the records are kept. Your trading style will be unaffected!

  • fxretracer

    I just dont appreciate the way it means I have one less way of trading at my fingertips.
    I cant really say if this will hurt me or not for sure…my feeling is it will, since hedging has got me out of many a bad trades, many like Tod described.
    I also think anything that takes more choices off the table will certainly hurt me too.
    I dont like it, and it will make me get another broker out of the US one day I imagine, but then thats goal right? Weaken the US any way possible..especially when it comes to competing globaly in the financial markets.

  • Bob

    I have a “hedging” strategy that just this last week has made over 86% Could I perform this strategy without “hedging” yes, but the EA becomes MUCH more complex since it would have to try to mimic what I am doing with the hedge with partial closes blah blah blah. I guess I’m moving my account out of the US.

    • http://www.theessentialsoftrading.com John

      Bob – Do I understand you correctly that you are “hedging” trades done by your EA and that is not part of the actual operations of the EA?

  • Al

    Adrian, to answer your non-hedge question, when you hedge it’s like pausing your position in time, allowing you to analyze and decide whether you want to get out and close all positions in profit or ride a retracement w/out worrying to much about a margin call. Plus you don’t have to worry as much about price spikes whether they be dealer induced or news events. Check out the EvolutionX and Robominer EAs which have been live forward tested on the pipcop.com website and have proven to be the most successful of all the EAs tested. These EAs don’t use tons of indicators just simple hedging strategies. I am not trying to solicit any EAs or websites I am just sharing my experiences.

  • Adrian

    @fxretracer: I just dont appreciate the way it means I have one less way of trading at my fingertips.

    That’s what I don’t understand. No tools are being removed, no order types are changing, you’ll still be able to do everything you’ve done before in exactly the same way. The only difference is that instead of having a long & short position appear in your records, you’ll be flat. How can you interpret this as meaning you have fewer ways of trading?

    @Al: when you hedge it’s like pausing your position in time, allowing you to analyze and decide whether you want to get out and close all positions in profit or ride a retracement w/out worrying to much about a margin call

    The point is that you have effectively closed your positions. With no positions and no market exposure, you can decide whether to stay out with your realized profits without worrying about margin calls or retracement, or to re-enter. The orders you’d place are the same.

    Why are you getting so worked up by some minor changes to the backend mechanics when you’ll only notice some minor changes in your records? You can still think about it as “hedging” if you like, only now instead of being effectively flat you will actually be flat.

  • DB

    Adrian, I think you just don’t get it. You’re absolutely right in your assertions about the ability to implement the same trading strategy with our without hedges. Nobody is arguing that. The thing you don’t get is that hedging is an algebra that abstracts lower level mechanisms making them easier to employ and manage. Bob is absolutely right when he says his EA will now be more complex. We’ve come to the same conclusion. We can acheive the same thing we do now, it will just be a lot more complex.

    Those of us who use hedging successfully understand and accept the idea that we have to pay for the higher level of abstraction we enjoy with hedging. Its like the difference between manual and automatic transmissions. Some people prefer not to be forced into manually working the gears. Perhaps the government should outlaw automatic transmissions because there are people who don’t understand that automatic transmissions cost more to buy and maintain. After all, they can get where they need to go using a manual transmission. Its a matter of freedom of choice. Traders should be allowed to choose in free markets.

  • Adrian

    DB,

    Nobody is arguing that.

    Actually, I think that’s exactly what some people are arguing. Unfortunately.

    The thing you don’t get is that hedging is an algebra that abstracts lower level mechanisms making them easier to employ and manage. Bob is absolutely right when he says his EA will now be more complex.

    How so? Can you give an example of how things will be more complex now than before, or more difficult to manage?

  • Job van Zuijlen

    It’s just another useless NFA regulation. You may not like the possibility of hedging, but you don’t have to use it. It doesn’t make trading Forex any safer. The NFA fails to understand that the Forex market is not a closed system and that it is unproductive to regulate it in the same way the futures market is regulated.

    Let’s say, for the sake of argument, that there are strategies based on hedging that are profitable. The NFA’s ruling would give an unfair advantage to non-US-based traders… Ah, do I see a conspiracy theory blooming?

  • fxretracer

    @fxretracer: I just dont appreciate the way it means I have one less way of trading at my fingertips.

    Adrian: The point is that you have effectively closed your positions. With no positions and no market exposure, you can decide whether to stay out with your realized profits without worrying about margin calls or retracement, or to re-enter. The orders you’d place are the same.

    What if I dont want to close a short becuase I want to stay in longer term trend, but want to go long to take advantage of a short term long trend, or “retracement”.
    Sounds like this is a scam to keep me in short term trades. Slugging with the small shrimp if u will.

  • Adrian

    What if I dont want to close a short becuase I want to stay in longer term trend, but want to go long to take advantage of a short term long trend, or “retracement”.

    You can still do that. You can still do everything you could before, it’s just a different bookkeeping system for the brokers.

    Going flat and then re-entering is identical to “hedging” and then closing the “hedge”. If this system is so important to your thinking, keep a separate system of books in Excel.

    • http://www.theessentialsoftrading.com John

      If this system is so important to your thinking, keep a separate system of books in Excel.

      I was actually going to recommend this myself. Trade exactly as you normally would, but use the spreadsheet to track your positions.

  • http://www.twitter.com/fxretracer fxretracer

    John: ” The measure would not prevent offset trades from happening. Quite the contrary. It would treat the going long when short and going short when long as exactly what they are – offsets.”

    I have to admit I am in a bit over my head here…I dont know all these terms…all I know is if I am in a what I have been told is a “swing” trade lasting for at least days at a time; I will want to take trades that are opposite this “swing” trade. Without hedging I cant do this, Oanda is a prime example of this nonsense.
    Tell me there are brokers where I can deposit small amounts of money (less than $100) in the US and take opposite positions in the same currency w/o closing the the origianl position out; I will have no problem with this new regulation.

    • http://www.theessentialsoftrading.com John

      fxretracer – With Oanda you can create sub-accounts so you can employ different strategies or trade in different timeframes seperately (and with other brokers you could open seperate accounts). I would actually encourage you do so that because it makes the record keeping cleaner and lets you know quite easily which are doing better or worse.

  • Adrian

    I dont know all these terms…all I know is if I am in a what I have been told is a “swing” trade lasting for at least days at a time; I will want to take trades that are opposite this “swing” trade. Without hedging I cant do this, Oanda is a prime example of this nonsense.

    That’s where you’re wrong. You most definitely CAN do this!

    John posted a good example in his follow-up post, check it out. As another example, consider someone trading USD/GBP. He’s bullish long-term but sees a counter-trend day-trade. With the earlier regs he would:

    1. Buy 100k USD/GBP (for the swing)
    2. Sell 100k USD/GBP (for the counter-trend day trade)
    3. Buy 100k USD/GBP (close the counter-trend day trade)
    4. Sell 100k USD/GBP (close the swing)

    Under the new regs he would do exactly the same. The only difference is that his blotter would show him flat after step 2 under the new regs rather than having a long and short position. That’s it. From the trader’s perspective, it’s purely cosmetic. It’s entirely up to you how you want to think of this, as keeping your swing trade and then making a second counter-trend trade, as closing the trade and re-entering, or as hedging then closing the hedge. The trades are exactly the same, your P&L will be exactly the same.

    The only difference, and I keep repeating this but no one seems to get it, is that your broker’s record keeping will be different. So what? If you want to think of it as having two different positions, keep the records yourself in a journal (all serious traders already do this).

    Why are you so upset by your broker showing the original position as closed? Why is this such a big deal to you? I really, really don’t understand. After all of this heat, not a single person has explained this simple, fundamental point. Please!

  • http://www.twitter.com/fxretracer fxretracer

    I am sorry Adrian, perhaps I am an idiot..but your example makes no sense to me.

    Under current rules, if I have an open short position in one pair, I have four choices:
    #1 Close it
    #2 Keep it open
    #3 Take another trade in the same pair but its a long trade
    #4 Take another trade in the same pair but its a short trade

    Are you saying that with the new regs, that opening another position in the same pair will not automaticly close the said positon? Like in Oanda for example.
    My understanding is the new reg will make all brokers like Oanda: all orders cancel eachother out. It will be impossible to to hold a short and long trade at the same time in the same pair.
    Perhaps answering this simple question can clear up the confusion here.
    I need a simple yes or no answer here, not a legal answer:
    Will I be able to hold both long and short trades in the same pair at the same time?

    • http://www.theessentialsoftrading.com John

      fxretracer – Your simple answer is “No”. You will not be able to have both a long and a short in the same pair on at the same time. The brokers will all do what Oanda does.

      Basically, what the brokers will be doing is looking at longs as + and shorts as -. If you go long 1 unit you’re at +1 in your account. If you then go short one unit that’s a -1, Add up +1 and -1 and you get 0. The brokers will be showing 0 instead of one +1 and one -1.

      The point is that the bottom line P&L math all works out exactly the same regardless of whether the broker shows the net 0 (new rule) or the +1 and -1 (“hedging”).

  • Adrian

    fxretracer – as John said, the simple answer is that no, you won’t be able to hold a long and short simultaneously. What will show up is the net difference. So if you have 100k long of USDGBP and then you short 50k, what will show up isn’t a 100k long and a 50k short, you will see just 50k long. When you’re long, you will still be able to buy more or to sell whatever amount you wish just as you always have been doing, the only difference is that you will only ever have one position which will be the net of your total longs plus your total shorts/sells. So if you sell, it doesn’t necessarily close out your position but if you hold 100k long and then you sell 100k, you’ve effectively closed your position and this is what your blotter will show.

    So, can you hold both long and shorts in the same pair? No. Can you buy and short the same pair as you’ve always been able to do? Absolutely! If you hold 100k of a pair, will you be forced to sell that 100k before making another trade? Absolutely not!

    Remember, brokers don’t think of “trades”, they think of “positions” and “executions”. It’s only we that break it into trades. Your executions will be totally unaffected, your net market exposure will be unaffected, the only change is how it will be displayed in your broker’s books. You are free to keep your own books however you wish.

  • http://www.twitter.com/fxretracer fxretracer

    Since the answer is “no” I will not be able to hold both a long and short position at the same time I will be getting an account outside the US that allows me to do that.
    Anyone who cant see my problem with this simply has never traded in the same forex broker arena I do.
    Or they just dont want me taking short term trades against myself for some reason.

  • http://www.twitter.com/fxretracer fxretracer

    I think what going on here is I just dont understand what you mean, because I have always used these small brokers.
    My experience is fairly limited.
    But when you say I can not buy and sell the same pair at the same time, then go into a complex explanation about how it will not affect me…I just cant understand it…

    I really think I dont understand what you mean…all I know is many traders seem so passionately against it…my experience from using Oanda vs FXDD is I prefere the hedge ability…
    If all brokers are going to be like OANDA in the US now…LOLOLOL
    I have a feeling you guys just dont have the slightest idea what your talking about, because you never placed a trade in your life.

    • http://www.theessentialsoftrading.com John

      I have a feeling you guys just dont have the slightest idea what your talking about, because you never placed a trade in your life.

      This could very well be one of the funniest (ironically, of course) comments made on this blog. :-) I couldn’t even begin to guess how many hundreds (thousands?) of trades I’ve done in the last 20+ years.

  • http://www.twitter.com/fxretracer fxretracer

    Adian”Under the new regs he would do exactly the same. The only difference is that his blotter would show him flat after step 2 under the new regs rather than having a long and short position. That’s it.”

    Thats it?!!
    Thats the whole problem lol
    The whole idea is to be short and long at the same time, what is so hard to understand.
    Only someone who has not traded would not get this.

    • http://www.theessentialsoftrading.com John

      fxretracer – Why don’t you provide an example trade sequence of the sort you do. From that I will show you what Adrian and I are talking about. It really is only a matter of perception.

  • http://www.twitter.com/fxretracer fxretracer

    This is where this discussion always goes, someone wnats me to describe what I mean. Then they procede to rip my trading apart.
    Just this morning I was long and short in the same pair at the same time. If I had not had that option this morning I would have just been in a bad trade the whole morning till the 1st trade came back around. As it was I was able to make money both ways…thats what the real issue is here, someone does not want me making doubletime profits on the market.
    Whats so hard about this?
    You say I will not be able to hold both long and short positions at the same time in the same pair.
    I do this all the time.
    Not much to explain.

    Adrain” The only difference is that his blotter would show him flat after step 2 under the new regs rather than having a long and short position. That’s it.”

    Will it “show” me flat, or will I really be flat? Anyway, the statement is like word voodoo and proves you cant hold the same position both long and short in the same pair.

    I cant imagine not being able to take short term trades against some of my positions as it is in Oanda.
    In Oanda if I buy 100k and then sell 100k in the same pair…it “closes” the position. This is a pain and limits my ability to hold a position for many weeks unless I just want to stop trading that pair for the time I am in a trade with it.
    With all due respect, If you traded for 20yrs you know this.
    I think I just dont know what kind of broker plaforms you guys are used too, but I know how OANDA works, and you say this new reg will make all brokers` like OANDA. Its not a matter of perception at all, its a matter of facts.
    If that is in fact true then: Case Closed.
    For the record, OANDA is known to be a place where traders keep their big money for longer term swing trades, its safe in the US and like we all discuss here, if you make long term trades you dont need hedging unless you want to trade against that position. But you can always use another broker or sub account for that if you have lots of money. Needless to say this can not be done by a small trader with a small balance, it spreads you out to thin.

    I am curious, why are you folks so determined to convince me I am wrong? What does it matter? Why do YOU want this new reg so BADLY…plse disclose any conflicts of interests you might have. I cant believe for a second its because you(the Gov) cares me.

    • http://www.theessentialsoftrading.com John

      fxretracer – This isn’t about ripping you. This is about demonstrating something so you can see where we are coming from. I’ll show you what I mean if you lay out the specific trades you did this morning – more than just saying I was long and short at the same time.

      As for the rest of your comment:

      - I can’t speak for anyone else, but I certainly don’t work for the government and am happy to state that since I don’t particularly care for much of what its doing.

      - Wanting the new reg has nothing to do with anything. I’m ambivalent about it as a trader, but as an educatior I definitely have issues with brokers who promote it. Call it my own personal sense of ethics.

      - I have used Oanda for years. I know very well how they work. I’ve also used numerous other brokers for forex and other types of trading. I’ve got a pretty good idea what’s out there if perhaps I cannot speak to the current state of this broker or that one.

  • http://www.twitter.com/fxretracer fxretracer

    Offsetting Transactions

    New Compliance Rule 2-43(b) requires an FDM to offset positions in a customer account on a first-in, first-out basis, thereby prohibiting a trading practice commonly referred to as “hedging.”
    Thats it right there in plain english: “thereby prohibiting a trading practice commonly referred to as “hedging.”

    I am a small trader with limited money, this will make it harder for me to make money…why cant you believe me?

  • http://www.neocortechs.com Marjorie Miller

    Adrian,

    You are so wrong and unable to understand plain english, I almost don’t want to waste my time. But here, let me explain one fact to you:

    With a hedged position, there is zero chance of hitting your margin, no matter what happens in the market. Therefore if, as you say, both systems can come up with identical results, then the superior system will do the same job with zero risk. And that would be the hedging systems.

    Q,E.D.

    Marjorie Miller

    • http://www.theessentialsoftrading.com John

      Marjorie – First of all, if you’ve got a position on that’s at risk of a margin call then you’ve almost certainly got too large a position on relative to your account size (or are trading too many positions). That won’t be a concern for a trader employing good risk management.

      Secondly, “hedged” is the same as a trade that has been taken flat in terms of net exposure. That means neither position has any price risk – and neither has the risk of margin call.

      But if you want to make it about superior systems, which is better – the system the keeps margin funds locked up, costs another spread from the additional transaction, and exposes the trader to negative carry (the hedge); or the one that frees up all the used margin, has no additional transaction costs, and has no carry exposure (going flat)?

  • http://www.twitter.com/fxretracer fxretracer

    John- I appeciate your sincerity.
    I dont see how explaining the details of my trade this AM would help, only to rip apart my system and say how I could have done it another way…but here goes an honest effort…from memory..

    I longed aud/jpy, the trade went against me…
    I shorted aud/jpy…and the short trade also went against me.
    The long audjpy went into profit..I closed it.
    The price fell, I then closed aud/jpy short, I even made profit on that trade.
    It would not have been required to wait till the short was in profit though; for as soon as the price fell below the level I closed the long, I was in profit, even if I closed the short at a loss.
    Net result I gained pips in both directions of the price action for that few hours in the SAME PAIR at the SAME TIME.
    (note: this exact way of trading will not be possible with US based forex brokers after May15th)

    Please dont bother with some long winded explanation of how this trading style I used this AMwill not be affected…the new rules clearly sate this will no longer be possible, in fact thats the express purpose of this reg..to prohibit just this type of trading.

    If you can prove that the new rules as stated above are wrong or missleading…show me a picture of you in a long/short position at the same time, show me 1lot long in eur/usd and say 2 lots short eurusd at the SAME TIME with a broker already under this regulation. I am not aware of this type of ability on some brokers to have “invisible” positons you seeem to be trying to explain.

    • http://www.theessentialsoftrading.com John

      fxretracer – No long winded explanation. One very simple side-by-side.

      What your broker saw as your net exposure today was you starting Flat, then getting Long. Then you went back to Flat. Then you went Short. Finally you got back to Flat. The positions shown in your platform went from None to Long, to Long & Short (same as Flat), to Short, back to None.

      What your broker will see as your net exposure under the new rules for the same trade sequence is you starting Flat, then getting one unit Long. Then you going back to Flat. Then you going short. Finally you getting back to Flat. The positions shown in your platform would go from None, to Long, to None, to Short, to None.

      The only difference there is what shows up on your platform. Behind the scenes everything is exactly the same. If you make the same 2 buys and 2 sells as you did today you will achieve exactly the same P&L result the whole way along – and the new rule doesn’t effect the trades you make. Your account will just show the positional progression differently.

  • http://www.neocortechs.com Marjorie Miller

    John,

    When I have an open position, especially the EURUSD, I keep $1000 margin, per 10K. Now that may be big enough for you, but not me. Now the EURUSD can take a 20 cent swing these days, so to be even safer, I put a “hedge stoploss”, as it were, at the same place perhaps you would put a regular stoploss. But I don’t lose my money. The market comes back, and I release the hedge and the market is now going the direction I had originally predicted, just not when I predicted. Hedging means I’m never wrong, and I never lose money. That is what the banks and brokers don’t like.

    I was down more money than I had in my account with hedges when the EURUSD suddenly popped up to $1.47. But I didn’t lose a dime. Now my account is up 10% already.

    The most important point is why should the way I like to trade, that let’s me sleep at night, be illegal? Why shouldn’t they make the way you like to trade illegal? It’s right up there with gay marriage and religion. Freedom of choice.

    Basically, John, if I want to take it up the butt, why is it any of your business?

    Madame Hedge :)

  • http://www.neocortechs.com Marjorie Miller

    Dear John,

    I must admit, I amused myself with my last message so much, I about laughed myself out of my chair. At any rate, after stopping laughing, I re-read you message again. And I noticed a few other things.

    One, by your first paragraph, you are saying that anyone who hasn’t employed good risk management in the first place, deserves to have the tool to stop their total destruction, hedging, taken away from them, and to lose all their money with a margin call. Shall we add the death penalty as well?

    Then you say that a hedge is identical to going flat. Yeah, all except for the non-recoverable loss.

    Then you speak of the superior system grade. I would love to be right all the time. When I’m not, I have in my toolbox, the ability to use what I call a “hedge stoploss”. I don’t always use it, but when I do, I’m real glad it’s there.

    What if the next thing the NFA comes out with, is to make ALL stoplosses illegal. Any objections to that John?

    M…;)…

    • http://www.theessentialsoftrading.com John

      Marjorie – The spam filter grabbed the comment you didn’t see post. Obviously it didn’t like something in there. :-)

      Firstly, my comment about good risk management made no mention at all about hedging. You’ve read something into it which was neither meant nor expressed as far as I can see.

      Secondly, on the non-recoverable loss part, I hate to say this but being hedged and flat have the same non-recoverable loss characteristics. In both cases you cannot change your P&L until you alter the state of your account from net flat (which is exactly what the hedge makes you) back into a directional exposure.

      If you are down $100 in a trade and hedge that, you have $100 less in your account just as surely as you would if you exited the trade. Your account is marked-to-market, so that’s a real loss, not something on paper. That’s $100 less you can take out of your account. The difference is that with the hedge position you still have margin tied up, so you can’t take all your money out if you want, and you’re exposed to carry expense while you’re holding the matched trades open.

      As for this whole thing about being right or wrong, trading isn’t about being right. It’s about making good trades. Sometimes they lose money, just as sometimes bad trades make money on sheer luck. The toolbox you mention for dealing with a losing trade basically comes down to two thing – leave the position running or take it flat. Hedging and exiting are both the same as taking the position flat. If you’re long, they both mean selling. If you’re short, they both mean buying.

      BOTTOM LINE: The new rule does not change the actual trades you make or the P&L of those trades. It only changes the visual accouting.

  • DB

    I’m glad to see there is still a spirited discussion happening around this issue. I would like the think the NFA would take note of the discontent and reconsider their position, but alas I’ve become jaded enough to the conceit of big government to expect nothing long or short of silence.

    To Adrian and John, You ask for examples of added complexity. Here is a simple one. Since I know how entrenched you are in your respective positions, I will expect to see a response along the lines of “that’s stupid”, you can do the same thing by doing x, y and z. Before you waste the keystrokes, let me say again I know the same result can be accomplished without hedging. My grievance is based in the fact that the NFA has taken away a tool the enables a tool that enables level of abstraction, and that’s wrong. Here’s the example:

    Trader Bob has looked into the future and is certain EUR/USD will rise 50 pips, roll over and then drop 100 pips, so Bob places two one lot orders: one long and one short. (We will ignore stop loss for now because it is irrelevant to this example.) Both orders are opened with Take Profit set at 40 pips. Both orders are now sitting on the server and will take profits without any intervention on Bob’s part. Bob can now hit the links confident that the market is under his command and he will arrive home with a nice 80 pip profit.

    But, now it’s May 16th, and lo the NFA and CFTC know better what’s good for Bob and won’t allow Bob to go long and short at the same time. Bob places the long order, so far so good. But as soon as Bob places the offset short order, poof! his position closes. Bob can’t hit the links as planned. Instead Bob has to sit at his station babysitting the long order before he can place the short order. Bob’s complexity of life has incrementally increased and his quality of life has incrementally decreased; and all because the government is here to “help”.

    Now, if I’m wrong with this example, by all means please comment. I have to say I don’t completely understand the new rule so far as it is stated.

    This part I understand: “requires an FDM to offset positions in a customer account on a first-in, first-out basis, thereby prohibiting a trading practice commonly referred to as “hedging.”.

    This part I don’t understand: “A customer may, however, direct the FDM to offset same-size transactions even if there are older transactions of a different size.”. Does this mean FDMs may allow hedging if a customer requests it?

    • http://www.theessentialsoftrading.com John

      DB- Trader Bob has looked into the future and is certain EUR/USD will rise 50 pips, roll over and then drop 100 pips, so Bob places two one lot orders: one long and one short. (We will ignore stop loss for now because it is irrelevant to this example.) Both orders are opened with Take Profit set at 40 pips. Both orders are now sitting on the server and will take profits without any intervention on Bob’s part. Bob can now hit the links confident that the market is under his command and he will arrive home with a nice 80 pip profit.

      If Trader Bob is confident EUR/USD will rally 50 then fall 100 why doesn’t he buy now, take profits 50 pips higher (or 40 if you want to make it conservative), then short and grab the 100 pips coming back down? That increases his profits 50% for exactly the same number and type of trades with no more or less effort or complexity required.

      As for the same size offset stuff, that just means you can tell your broker that if, for example, you built up a EUR/USD long by first buying 50k, then another 50k, then 100k that if you then sell 100k you want that sale matched against the final 100k buy rather than the two 50ks done earlier. Otherwise, under first-in, first-out they would offset starting with the earliest trades.

  • http://www.neocortechs.com Marjorie Miller

    John,

    I went to bed last night thinking I had not only lost my Freedom of Choice in Trading Systems, but had also lost my Freedom of Speech. To a Bot, at that. I am glad to say, Madame Hedge was approved by the human. See message above. Humans 1, Bot 0. Let’s hope I also regain my Freedom of Choice of Trading Systems when we finally get in touch with the NFA humans.

    To me John, a negative sell is nothing more than a buy without the loss. Indeed, if I did it your way, I would take the loss on the sell and then the loss on the buy, instead of no loss at all. As Warren Buffett said, “1st rule: Take no losses. 2nd rule: See 1st rule.”

    Let me tell you the Tale of Two Accounts. One, I did not use hedging, and it is now negative. The other one I did use hedging, and it is +10%. So there is a difference in the net end accounting. Positive or negative, John. :) .

    Now, if there were truly no difference as you say why would the NFA be making the accounting “invisible” to the consumer, so that I must now do the accounting I used to see on my screen, in excel, to be NFA compliant? If, as you argue, there is no difference in the end, would the NFA care, and be wasting everyone’s time and money re-programming their systems?

    Last but not least, I got my degree in Math and Physics and have been a Software Engineer for the last 27 years, concentrating in AI and robotics. Now if I am having trouble understanding this diarrhetic english coming out of the NFA, ergo the average public…

    If you are saying the new NFA rule of no hedging is, as a Mathematical System equivalent to hedging, I must disagree not only in theory, but in application, as the two referenced accounts show. If one changes the risk structure of the system, the system is different, and the outcome is different, as well as your sleep patterns.

    As well, I was thinking we ought to make all forex trading illegal. That would fix alot of problems and by golly, it was these traders that got the economy in trouble anyways. Yes, not only make ALL stoplosses illegal, but all forex trading illegal. Except of course, only illegal in the US. The rest of the world will continue to trade forex. Beware John, there are people who feel that way. Indeed, I’ve had a religious person refer to Jesus against the moneychangers, oh evil one.

    One of the methods of proof in Mathematics, is to test the endpoints of an argument. If the theory falls apart at endpoints, it called “Proof by Contradiction”, by assuming the premise, and showing the premise leads to a false conclusion, a contradiction in the system.

    One of the GREAT things about hedging is, you are always right, with complete accounting right on your screen. :) . Try it, John, you’ll like it…;)…

    Hedgy Wedgy Baby :)

    • http://www.theessentialsoftrading.com John

      Marjorie –
      To me John, a negative sell is nothing more than a buy without the loss. Indeed, if I did it your way, I would take the loss on the sell and then the loss on the buy, instead of no loss at all.

      First of all, “negative sell”? What do you mean by that.

      Secondly, what way is my way that’s taking a loss on the sell then the buy?

      Let me tell you the Tale of Two Accounts. One, I did not use hedging, and it is now negative. The other one I did use hedging, and it is +10%.

      Ummm…Unless you’re going to show me two accounts which did exactly the same trades then I can make absolutely no conclusion about the relative performance of the two. If, however, you send me a list of “hedged” trades, I can demonstrate that they are exactly the same as trades done “un-hedged”.

      Last but not least, I got my degree in Math and Physics and have been a Software Engineer for the last 27 years, concentrating in AI and robotics.

      That’s good. Then you understand the cummulative property of mathematics. That’s all we’re talking about here.

      When you buy that’s +1. When you sell that’s -1. So if you go long, hedge with a short, take off the short (which is a buy), then take off the long (a sell) that’s +1 -1 +1 -1. If you instead go long, then exit the long (sell), then go long again, then exit the long that’s again +1 -1 +1 -1. Same thing. No matter how you move the buys and sells around it’s all going to add up the exact same way. No change to the outcome. No change to the risk profile.

      If you disagree then please demonstrate mathetmatically how the two approaches produce different returns and risks.

  • DB

    John, like I said, since you are entrenched in your position you argue Bob’s trading strategy and refuse to address the mechanism that is degrading his quality of life. You asked for an example, I gave you an example. Please have the honesty to admit that the example is mechanically and mathematically valid.

    Your response indicates you think much like the government who knows better what is best for Bob than Bob does. Perhaps you might want to propose to the NFA that they provide a representative to each trader to sit next to them and point out in real time, each flaw in their strategy. Oh wait! The government can’t afford to do that can they? No they can’t. So maybe it’s safer if they just outlaw forex trading as Marjorie suggests. That way nobody will miss out on profits they could have had, and nobody will lose money either.

    • http://www.theessentialsoftrading.com John

      DB – I asked a simple question. You’ve provided no answer. Just more of the same “That’s the way I want to trade”. You’re right that it sidesteps the issue, though, so I’ll put that question aside. Instead, I’ll put forth a challenge.

      Demonstrate how Trader Bob in a hedging permitted situation doing those trades he’s doing is any different from a risk or P&L perspective than Trade Joe doing exactly the same trades at the same times and prices in a non-hedging account. Show me side-by-side what Trader Bob’s account balance, margin requirement, P&L, and risk looks like compared to Trader Joe’s.

  • http://www.neocortechs.com Marjorie Miller

    I say we make the NFA illegal. Let’s start a “Ban the NFA” campaign. The best defense is a good offense…

    Here’s an ad for Freedom FX: “Non-NFA Forex broker: You can hedge with us.”

    Now that’s catchy, if you ask me…Hey there’s an opportunity here…complete destruction of the NFA and make millions at the same time…

    Or, they can just change the rule. :)

  • http://www.neocortechs.com Marjorie Miller

    John,

    Your system would work without one condition that unfortunately exists in the system: The Margin Call.

    If it were not for the Margin Call one would not need to hedge, and results would be the same. The Margin Call forces your hand, as they say in poker. You must fold. You lose. You must close you position.

    With a hedge, you stay in the game. Game Not Over. You can wait for your Ace. Time is on your side. :)

    Consider, the brokers are the casino, the house, essentially. They want you to have to fold. The house then gets the money on the table. Not you. But say, you don’t have to ante up, which is what a margin call is, you can wait for the winning card. You don’t have to fold and you don’t lose your money. Hence, the new NFA no hedging rule: good for the brokers/house, not the traders/players.

    When the market is not volatile, like right now, I don’t bother hedging, tho even right now, with no hedge, I have a “pending order hedge stop-loss” for the EURUSD at $1.40, just to have ZERO chance, NIL, NULL, ZIP, of being margined out, or even losing more than I’d like. And yet I have a $3000 buffer on a $10K lot. That’s just the kind of girl I am. :) . If I can reduce the risk of loss to almost zero, I will do that. The minimal interest charge to do so, is to me, an insurance payment against loss. When the EURUSD was near $1.25, and I had open positions, I kept an opposite pending order hedge stoploss at $1.23, just for safety’s sake, $1.23 and $1.40 being no-man’s land for the recent EURUSD, though historically in the realm of possibility.

    Sometimes, I’ll just make a buy and sell at the same price even, and take each one, as it becomes positive, as someone else described earlier on the message board. Hedging makes it so easy to be right, no matter what happens. :)

    My first trade ever, I margined out. Plus the broker sent me a bill for another $400. I vowed never again would I margin out. An expensive, but effective lesson.

    Siddhartha

    • http://www.theessentialsoftrading.com John

      Marjorie – You still have not demonstrated anything mathematically here. Show me where your go long (buy), go short (sell), exit short (sell), exit long (sell) is any different from go long (buy), exit long (sell), go short (sell), exit short (buy). You claim it’s in the margin call exposure, but please point out where that margin call exposure is different between the two.

  • DB

    John,

    You’re still missing the point. I’ve stated several times that I understand there’s no difference in balance, P&L, risk, etc.

    Listen up! I’m saying the rule takes away freedom of choice and increases complexity! Do you understand the principles of algebra and abstraction? We build algebraic abstractions to simplify and encapsulate complexities to that we may work at a higher level of problem solving. You and Adrian (or maybe it was just Adrian) asked for an example of how the rule increases complexity. I provided that. Your response was first to challenge Bob’s trading strategy and then to reprise the same old tired argument about risk, P&L and account balances.

    I again challenge you to be honest and admit that the Trader Bob example increases complexity of life and reduces quality of life.

    I’m beginning to believe there’s something on the east coast that has addled the brains of all who dwell there. Sheesh.

    • http://www.theessentialsoftrading.com John

      DB – Maybe I’m being dense, but I didn’t see where the no hedging rule increases complexity. Please explain that to me. If it makes sense then I’ll agree all you like.

      But let me make one point since we agree that there’s no functional difference between the risk and all that. When the broker isn’t forced to net out your positions then they are basically pulling a fast one. Showing those open positions means you have to post margin for a hedged position, which you don’t do in a netted situation. There’s absolutely no reason for the broker to require that you have margin locked up because you have no risk. On top of that, you are most likely in a negative carry situation. So basically the broker in a hedge is holding your money and charging you to do so even though you have no risk or exposure. It’s kind of like the bank not allowing you access to your checking account funds and charging you interest on them. Now this might be a non-factor for an active short-term trader, but it does matter if you’re holding positions on the roll and/or are running multiple positions. Successful trading is difficult enough without the broker just flat out taking your money from you. THAT is why I’m in favor of the new rule.

  • DB

    BTW, forgive me for sometimes being insulting. I have a REALLY hard time with people who can’t for whatever reason open their minds to the fact that other people view the world differently than they do.

    Perceived rightly or wrongly, all people must have a right to their own views and be entitled to make choices as long as those choices don’t infringe upon the rights of others. This is the basis for the founding of this country. Over the last hundred or so years, we as a nation have strayed from these principles and now live in a state of government tyranny. This latest NFA rule is just another nail in the coffin of freedom of choice.

    I will quote again:

    “All tyranny needs to gain a foothold is for people of good conscience to remain silent.” – Thomas Jefferson

  • http://www.neocortechs.com Marjorie Miller

    You can lead a horse to water, but you can’t make him drink…

    • http://www.theessentialsoftrading.com John

      Marjorie – You can lead a horse to water, but you can’t make him drink…

      Which answers what, exactly? If I’m the horse in this metaphor then I’m not drinking because you haven’t shown me any water yet, or at least convinced me that what you’ve brought me to is in fact water.

  • DB

    John,

    I’ll go back to Trader Bob. Hedge scenario: Bob places his hedge and goes to play golf and has a good time. No hedge scenario: Bob has to place the buy order, wait until the order takes the profit and THEN place the pending sell order.

    In the first case, Bob can place a parallel state position and go play golf. In the second case, Bob is forced into placing a serial state position which can’t be done at a single point in time. This changes Bob’s golf plans thus increasing the complexity of his life. More simply, his hassle factor has increased.

    To your second point, not true. We use FXDD. I can tell you If you place a perfect net zero hedge at FXDD, the margin is freed up. If your hedge is not net zero, (for instance, you hedge instead of stop loss), then yes your margin is tied up, but that is no different than stop lossing out and losing the margin. I don’t know about other brokers, but this one apparently nets out the margin ala FIFO, but enables the enables the hedge abstraction. The only “fast one”, if you want to call it that, is the double spread, and several of traders here have stated several times they want the freedom to pay a double spread and carrying interest if they so choose.

    • http://www.theessentialsoftrading.com John

      DB – So you’re saying Bob puts in a long with an exit order at some level above and a short trade with an exit some place below. Am I following correctly? I get the point your making about set it and forget it. I think one of us is missing something though. You seem to be saying that you need to wait for a level to get hit to execute a trade entry manually. Please correct me if I’m wrong there, that would suggest that you can’t place an order for automatic future execution at a prespecified price.

      Also, I’m not clear on the “perfect net zero hedge” and the “not net zero”. Can you clarify?

  • DB

    John, one more thing. You say:

    “Successful trading is difficult enough without the broker just flat out taking your money from you. THAT is why I’m in favor of the new rule.”

    Are you saying YOU hedge? Are you saying YOU hedge and don’t know what you’re doing when you do it? If YOU are not doing it and therefore brokers aren’t bilking YOU unfairly then what gives YOU the presumptive right to decide for others? That’s classic governmental tyrannical thinking. Those who choose to use hedging are not trampling on your rights. Why do you feel you need to trample on theirs?

    • http://www.theessentialsoftrading.com John

      DB – Are you saying YOU hedge?

      I use Oanda, so I cannot hedge – unless I use seperate sub-accounts that is. That, however, doesn’t mean I cannot execute exactly the same trades as someone who hedges does, with the same results, though, as I think we’ve clarified. Actually, since Oanda does continuous interest I’m much better off not hedging because I would always be in a negative carry no matter how long or short my hedges were held.

      As for tyranny and all that, the gov’t isn’t impinging on your right to make whatever trades you want. They are just forcing the brokers to properly display your net position. If anyone should be squawking it’s the brokers.

  • Adrian

    @DB – thanks for your examples. I’m not sure I’ve cottoned on to the difference but you’re helping us get closer. You’ve said that a trader can’t place a long and short order at the same time – that’s not correct. A trader can place a long entry order and then a short exit just as before. In fact, the change won’t have any impact at all on trade executions. The orders won’t be affect in the slightest, traders can place exactly the same orders they’ve always placed in exactly the same order and time. So you can rest easy with your example of a trader being able to head off to the golf course as before! The difference has nothing to do with posting long & short orders, it just affects the bookkeeping.

    @Marjorie – Again, I apologize if I’ve missed something and I hope you’ll correct me but it sounds like you’re saying that under the “hedging” setup, you never had to book a loss and are afraid that under the new system you will, is that right?

    As for margin calls, you have nothing to fear there. Buying one lot and selling one lot leaves you either perfectly hedged or flat. In the former case you have a lot of money tied but no margin calls, in the latter case you have no money tied up and no possibility of having any margin calls. By using the new system, it will actually free up funds which would otherwise be tied up in positions; it certainly will not create any more market exposure and will definitely not increase your risk of margin calls.

    I’m not sure why you think this is a concern so I think I’m missing something. Can you provide an example where you think the changes would harm you?

  • DB

    John, Adrian, Perhaps I’m misunderstanding the situation. It is my understanding that under the Trader Bob scenario, as soon as Bob places two offsetting market orders, the broker will then close out both orders because they net to zero — like matter and antimatter, they annihilate each other. If the offsetting orders cancel and close, how can any TPs trigger on the long and then on short? Please don’t respond with one’s a market and one’s a pending. The example stands, both are market orders. Am I off base? Do the two orders survive?

  • Adrian

    @DB – if you place two market orders, they’ll execute and you’ll be flat, minus the spread. The broker doesn’t close the _orders_ remember, the change is purely accounting. And yes, assuming the long & short were for the same size, after this set of orders, instead of showing a long & short position, you’ll show flat. That’s the only change. Order execution will remain unchanged. Don’t know how many more ways I can say this.

    I don’t see how this could ever be advantageous, except to the broker. I may have taken this scenario and assumed you were talking about long & short limit orders (outside enveloping) or something similar. I was trying to understand what you were getting at in your example but it looks like I missed it so thanks for the clarification.

  • http://www.neocortechs.com Marjorie Miller

    Hi Guys! I’m back!!! Had to wash the dogs and vacuum!!!!! :D !!! :) !!!!

    Adrian and John,

    Oh how I wish you were right. Yes I do . I really do. But…here’s the response I got from IBFX customer support. I have sent my feelings to the NFA as well. Everyone else should as well…

    Vive La Revolution !!! Ban the NFA !!!! Save the Hedge !!!!

    On Thu, Apr 16, 2009 at 3:49 PM, wrote:

    Ms. Miller,

    Thank you for your reply and yes you are correct. We do understand the frustration. We haven’t had an official statement on why the NFA came to this decision but it is in fact true that you cannot have both a Sell and a Buy order open on the same pair at the very same time on the same account.

    You are welcome to send your comments to the NFA as well.

    Best Regards,

    Jordi Sales
    Client Services
    Sig25-111308-1012am
    Toll Free: 866-468-3739
    International: 1-801-930-6800
    Fax: 1-212-884-0609
    3165 E Millrock Dr, Ste 200
    Salt Lake City, UT 84121
    http://www.interbankfx.com

    • http://www.theessentialsoftrading.com John

      Marjorie – Jordi Sales there seems to have misspoke (or mis-typed as it were) in saying that “…you cannot have both a Sell and a Buy order open on the same pair at the very same time on the same account.” You most definitely can have open orders, it’s just that open positions/trades will be offset and netted out.

      But I’m still waiting on that margin explanation.

  • http://www.fxretracer.blogspot.com fxretracer

    John:’What your broker will see as your net exposure under the new rules for the same trade sequence is you starting Flat, then getting one unit Long. Then you going back to Flat. Then you going short. Finally you getting back to Flat. The positions shown in your platform would go from None, to Long, to None, to Short, to None.”

    That makes no sense whatsoever…what it does meann is I would have taken 18 pips spread in loss at least + the loss of closing losing positoins.

    John:”You most definitely can have open orders, it’s just that open positions/trades will be offset and netted out.”

    Huh?!! You dont understand what the question was I hope…this is what we dont like: “both trades will be offsetted and closed out” you think we are idiots clearly, we KNOW we can still have open positioins…just NOT open positions that are opposite eachother in the same pair at the SAME TIME!!!!!

    I tried, I am tired, cant get through to these guys…I could rip many thing apart that you have said John, but I have a life and know ur jus to going to respond with the same doublespeak jargon that makes my head spin…I feel like I am in the Fairy Tale “The Emperor Wears No Clothes”

  • DB

    John, Adrian – The IBFX letter that Marjorie posted says: “you cannot have both a Sell and a Buy order open on the same pair at the very same time on the same account.”. John, I know you believe they are mistaken, but that is the response we are getting from several brokers.

    The rule opinion stated at the top of this thread says: “thereby prohibiting a trading practice commonly referred to as “hedging.”. It doesn’t say this is just a bookkeeping change, it says they want to ban the PRACTICE! And that’s just how the brokers are interpreting the new rule. So, the Trader Bob scenario doesn’t work. Trader Bob will place his trades, the broker will detect a Sell and a Buy on the same pair at the same time and close the position.

    Adrian, what evidence do you have that leads you to believe differently?

  • Adrian

    DB & Marjorie,

    Shame that your broker says that but perhaps you should press them harder. The regs are new and it sounds like the CS rep is confused. In the end, the best test will be to see how your broker really implements the change and see for yourself.

    I’ve gotten into fights with some brokers because they refused to let me have open long & short limit orders open at the same time for the same stock which is not only perfectly legal but a standard component to many strategies. I talked to the customer service and they told me it was to prevent “going short against the box” which, if you know anything about this term, is complete BS. Despite providing the actual specs for this term and quoting the SEC directly they refused to back down from this absurd position and I had to change brokers. Fortunately of the five or six different brokers I’ve used, only one of them has this problem.

    What evidence do I have that leads me to believe differently? The regulation itself, of course! Read it, don’t rely on some hyperbolic summary from someone else, check it yourself. The wording is clear.

  • http://www.fxretracer.blogspot.com fxretracer

    Yes Adrian, the language in the new reg is clear…we all agree on that:-)

  • DB

    Adrian – I have read it, and here it is for you to read as well:

    b) Offsetting Transactions

    Forex Dealer Members may not carry offsetting positions in a customer account but must offset them on a first-in, first-out basis. At the customer’s request, an FDM may offset same-size transactions even if there are older transactions of a different size but must offset the transaction against the oldest transaction of that size.

    Tell me how you can divine from this language that this is just a bookkeeping change. The NFA in their announcement letter of the rule change stated clearly that it is their intent to eliminate the practice of hedging. Tell me how, under the language above, the Trader Bob scenario is not substantially changed.

  • http://www.phkcorp.com PHK Corporation

    I tend to use hedging very successfully when a unexpected reversal occur on my initial trade, I am able to open the opposite and pick up some positive pips until the ccy pair returns to the expected direction. I have been very successful using this techniquem where balance incresas.

  • Adrian

    DB – notice it says nothing about offsetting orders, transactions, executions, routing, or anything at all to do with executions. It is saying that instead of showing multiple offsetting positions, the dealer must add or remove from the initial position on a first-come, first-serve basis.

    The reason that the Trader Bob scenario isn’t affected is because there are no order execution changes.

    The reason that hedging isn’t affected is because it was an illusion from day one and if you wish to perpetuate this illusion, you’re free to do so by keeping your own books. That’s how the rest of the world handles this situation when they, for instance, want to hold a long-term position in SPY but wish to take day trades as well. The trader can still record it as a long-term position and several distinct day trades even though the broker will just record a single, fluctuating position. A real hedge would be buying put options, what Trader Bob is doing is closing and then re-opening the position.

    Anyway, this is going round in circles. We’ve expended countless words and with the exception of Marjorie’s e-mail response from her confused CSR, no one from the pro-hedging side has come up with a single example where this would affect their P&L or their trading style. Please do so and give me the numbers. John has done this, I’ve done this, it’s time for you to pony up.

  • DB

    Adrian – With all due respect, the letters I’m getting from, and conversations I’m having with brokers say you are dead wrong. I just got off the phone with FXCM. They have already put into place a program to move customer accounts to FXCM-UK where no anti-hedging rule exists. While talking with them I explained “in detail” the Trader Bob example. The representitive said in very certain terms that Trader Bob’s long and short orders will mutually cancel one another and that Bob’s effort will net no P or L whatsoever following his afternoon on the links. If that’s not an affect on the P&L, I don’t know what is.

    The NFA states they want to eliminate the “practice”. That’s exactly what they’re doing. If you still want to stick to your position and you don’t believe what I’m telling you, I invite you to call a few brokers, as I have, and ask. If, after talking to them, you conclude they are all wrong, please call the NFA and tell them they don’t understand the new rule either. I’m sure they’ll listen.

    WRT to numbers, I’ve done that. They’re in the Trader Bob example. Go look at it again.

  • http://www.fxretracer.blogspot.com fxretracer

    Adrian”the dealer must add or remove from the initial position on a first-come, first-serve basis.”

    With all due respect, do you even know what that means Adrian…we are the ones producing evidence…its time for YOU to “pony” up.
    What you have is double worded duoble speak voodoo fancy shmancy terms and lingo…dont impress me…you can SOUND like you know everything…but I really wonder if u ever traded with less than 1k in your life.
    The supportors of this reg are just big bitter libs who are trying to weaken US Financial power, and never traded anything like a micro account in their life I am certain. But they do know many small fish do, and thats what counts; they have to squash the small fish.
    How you can sit here and tell us were all dumb in so many words and have not produced any evidence, is laughable.
    You notice in the Trader Bob scenario, you or John imeadiatly targeted the system. “if trader Bob can see into the future, then why not just trade based on that knowledge” or something to that effect…
    Thats what is really at the heart of this reg beside weakening US financial power, its about big boys who dont like the fact I can milk the system coming and going…just like they do…but I can do it with less than 100 bucks…

  • http://www.neocortechs.com Marjorie Miller

    hey guys!

    Upon further pondering, I pondered as thus.

    What’s the argument here? The right to hedge or the wisdom to hedge?

    If I were selling something here, I’d argue in favor of the wisdom of hedging. But that is not my argument. My argument is the right to hedge.

    I as well have been spending what little time I have, trying to find the answer to this question. I await an email response from FXDD, and thank you DB, I also got an email ad for FXCM-UK not being effected by the fake consumer protection association NFA. The NFA’s “no hedging” position is like the EPA sponsoring a toxic dump. Actions speak louder than words, and apparently the NFA is not about protecting the consumer from unscrupulous, sudden large movements of price which can be manipulated by brokers and banks, which can only be effectively answered by a sudden stop in trading, by a hedge, until the brokers and bankers stop playing their rip off game, I will wait to continue trading. If you think you’re not being played by the brokers and banks, John and Adrian, you’ve failed to see the bigger picture. The brokers and the banks want your money, all of it, and hedging stops them from doing that, as many peoples results, including mine, show.

    Speaking of, John and Adrian, I’ve made $2400 since 3/27/09 hedging. Today’s 4/22/09, and I haven’t had anytime to do any trading this week, so I just left everything hedged until it is convenient for me, not convenient for the market. If the market goes to hell in a handbasket, I’m still happy tripling my money this month already, in about 2 weeks work. The profit is locked in, and I can do all the other errands I need to do, and if the market moves the way I want it, I’ll make even more from my hedges. Whenever I want. Otherwise, I can just happily keep the profit I have. Please do tell me exactly how much money you have made in the last 2 weeks with your methodologies, and I will certainly listen to real numbers.

    I don’t argue for argument’s sake. I merely want to know the answer to my question and why the people at the NFA are trying to cloak what they are doing by not using plain english. And this is what we should all be worried about.

    I will say, though the FXCM-UK may be a temporary solution, the NFA will take their fight to England if we don’t end it here.

    Basically, not being allowed to hedge, is like a prostitute having sex before collecting the cash. We all know what’s going to happen there.

    Madame Hedge, Pro-Hedging Force Brothel representative, :)

  • foongcei

    hi there,

    me still in doubt about the defination of “hedging”,

    example;
    day 1 , i find that euro at 1.25 is pretty low…so i go long….but it keep falling. at the end of the week, there is a dead cat bounce, thus i go short on euro, while still holding the long position, this is prohabited?

    please advise….

    thanks

    • http://www.theessentialsoftrading.com John

      foongcei – If you are simultaneously long and short the same currency pair in the same account that is indeed considered “hedging” and with therefor no longer be possible under the new NFA rule.

  • http://www.neocortechs.com Marjorie Miller

    hey guys,

    Here’s a good news email from http://www.Forex.com pasted below!!! Forex.com is moving all their Metatrader accounts to England to retain the right to hedge!!!! The Revolution has begun!!!! It’s kind of funny, that Americans fought England to get our rights and freedom, and now we are returning to England to get our rights and freedom which have been blocked in the United States.

    Funny, but infuriating. We must find out who runs the NFA, and why they do not feel they have to explain the reasoning for their “regulations” or have discourse with the public, or the regulation will follow us to England…

    Dear Client:

    We’re committed to providing you with the tools you need to execute your trading strategies. Beginning May 15, 2009, all MetaTrader accounts will be serviced by FOREX.com UK Ltd., which is authorized and regulated by the Financial Services Authority (FSA).

    This change will allow us to continue to support all MetaTrader accounts, including those customers who currently use hedging as part of their trading strategy. As a FOREX.com UK customer, you will still benefit from the same level of stability and superior customer service you have come to expect.

    The transfer of your account will be a seamless process. Within the next few days, you will receive another email with specific instructions regarding the account transfer process. In the meantime, please feel free to contact a forex representative with any additional questions or concerns.

    Thank you in advance for your continued business.

    Sincerely,
    The Team at FOREX.com

    Customer support seven days a week

    24 hours a day from 10am Sunday to 5pm Friday
    Saturday from 9am-5pm ET

    Toll Free: 1.877.FOREXGO (877.367.3946)
    Int’l: 1.908.731.0750
    support@forex.com

    44 Wall Street, 7th Floor, New York, New York 10005
    Tel: 1.877.FOREXGO (367.3946) or 1.908.731.0750 | Email: metatrader@forex.com

    • http://www.theessentialsoftrading.com John

      Marjorie – My question is this: What happens when the FSA matches the NFA rule change? I won’t be surprised at all to see it happen before too long. All part of the move to global regulatory standards! :-p

  • http://www.neocortechs.com Marjorie Miller

    John and Battalion!!!!

    Here come the BlueCoats!!!! Vive la Revolution, Part Deux!!!!

    Seriously, I will be studying up on the NFA this weekend at http://www.nfa.futures.org/

    I’ll look into the FSA too. We cannot let the NFA take this global. Indeed, they need to be put in their place, right here in the good ol USA. I think we have a little spunk left in us.

    The funny thing is, who do they think this rule is good for, and who exactly votes on their rules?….

    one light if by land, two if by sea…

    Paulette Revere :)

  • http://www.fxretracer.blogspot.com fxretracer

    This is the chat I just had with FXCM:

    FXCM£8: Welcome to FXCM’s Live Chat Feature. How may I help you?

    Joshua: Hello, how will May 15th affect my account?

    Joshua: a micro

    FXCM£8: Hi

    FXCM£8: yes

    FXCM£8: no US firms can offer hedging starting May 15th

    FXCM£8: you can move your account to the UK division but the minimum is $2,000

    Joshua: omg

    Joshua: ok thank you very much:-)

    There you go..seems all the brokers are confused…and spending tons of money to move client accounts to UK because of NFA reg on May 15th.
    I find it stunning these pro May 15th reg supporters have pushed their side so hard…interesting the big supporters never gave a profile like most of did on this thread.
    The case is closed..as I mentioned before….
    Viva Revolution!
    Good Luck Everyone!

    • http://www.theessentialsoftrading.com John

      I find it stunning these pro May 15th reg supporters have pushed their side so hard…interesting the big supporters never gave a profile like most of did on this thread.

      Who are these supporters you have heard from who haven’t given a profile?

  • http://www.neocortechs.com Marjorie Miller

    We are not an Army of One…we are One Army…:)!!! :D !!!

    Our voices are already being heard. If everybody demands a response from NFA as to the motivation for this rule, they will have to give one.

    When was the rule request submitted, by whom, what problem is it “solving” and why it is necessary to regulate, what are the expected repercussions of the regulation, and how many people have complained about it so far?

    And last but not least, what is the procedure to appeal rules?

    Just a quick look at the site, and well, they collect fees from their members, so guess who they probably work for…

    I was very happy that forex.com took the initiative to solve the problem. Now that’s service. I hope they also complained to the NFA…I must write them a thank you note…

    The T-Party :)

  • DB

    All,

    I sent a letter of protest to the NFA last week when I first heard about this draconian new rule. This is the response I received:
    ————
    National Futures Association appreciates your input and concerns about NFA Compliance Rule 2-43(b). We adopted the rule only after evaluating several alternatives (including disclosure), requesting comments from all of our Forex Dealer Members, and considering the comments we received from those firms and from the public. After careful analysis, we concluded that requiring positions to be offset provides the greatest degree of customer protection and that any burden it imposes is justified. You may continue to take opposite positions as a result of separate trading strategies as long as you do so in separate accounts.

    Thank you for your input.

    Sincerely,

    Lauren Brinati
    Senior Manager, Compliance
    ———-

    I think the key words “provides the greatest degree of customer protection” are clear evidence that socialist nanny-state mentality is dominant at the NFA. The only way to counter this is immediate and massive protest.

    Write to the NFA and protest this intrusion on trading rights!

    Even though I may sound like broken record, I’ll post this quote again:

    “All tyranny needs to gain a foothold is for people of good conscience to remain silent.” – Thomas Jefferson

  • Bourn

    Hi,
    I am from England and pray it won’t be the case here and in Switzerland. Anti-hedgeists – your points are a loughing-stock, really…. Hedging is the ONLY way for a small trader to be profitable! Full stop. You can ban it only after you make the forex market 100% stop-hunting free. And this is what the NFA must address…

    You, the Americans, look really not wise – first banning the internet gambling (sport betting) and now hedging. Then, perhaps, trading as whole – communism is comming…

  • http://www.neocortechs.com Marjorie Miller

    hey All!!!

    I’ve been SWAMPED this week! But I wanted to share an email with you from http://www.forexpeacearmy.com, a great site that fights for forex consumer rights. Also got an email today from FXDD saying not to worry, they are going to figure out a way for people to continue hedging if they want.

    Seems everybody’s up in arms, which is good. I think if enough people contact the NFA, at the NFA contact info listed in the below pasted email, I think the NFA will change it’s mind or go broke with no US member brokers, as all the money is moved to the UK, as http://www.forex.com and http://www.fxcm.com are already doing.

    By the way, thanks for the shoutout from the UK!!!!! :D !!! :) !!!! I’m being held hostage in the USA against my will. Please send boat, and alot of money. :) .

    Columbus :)

    pasted from: http://www.forexpeacearmy.com/forex-forum/forex-articles/4587-new-nfa-rules-what-they-mean-you.html

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    Pharaoh Pharaoh is offline
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    Default New NFA Rules and what they mean to you – 04-29-2009, 09:02 PM
    The NFA Giveth and the NFA Taketh Away
    by Pharaoh

    By now, you’ve probably begun to hear about the new anti-hedging regulation the NFA is about to impose. This can be pretty inconvenient for some trading styles, but don’t be ready to move all of your money offshore yet. The NFA also gave traders a HUGE benefit as part of the same new regulations.

    First, let’s get the bad stuff out of the way.

    As of May 15th, 2009, hedging won’t be allowed on NFA registered brokerages. What this means is that you won’t be able to have any new long and short positions on the same currency pair at the same time. Not all brokerages permitted this, but hedging ability is standard for MT4 accounts and does work with other forex trading platforms.

    Usually, to open a long and a short on the same pair is silly, but there are legitimate reasons to do this. Some EAs us a hedging strategy. Some traders (myself included) might have long term positions in one direction and want to take short term trades in the opposite direction while letting the long term trades run. Also, when a trader has been foolish enough to let a position run far against him with no stoploss, opening a hedged position locks in the loss to that level, giving the trader time to contemplate the unpleasant choices left available (at least until swap fees or widened spreads finally eat all remaining available margin). Just to be generous, they announced this on the 13th of April so that those of us who hedge would have month to adjust our strategies. Nice to know that they expect people to be able to take strategies developed over months or years and adjust them in only 1 month.

    For those who want to hedge, there are several options. At least 1 brokerage is trying to determine if hedging can be done intra-day and that opposing positions will only automatically close at rollover time. Other brokerages that have licensed offices both inside and outside the USA are allowing US clients the option of moving to one of their offshore branches.

    Another choice would be to open a second account at your brokerage and place your hedges in the other account. For those who like to leave long term trades open while making short term trades, this would work well. For someone trying to buy time to think of options during severe drawdown, it would fail. For forex robots that hedge, it would fail.

    Other options are “synthetic hedges”. This would involve opening trades on related, but not identical pairs. The EUR/USD and GBP/USD tend to move in the same general direction much of the time, so if you wanted to trade opposite of a EUR/USD long, you could open a GBP/USD short. The EUR/USD and USD/CHF are inversely correlated, so if you wanted to hedge a EUR/USD long, you could open a USD/CHF long. Forex trading robots that hedge normally would need to be reprogrammed for this to work.

    I contacted several brokerages and asked them a simple question. If I have a long position on the EUR/USD and try to open an equal sized short position, what happens? The possibilities are: 1. It won’t let me open a short position. 2. The positions will cancel out, thus closing my long trade. 3. Positions will open, but will cause close outs at rollover time. None of the brokerages were sure, but said that they would have answers soon – I hope before May 15th. Judging from the lack of solid answers from the brokerages, this was definitely not their idea and they are scrambling to find ways to deal with it.

    Assuming trades are forced to be closed (instantly or at rollover), the rule seems to be FIFO – first in, first out. Thus, if you open a 0.8 lot long on the EUR/USD, then a 0.5 lot long on the EUR/USD, opening a 0.5 lot short on the EUR/USD will close 0.5 lot of the first 0.8 lot EUR/USD long that you opened.

    Why did the NFA do this? My personal theory is that they accidentally took the wrong medications one morning, but they do claim to have had some real reasons. For inexperienced traders, a broker might encourage hedging just to collect more spread. An unscrupulous account manager could open hedged positions and later close the half that was in profit to show profits (at least for clients who are not bright enough to ask about currently open positions) and collect performance fees. Some people might be stupid enough to leave hedged positions open for long periods while the swap fees eat their remaining account balance.

    Overall, I find these reasons to be very inadequate. Truly stupid traders will find a way to get margin called very quickly without the NFA messing with those who have legitimate reasons to open opposing positions. Some people need training wheels to learn to ride a bicycle, but this is the same as forcing all of us to have training wheels on forever for the sake of a few perpetually unbalanced people. The sad part it that in this time of economic upheaval, I’m sure this will cause a number of traders to move their accounts to offshore brokerages. Very likely, some of these brokers will scam the traders out of their money. Also, some US brokerages will end up hiring fewer workers or laying off workers because of reduced business volume. Way to go NFA! Save a tiny amount of money for a few people and end up costing jobs and making others move their money out of the country to banks and brokerages that are at least potentially riskier.

    So, for those of you who want to get in touch with the NFA and throw a screaming fit, here’s their contact info:

    Email: information@nfa.futures.org

    Chicago Headquarters
    300 S. Riverside Plaza, #1800
    Chicago, IL 60606-6615
    (312) 781-1300
    (312) 781-1467 (fax)

    New York Office
    120 Broadway, #1125
    New York, NY 10271
    (212) 608-8660
    (212) 964-3913 (fax)

    OK, now that I’ve told you about the truly moronic part of the recent decision, let me tell you the good part. While one group of NFA regulators was exploring the deeper recesses of bureaucratic stupidity, some brilliant crusader for traders’ rights slipped in the BEST RULE EVER!!!!

    Many traders have experienced the ripoff where a brokerage waits days (or weeks or even months) to say “We’re sorry, but there was a price feed error, so 40 pips of your 50 pips profit are gone.” As of June 12th, 2009, that semi-legal form of theft ends for good with NFA registered brokers.

    For positions established after June 12th, brokers are greatly restricted from making price adjustments to client orders. There are only 2 exceptions.

    First, if a customer disputes a price, adjustments may be made, but ONLY in the customer’s favor.

    Second, if the broker has an exclusively straight-through processing model and the liquidity provide makes a price adjustment. In these cases, the customer must be notified within 15 minutes. Yes, that is 15 minutes from the order being executed to send a notification to the customer. Save those emails with full headers – you may need them to prove that they waited 20 minutes to notify you. If the broker isn’t exclusively STP, then they don’t even get 15 minutes.

    As for spike trading and broker rules – I really am not sure how this will work with a non-STP broker. They won’t be able to adjust the price. I have a feeling we may see some interesting legal cases starting in late June.

    For those of you contacting the NFA to complain about the hedging rule, make sure to take a moment to thank them for the new protection they’ve given to traders to keep brokers from being able to make up prices later. Maybe this will drive some business back to US brokerages.

    I’d like to give a special thanks to my fellow FPA member G3flyer for posting some more details in FPA’s forums. I was already working on this article, but the PDF file he posted from the CFTC and NFA filled in a lot of details about what motivated these changes.

    New NFA Rules on Hedging and Price Adjustments

  • http://www.neocortechs.com Marjorie Miller

    hey – just sent this email protest to information@nfa.futures.org
    will post their response when and if I get one…

    Dear NFA,

    Before I learned to hedge forex 6 months ago, I lost $2500. After I learned to hedge forex, I made $3000, leaving me with no loss, and a nice $500 profit. The $30 in interest I paid in order to hedge, was my insurance payment, which I then handily made back, as I then still had money to invest.

    Now all the sudden, the NFA which is supposed protect the consumer, comes out and says “in one month, hedging will be banned”, for my own good. I beg your pardon? Not only that the diarretic NFA language cannot even be understood by anyone, as many theories as to what the NFA means can be found in the comments at: http://www.theessentialsoftrading.com/Blog/index.php/2009/04/14/no-more-hedging-for-forex-traders/comment-page-2/#comment-13963

    Why is there is no comparable public discussion page on the NFA website? At the above blog link, an NFA representative says the following:

    National Futures Association appreciates your input and concerns about NFA Compliance Rule 2-43(b). We adopted the rule only after evaluating several alternatives (including disclosure), requesting comments from all of our Forex Dealer Members, and considering the comments we received from those firms and from the public. After careful analysis, we concluded that requiring positions to be offset provides the greatest degree of customer protection and that any burden it imposes is justified. You may continue to take opposite positions as a result of separate trading strategies as long as you do so in separate accounts.

    Where is the table outlining the Pros and Cons and how the NFA made this decision with such “careful analysis”? How is it that NFA thinks that for my own good that “any burden it imposes is justified”. That losing all my money because of a margin call because I could not margin, is justified and for my own protection? I’d say protecting myself FROM the NFA is worth any burden. Has this NFA representative ever traded before? Please tell your “analysis committee” that hedging in two separate accounts, will still lead to a margin call, and therefore lead to much more than a “burden”. And for what purpose?

    Speaking of purpose, what is this “message from God”, dictatorial attitude from the NFA? Why no discussion pages for these consumers that the NFA is supposedly so concerned about? Who regulates the NFA? I hope it’s just the market forces, because the NFA is a joke and has just written their epitaph. No one has any respect left for the NFA. The NFA has become the laughing stock of the Forex community. Do a search. It’s like the EPA dumping pollutants and while they preach about clean water.

    The following link, http://www.forexpeacearmy.com/forex-forum/forex-articles/4587-new-nfa-rules-what-they-mean-you.html, is for the http://www.ForexPeaceArmy.com discussion entitled “What’s the NFA up to?” The FPA is what the NFA should be. The NFA apparently collects dues from it’s broker members, and therefore works for them. In contrast, the FPA does a great job, doesn’t charge a cent to it’s members and makes it’s money with advertising on the site. Too bad the NFA isn’t as efficient. I’d go with an FPA approved broker before an NFA approved broker any day.

    I’d like to know the exact names, positions and affilations of the NFA people who ramrodded this through. If they are so proud of their regulations, then they shouldn’t mind seeing their name next to it, so that people can analyze their possible conflict of interest in “looking out for the consumer”, as appears to be the case here.

    Marjorie Miller

  • Bourn

    Good text, Marjorie,
    you could also mention some other ways to be introduced by the NFA to protect unexperienced traders (but I’m not sure they realy want it). For example, to give the traders an easy switching to different leveraging, 2:1, 5:1 etc. After all its all about choice for us, the consumers. By having wider choice we are protected stronger !

    By the way, a friend of mine, who uses some hedging strategy, within a year was able to get ~5 times his university professor salary. And he traded from a very modest deposit. And he had a very comfortable life. All his previous experinece without hedging was jast pathetic…

  • http://www.neocortechs.com Marjorie Miller

    Thanks Bourn, we may need a little “Bourn Ultimatum”…;)…

    I just saw the funniest posting at FPA (by “onewithzachy”)…I love the simplicity of the question/argument:

    “I haven’t yet read new NFA rules about hedging, but we’re trading pairs of currencies so…”

    Isn’t trading a currency pair, by definition, “hedging”?

    Now that’s funny…

    Thank you onewithzachy for pointing out this fun-da-mental contradiction…:)…

    • http://www.theessentialsoftrading.com John

      Isn’t trading a currency pair, by definition, “hedging”?

      No, it isn’t. To suggest otherwise implies a “fun-da-mental” lack of understanding.

      Trading a currency pair is trading the value of one currency in terms of the other, like USD/JPY being the number of Yen each Dollar is worth. Theoretically, that could go to zero in exactly the same way the value of Gold in terms of Dollars could. Not likely, of course, but possible – meaning a limit on one side of the equation (just like holding a stock).

      Pair trading, like being short Ford and long GM, has no limits because you’re trading the diffence between the two, not the value of one in terms of the other as in currencies. If you really want to stretch things, you could call that pair trade a hedge by saying that shorting Ford against your GM long provides protection against sector and/or general market moves. Given how Ford can move all by itself having nothing to do with the market or sector, though, I wouldn’t call it one myself. It’s a relationship trade.

      By the way, there have been some serious allegations of misdoing in regards to FPA in the past. I can’t say whether they were legit or not, but taking things there with a grain of salt is probably a good idea.

  • http://www.neocortechs.com Marjorie Miller

    John schweety,

    You speak of the lawnmower and leave out the lawn. :) .

    The question is Why would someone buy a “currency pair”, not How. Buying a currency pair is a hedged bet, based on fun-da-mentals and technical analysis. An “Un-hedged bet” is by definition stupid.

    Here’s a little Mental-Fun for ya. Let’s just consult the dictionary definition of the word “Hedged”. Then put “un” or “not” in front of any example below (negate the statement), like this example:

    to NOT enter transactions that will protect against loss through a compensatory price movement.

    or here’s a good one:

    to un-mitigate a possible loss by counterbalancing (one’s bets, investments, etc.).

    Have Fun…;)….

    Ari :)

    from http://dictionary.reference.com/browse/hedge

    hedge
       /hɛdʒ/ Show Spelled Pronunciation [hej] Show IPA noun, verb, hedged, hedg⋅ing.
    –noun
    1. a row of bushes or small trees planted close together, esp. when forming a fence or boundary; hedgerow: small fields separated by hedges.
    2. any barrier or boundary: a hedge of stones.
    3. an act or means of preventing complete loss of a bet, an argument, an investment, or the like, with a partially counterbalancing or qualifying one.
    –verb (used with object)
    4. to enclose with or separate by a hedge: to hedge a garden.
    5. to surround and confine as if with a hedge; restrict (often fol. by in, about, etc.): He felt hedged in by the rules of language.
    6. to protect with qualifications that allow for unstated contingencies or for withdrawal from commitment: He hedged his program against attack and then presented it to the board.
    7. to mitigate a possible loss by counterbalancing (one’s bets, investments, etc.).
    8. to prevent or hinder free movement; obstruct: to be hedged by poverty.
    –verb (used without object)
    9. to avoid a rigid commitment by qualifying or modifying a position so as to permit withdrawal: He felt that he was speaking too boldly and began to hedge before they could contradict him.
    10. to prevent complete loss of a bet by betting an additional amount or amounts against the original bet.
    11. Finance. to enter transactions that will protect against loss through a compensatory price movement.
    Origin:
    bef. 900; ME, OE hegge; c. D heg, G Hecke hedge, ON heggr bird cherry

    Related forms:
    hedgeless, adjective

    Synonyms:
    9. evade, stall, delay, temporize, waffle.
    Dictionary.com Unabridged
    Based on the Random House Dictionary, © Random House, Inc. 2009.
    Cite This Source
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    Link To hedge
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    Related Words
    circumvent, dodge, duck, elude, evade, fudge, parry, put off, sidestep, skirt, hedgerow, hedging, hedge in
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    • http://www.theessentialsoftrading.com John

      The question is Why would someone buy a “currency pair”, not How. Buying a currency pair is a hedged bet, based on fun-da-mentals and technical analysis. An “Un-hedged bet” is by definition stupid.

      Marjorie – I’ll leave aside the question of whether forex or any other trading is betting/gambling for a seperate discussion because that could certainly go on for pages and pages.

      As for the rest of it, your pasting in of dictionary definitions serves only to lengthen your comment not elucidate it. Explain your point regarding not taking an unhedged bet. Where is the hedge when you go long USD/JPY, for example?

  • Bourn

    hedge = protection !!! Nothing more, nothing less. It doesn’t matter whether one uses options-shmoptions, comodity-shmomodity or sell-buy the same currency pair to hedge (as explained above by Marjorie and the others).

    This is how brokers (especially market-making) balance their books – they balance Long Positions against the Shorts (a huge task if a strong trend and/or liquidity problems exist), and if any outstanding trade carries risk to them, they are ENTITLED to spike the price up/down to take out ones position, even if the Interbank price traded nowhere near that level. This is not a secret. In fact, you most likely to find that in their customer agreement. Moreover, this the essence of the retail forex. Stop-hunting rules! The NFA, FSA etc. – do not care. Sure – we all know this fact. So how to survive this cheating? Don’t use stops – use hedges! There is NO other realistic way for sistematicly profitable trading. If somebody with 20+ trading years used hedging – now they would be right up there with Mr Soros and Mr Simons (no intention to offend anybody)…

    • http://www.theessentialsoftrading.com John

      hedge = protection !!! Nothing more, nothing less. It doesn’t matter whether one uses options-shmoptions, comodity-shmomodity or sell-buy the same currency pair to hedge (as explained above by Marjorie and the others).

      Bourn – No one is arguing that. Same currency pair offset is certainly the ultimate hedge, just like exiting your position.

      Stop-hunting rules!

      I’ve got a post going up on Monday which provides contradictory evidence to that fact – not mine, someone else’s

      If somebody with 20+ trading years used hedging – now they would be right up there with Mr Soros and Mr Simons (no intention to offend anybody)…

      You seem to imply there that there aren’t any 20+ year traders who’ve had consistent success with hedging. Hmmm…..

  • Bourn

    no, John – exactly the opposite – one MUST use hedging to be successful over 20+ years…

    About the comming article you’ve mentioned – I am sure it will be from a “theory” trader or a broker…

    It just happened that I know the “kitchen” inside out. You know, a brokerage firm is as any other business which needs some capital at its start-up. Their main goal is to preserve this capital and to grow it – they also want to be rich! They use it to balance the book. Otherwise they’ll be dead as soon as a more or less strong and persistent trend happens. So the bigger this capital is – the better, obviously. And they do their capital/risk management too. Further, it is gullible to think a broker makes their living from the spreads only – this provides just a tiny part of their profit. And it is naive to think that those 90% of loosers in the retail forex (known statistics) provide the profit for the 10% of good traders (minus spreads). No. In the retail forex they provide for brokers to fulfil their main goal (see above), their salaries etc.. They have many ways to cheat on small traders, with the stop-hunting being the favorite and being virtually legal…

    I feel sorry for the clever and talanted people, like Marjorie. Who’s cracked the “cheating game” by finding a way of not using stops (call it hedging or being flat, or “exiting your position” – doesn’t matter). Now it will be taken from them by the supposed to be supportive NFA – difficult to believe the decision will be reversed – it is on the broker side… America disspoints once again…

    • http://www.theessentialsoftrading.com John

      They use it to balance the book. Otherwise they’ll be dead as soon as a more or less strong and persistent trend happens.

      Bourn- You do realize, right, that brokers can and do hedge any un-offset customer positions?

      As for clever and talented Marjorie, my contention all along is that the cleverness and talent is in decision-making which determines where she executes her trades. That’s what’s making her money. All the rest of it with the hedging is window dressing through an alternate method of accounting. If she made poor decisions she’d still end up losing money and all the hedging in the world couldn’t make it otherwise.

  • la

    It is clear to me at least that hedging clearly provides a means to control risk and one which savvy forex traders, eg marjorie, uses to their advantage.
    Anyone who argues against the ability of hedging to reduce risk simply do not undertstand, full stop.

    It is also clear to me that the ability to hedge does not provide an advantage to the dealers/marketmakers. Point in case, FXCM are moving operations to the UK.

    So who are the NFA protecting? Clue: Themselves.

    • http://www.theessentialsoftrading.com John

      It is also clear to me that the ability to hedge does not provide an advantage to the dealers/marketmakers. Point in case, FXCM are moving operations to the UK.

      la – You have provided contradictory evidence to the point you’re trying to make, I think. If there were no advantage to be had in this hedging business by the likes of FXCM, then why would they go through all the hassle of moving customer accounts to an alternate juristiction? They most certainly aren’t doing it out of the goodness of their hearts. If hedging does in fact provide an advantage to the customer, and the NFA is simply representing it’s membership as others have accused them of doing, then why would the brokers so readily shift accounts out of US authority? I actually spoke with someone from FXCM on Friday. She said they were prepared to move those accounts again to Austrailia or one of the other locataions they are set-up to do business in were the FSA in the UK to adopt rules similar to the NFA.

      As for hedging being a means of risk control, no one is arguing that at all. It definitely is – in exactly the same way as closing out a trade. If you believe otherwise, demonstrate how it’s not.

  • Bourn

    Yes, John, they can and do hedge. But only if they have an opportunity – it doesn’t always exist ! So most of the time they use their capital to cover the unbalanced trades – huge risk for the capital, but hey they can always and easily top it up by stop hunting etc.. Similar to your big banks who first forgot and then could not find means to hedge their spiralling credit debts, then lost their capital. It is okay for them – the grateful goverment is ready to bail them out with the taxpayers money…

    • http://www.theessentialsoftrading.com John

      Bourn – There is always the opportunity for retail forex brokers to hedge in the market via inter-bank trading. It’s the advantage of being part of the deepest, most liquid market in the world. I’ve never worked for a bank, so I cannot speak to the risk management methodologies they employ and at what point hedging plays into it, but the most definitely always have the opportunity. The comparisson to what happened with the banks is inappropriate. They were/are in much less liquid securities.

  • Bourn

    John, – you are wrong, sorry – the retail forex broker, even the bigest and well connected, do have problems with liquidity. Especially nowadays. 2 trillion $ a day ! well brokers like to pay lip service to it. How do you know it is enough – you may need 10 or 100 trillions. And my example with the banks is very relevant, after all they are also brokers and it reflects the common dishonesty in the financial industry.

    I would not waste my time writing here – just feel sorry for the guys. By the way, if Marjorie would be able to be succesfull – another problem is comming. Her account will be put on manual and then closed…

    • http://www.theessentialsoftrading.com John

      Bourn – I’d love to see a demonstrated need of any retail broker for trillions in liquidity – which means a requirement after the netting of customer positions. Oanda is one of the largest brokers and the poster I quoted in today’s blog entry talks about them having something above $1 billion in customer funds. Even leveraged 100:1 it’s still only $100 billion in positions – and that’s gross, not net.

  • la

    John-you have followed the argument I set and arrived at the same conclusion. Therefore no contradiction there. You see, if the ability to hedge (and we are talking about the ban on hedging, remember) provided an advantage to the brokers, they would not want to shift operations.

    As for hedging = closing out a trade, still you refuse to undestand, while accepting it is another form of risk management. Hedging is not the same as closing out a trade. If you take away some forms of risk managment you restrict the retail customers ability to manage their trades and that cannot be good for retail customers, can it. Why not accept you are wrong.

    Providing another example is futile.

    • http://www.theessentialsoftrading.com John

      la – You say we’ve come to the same conclusion, but your statement suggests otherwise.

      “…if the ability to hedge (and we are talking about the ban on hedging, remember) provided an advantage to the brokers, they would not want to shift operations.”

      If brokers are moving their client accounts (those who wish to continue hedging) away from NFA jurisidiction to allow those customers to keep hedging, does that not imply that the brokers see an advantage to themselves in allowing customers to keep hedging?

      “As for hedging = closing out a trade, still you refuse to undestand, while accepting it is another form of risk management.”

      I’m not refusing to understand anything. My very simple point when I say hedging=closing out the trade is that as soon as a hedge is put in place that position can neither make nor lose money no matter what prices does. In that way, it’s exactly the same as closing the position. It takes directional exposure to gain or lose from directional movement. A hedged position has no directional exposure, and neither does an exited position.

  • Daniel Palos

    I view hedging as an analogous equivalent to getting a “share” secured loan from a credit union versus a signature loan. Deposits are called shares at a credit union.

    Usually when you finish paying off a share secured loan (as a form of hedging) you still have the shares (account balance) in your account.

    With a regular signature loan (as a form of stop loss), you only pay off the loan.

    • http://www.theessentialsoftrading.com John

      Daniel – A “hedged” forex position is one in which one’s account can neither gain nor lose so long as the hedge is in place. The trader can only make any account gain or loss (from existing levels) once one leg of the hedge is removed. Depending on how long the position is held, as well, the hedged trader could be exposed to a negative net carry situation as well, which means an erosion of portfolio value (albeit a slow one). I don’t think that quite fits with your analogy.

  • Adrian

    John – I’m curious about this definition of “hedged”. In all of the other areas I can think of a hedge provides downside protection (such as a put option), sector or market protection (such as shorting an index, sector ETF or basket of competitors) or supplier protection (such as going long an oil driller but short crude oil). I’ve never heard of a a “hedge” which totally eliminates market exposure without being called an exit. Are there other situations where traders or businesses cut all exposure and still call this a hedge? It sounds a lot like people are reacting to the name rather than to what is actually changing.

    • http://www.theessentialsoftrading.com John

      Adrian – Only in retail foreign exchange trading is going simultaneously long and short the same instrument called a hedge. In every other market a hedge is generally something which while reducing risk as you’ve indicated, does still leave some potential for gain. The forex “hedge” leaves no such potential since it is entirely neutral (while in place), which folks outside retail forex would call an offset.

  • Daniel Palos

    John – I could try to further clarify my analogy, but it would only complicate it with variables that would also be based on analogy. The point being, however, that with a hedged position, the account balance doesn’t change regardless of market volatility; except for negative carry fees. With a stop loss, a negative impact on an account is registered immediately.

    However, I would like to present another point of view concerning the ban, in the US, on hedging. I don’t have any issues on not being able to hedge on the demo account that starts with fifty thousand dollars. So, from that perspective, I think only people who are wealthy enough to open a real account with fifty thousand dollars should be restricted in hedging.

    From another perspective, if our benevolent regulators really want to level the playing field and protect the consumer, then they should “grant” anyone with less than fifty thousand to open an account, the balance to make up for the shortfall, as a form of eminent domain for denying and disparaging the privilege and immunity of being able to hedge.

    By the way, I have voted with my mouse and keyboard. I have requested my FXCM accounts be transferred to a jurisdiction that still allows the individual liberty and freedom to hedge, as a form of pursuing financial Happiness.

    • http://www.theessentialsoftrading.com John

      The point being, however, that with a hedged position, the account balance doesn’t change regardless of market volatility; except for negative carry fees. With a stop loss, a negative impact on an account is registered immediately.

      Daniel – If you’re long, then the market goes 100 pips against you it doesn’t matter whether you “hedge” the position 100 pips down or you are stopped out (or otherwise sell) 100 pips down. You’re still 100 pips down with a market neutral position in either case.

      As for your proposal, if the gov’t is giving away $50k accounts to hedgers, sign me up! I’ll hedge too. :-)

  • Daniel Palos

    I would contend that, a hedged position is only the equivalent to a paper loss on a negative trade. That negative trade would be a realized loss if I used a stop loss. The “proof” is that my account balance doesn’t change with a “paper loss” as it does with a realized loss.

    • http://www.theessentialsoftrading.com John

      I would contend that, a hedged position is only the equivalent to a paper loss on a negative trade.

      Daniel – My contention is that since forex positions are marked-to-market (evil phrase in these days!) your losses are realized as soon as price goes against you, whether or not you exit or hedge the position. It’s that much less money available for you to withdraw from your account or apply to margin on a new position. Of course it also works in a positive fashion when price moves in your favor. This is where forex (and futures) differs from a market like stocks where you are putting money into the market and would never be able to take gains out until you closed the position because your money is all in the stock.

  • Daniel Palos

    What is your opinion on the, “banned” in the US, ability to hedge positions And use a dollar cost averaging strategy on those hedged positions?

    In my view being “protected” by inefficient regulations is not better than being somewhat ignorant of markets in our mixed-market, political-economy.

    How else will someone be able to practice, more often, rather than less often, if hedging is not available?

    • http://www.theessentialsoftrading.com John

      What is your opinion on the, “banned” in the US, ability to hedge positions

      Daniel – My view is that this move by the NFA basically is little more than just moving retail forex accounting in line with every other market. It’s a consistent standard. In stocks or futures if you go long and then go short your are flat. You don’t have any positions. I do agree that there’s an element of “protecting traders from themselves” in there and I’m hesitant to go along with that, except that I do find it a bit slimy when brokers actually promote a practice which is wholely to their benefit.

      As I think is pretty clear, I don’t hedge and never would. That doesn’t mean the new NFA rules don’t impact me, though. The FIFO rule which requires the offsetting of the first position you enter will require some adjusting in the way I do closing orders, but I see it as a minor thing. Again, it just brings forex in line with stocks, futures, etc.

      How else will someone be able to practice, more often, rather than less often, if hedging is not available?

      The contention I have tried to make all along is that the basic decision-making and trade execution process you employ when hedging is exactly the same as it is without hedging. Hedging is just a bookkeeping method. It has no impact at all on someone’s bottom line. If you doubt that, do a comparable set of trades hedged and not hedged and you’ll see the P&L comes out the same. So long as you buy and sell at the same points it doesn’t matter what you chose to call it. The bottom line result is the same.

      Think of it this way. You do your analysis and go long. The market goes against you 100 pips. Your analysis says you should hedge there and wait for things to turn. At some point later the market has turned (or you think it’s going to), so you lift the hedge and get back to net long. The market goes your way and at some point your analysis or system or whatever gives you an exit signal and you close out for a net 100 pip profit.

      Now compare that to this sequence. You do your analysis and go long. The market goes against you 100 pips. Your analysis says you should exit there and wait for things to turn. At some point later the market has turned (or you think it’s going to), so you get long again. The market goes 200 pips your way and at some point your analysis or system or whatever gives you an exit signal and you close out for a net 100 pip profit.

      Tell me what the difference between those two scenarios is. The decision-making process is exactly the same. The finaly P&L is exactly the same.

  • http://www.fxretracer.blogspot.com fxretracer

    Here is an example ( and proof for you hard heads)) of a trade that will not be possible with new NFA rule because I took the trades at the exact same time:http://twitpic.com/4krhm/full

    That done, I dont expect anyone to understand, as clearly this thread is populated with a bunch of rocks.

  • http://www.fxretracer.blogspot.com fxretracer

    John as for your last scenario or whatever, I find it laughable.

  • http://www.fxretracer.blogspot.com fxretracer

    http://twitpic.com/4krhm/

    there it is again, my apologies.

  • http://www.fxretracer.blogspot.com fxretracer

    What hedging does is improve your odds in forex of winning by 50%.
    Fact is: if you take a position in forex without any preparation, plan, system ect, it is 100% certain you will end up in a loss. At least with a hedge you can get a 50% chance of winning or losing.

    Believe me I KNOW, how else can so many lose at trading till they figure out something to help them along.

    Please I dont want to hear about how badly I trade, or how lousy my system is. Or that you have a great system for sale that will eliminate my need to trade this way.

    This is the “evidence” requested by so many on this forum. This is surely not the first time I have “ponied up” on this thread and explained things in a manner even my cat can understand..

    Anyone who does not get this is simply refusing to learn.

    Again here is the link for those who may have not seen it: ttp://twitpic.com/4krhm

    Some on this thread do get it, and you know who you are;-)

  • http://www.theessentialsoftrading.com John

    fxretracer – Firstly, what exactly is that chart supposed to be representative of? I see two entry level (presumably) which aren’t even the same size so it’s not a full hedge. What’s the red line? Is this supposed to be an example of a straddle type of play? Too much detail lacking for me to make heads or tails.

    Second, what’s so laughable about my “last scenario”? You can’t hope to educate the ignorant masses if you don’t explain things to them.

    Thirdly, there are so many errors in your “50% improvement” comments that I don’t know where I should start first. How about with even someone with no plan and no knowledge can get it right 50% of the time out of blind luck? Then I’ll toss in that win rate does not by itself determine profitability. People get much too focused on that metric when they should be equally focused on the ratio of their average winner to their average loser. If you win 90% of the time it’s no good if those 10% of trades lose more than the other 90% combined. Lastly, how exactly does creating a price neutral position improve your win%?

    You’ll notice in here that I have not commented on your trading or your system. I have consistently said that trading comes down to good decision-making (automated or manual) in regards to buying and selling. Those who consistently make money in the markets do so because they pick the right points at which to trade and how large. The hedging thing is just a way of doing the accounting. It doesn’t change the fact that you still need to make good buy/sell choices.

  • http://www.neocortechs.com Marjorie Miller

    hey guys!!!! :) !

    Boy, you guys have been busy!!!! Thanks for your kind words!!!

    I’ve been holding my breath. Phew. Things are looking good though.

    And it answers your question John. Holding breath = hedging. :) .

    You asked how a buy of a currency was a hedge. Where is the hedge when you go long USD/JPY, for example? to be exact.

    Well, let us use first rule of proof: let us assume there is no “hedge” in a buy of a currency. That would mean all buys are created equal and of equal risk.

    But this is not the case. Which is why I am holding my breath. I did a sell of the EURUSD at $1.34 on Monday. It is my feeling, from fun-da-mental and technical analysis, that the Euro cannot nor does not want to hold on to such a high value, because of the effect a strong currency has on exports. Case in point, the United States export deficit. Good reason to weaken currency is to increase exports. Plus ECB talking of stimulus package, which means weakening their currency, ie. print more money to get things going, but devalues money possibly.

    Which means my first bet is hedged in this belief of the future. Now, what if I’m wrong? I am writing this now, because the the EURUSD is plunging. But what if, as the article I will post after this email, called “The Curious Case of Missing Intervention”, things go suddenly illogical, and the EURUSD returns to $1.60? Why would a central bank allow it’s country to be so pummeled?

    Well, that’s a deep question of conspiracy for another time, but, if the central bank does not act, I want my Plan B. My second hedge being the actual hedge. Plan A: read the market, Plan B: hedge to protect assets until normalcy returns.

    The other night I took a jog between 11-midnight. Now this sounds kinda stupid, kinda like trading Forex. ;) . But I have 2 Australian shepards with me, and so I’ve never had a problem jogging at night. :) .

    The NFA is saying that I have to go jogging in a not so good neighborhood, Forex, without my dogs. :) . Now why would the NFA not want me to have my dogs if they are looking out for my safety?…

    As the article pasted below shows, I think perhaps the NFA works for the banks. BTW, I wonder if the brokers will still be allowed to hedge…

    copyright material removed

    • http://www.theessentialsoftrading.com John

      Marjorie – First of all, please do not paste anymore copyrighted material in your comments. I’d rather not start getting letters from lawyers or having my employers get hassled by extention. If you don’t think they see their content when it gets shared around like that you should ask the guy who took my place in a position I held a few years back. He reposted some content from Deutsche Bank and they had him fired for it. Links are fine, of course.

      Now, to respond to your comment. I’m trying to figure out which of the definitions of “hedge” or “hedging” that you or someone else posted you are using to define doing well thought out market analysis before entering a trade as a hedge. It doesn’t seem to fit any of them. Educated guess fits. Calculated risk definitely works. Hedge or hedging not so much. :-)

      Your running with the dogs is a very good hedge analogy, though. The dogs protect you against certain types of risk, but not everything. They probably aren’t going to keep you from twisting and ankle, for example. At the same time there is a cost associated to having them along. Chances are you don’t run quite the same with them as you would if they weren’t along in terms of pace or distance or whatever. Hedging does generally have some cost associated because it’s basically insurance. At the same time, though, you still have the upside of being able to run and the benefits that provides you.

      The dog thing is a classic example of what market participants outside retail forex would call hedging. It’s such a good analogy that I may use it some time down the road. :-)

      The reason why what you are calling hedging is not looked on as such outside retail forex is because there is no risk left and no gain potential. As long as you are hedged you can neither lose any money nor gain any. Hedging the way you are looking at it would be like your dogs being so protective that they won’t let you out of the house to go on your run – no risk, but also no chance for reward.

  • http://www.fxretracer.blogspot.com fxretracer

    Wow, they never give up. Even with proof in the face.
    Anyone who cant understand the chart I posted is surely one who has never traded the way I do. So no use trying to talk to them I guess.

    Thats why this rule is so messed up, they ( John and big players like him who make the regulations) have no idea what we as small traders go through and have most certainly never traded the micro lot. After all I bet a trader with 20+ yrs never had any interest in trading small time like that, why would they?They dont have a clue what kind of effects and unitindended consequences the regs will have on folks. Its a classic case of regulations running amuck and to much judicial interferance in We the Peoples life.

    This has always been the prob with big Gov of course, they just get “out of touch” it cant be helped.

    John, you`re so big time we are not even on the same wave length.

    Marjorie, keep up the good fight:-)

    Heres “To We the People”!

    • http://www.theessentialsoftrading.com John

      John and big players like him who make the regulations.

      fxretracer – You (and any other commentator who is of the mistaken impression that I trade huge positions) might want to get your facts straight. I am not a “big player” by any definition of the word. I do not now, nor have I ever traded professionally and have no intention of ever doing so. I’m quite happy trading on my own limited fashion. I do not trade for a living. I do not have any part to play in regulations. I am, in fact, subject to a number of them because I have the misfortune of working for a Registered Investment Advisor, which means there are all kinds of SEC hurdles I have to go through for compliance purposes where my trading and such are concerned. I have traded many, many, many micro lots (and smaller) in my life, and I’m sure I’ll do so in the future as well. I think the biggest total position I ever ran in forex was 3 full lots in EUR/JPY and I only did that once.

      In short, I play with my money in the same sandbox you do.

      Now back to the subject at hand.

      Anyone who cant understand the chart I posted is surely one who has never traded the way I do. So no use trying to talk to them I guess.

      It occurs to me that all I ever get back when I pose a question about anything regarding hedging is “Well if you can’t see it then it’s no use explaining it.” If no one is willing to clarify things then I can’t help but be left to wonder if in fact there’s really anything there at all. I’ve traded a lot of different systems and styles over the years and I’ve researched many more – including the whole hedging/straddling/gridding area. If you explain what I’m supposed to be seeing on your chart I’m pretty sure I’ll get what you’re driving at.

  • http://www.fxretracer.blogspot.com fxretracer

    John- First I find it amazing you dont even realize what the red line is. Second-Traders have told me the chart is comprehensive. Third-I closed those positions with 4 dollars profit. Fourth- Money talks and BS walks.

    • http://www.theessentialsoftrading.com John

      fxretracer – I’ve never traded with FXDD, so I’m not familiar with the way their charting works and I didn’t want to make any conclusions without getting clarification. My first impression was that the red line is a stop for the long position as many charting systems I’ve seen use red to denote an out of the money order (or execution). But that struck me as not making sense in this case. Is that were you exited both the long and short positions? If so, then of course you made money. You were .05 net short at an effective price of something like 1.3405. It looks from the order #s that you went short first, then put on the long, leaving that little sliver of downside exposure. Effectively, you closed 2/3rds of your position at a what looks like maybe a 2 pip loss and road the rest for a gain that looks like about 18 pips while having to sit through about a 30 pip drawdown on that 0.05 lot. Do I have that correct?

      As for your cute little comment at the end, believe what you want. You’ve proven that you’re going to no matter what I say. I’ll let those who actually see my trading strategies on a daily basis judge whether I know my stuff or not.

  • http://www.neocortechs.com Marjorie Miller

    hey John,

    I’ve pasted the entire censored email below. It has a box on it that says “Forward to a Friend”, so I thnk that’s what they wanted me to do. It is a marketing email as well as you can see in the header. I have written Joe a reply and asked for permission to post, or a link, but I hate links that go bad. But seriously, this was not intended to be an insider tip email I don’t think…;)…

    As far as my dogs, they are well behaved and do what I say, so no problem getting out the door with the dogs, just my own laziness!!!! But I WOULD NOT go out jogging in the dark WITHOUT my dogs is the point, and it would be stupid to do so…

    So are you telling me you get PAID to write these posts John? Damn, where do I sign up? :) !

    Madame Pen :)

    • http://www.theessentialsoftrading.com John

      Marjorie – I’ve had to delete the pasting again. Permission to forward is not the same as permission to permanently post on a website. If you provide me with written permission then I’ll allow it, though.

      And no, I do not get paid to post. The employer I referred to in an earlier comment pays me for writing market analysis, not blog posts (at least so far anyway). This blog is strictly my own work.

  • http://www.fxretracer.blogspot.com fxretracer

    No John, look at the order numbers again. I was long first then short .Nice try though.

    But once again your subtly attacking my strategy or system or whatever, by saying I could have just closed the long early instead of waiting for the profit from the short to outgain the loss from the long. In other words: I should have known better. Thanks daddy:-)

    Maybe I will buy your book, then I will have no need to make trades in this manner; and thus become what you would regard as a real trader and not some schlep who does not derserv to be able to play in your elitist arena at all with all its standerization and market consistancy.
    Hello! Its precisely the unregulated and unique features not found in other markets that makes forex so lucrative for so many. Why cant you just swallow the pride and admit this only serves to get money out of the US and thus weaken it in the global financial arena? Even you did not understand the full scope of this reg in the beginning. We here in this thread are the ones who got you to realize more than you firts thought. Now on your blog you act as though you just missed it. You sir are rediculous albiet frustratingly funny.

    Your response to my chart suggested I just have no idea what I am doing, (which might be true) but I wonder if you would really every recieve any knowledge from anyone who is not your superior or at least equal.

    Lastly, though you come on nice and all; I find your dismissing all of my honest efforts and not to mention work to explain myself as though they make no sense very disrespectful. But hey its a two way street here. I do apologize for my snarkyness. I just am flabbergasted by how hedging topics always ignite such a hub-bub. It proves to me its a very large and widespread special interest at stake. You never know who your talking to.

    • http://www.theessentialsoftrading.com John

      fxretracer – You’re right, I goofed on the order numbers. Long first then short. Not that it really changes the bottom line, of course.

      To suggest, however, that I’m “subtly attacking” your strategy or suggesting that you have no idea what you’re doing is erroneous. I don’t know what your strategy is. I have no idea what your decision-making was to enter the long in the first place, to then put on the short, or to exit where you did. For all I know you’re methodology is amazingly profitable.

      You’re reading something in that simply isn’t there.

      All I did was attempt to walk through the trades you executed – granted somewhat erroneously – to understand what went on. I made no comment on when you could have or should have closed the long position. My only comment was that by lining up a 0.10 long with a 0.15 short you ended up with a net 0.05 short position. Can you deny that fact? Am I wrong that the reason you made money on the trade is because you had a net short position and closed things out at a price below your net entry? If so, please correct my errors.

      One of the reasons I teach is because it’s one of the best ways to learn. I’ll learn from anyone who’s willing to show me something new and take the time to explain it. I definitely don’t know it all and have admitted as much many times on this blog. I asked you to teach me, but all you did was tell me to look at the chart and then belittle me for not seeing things right away. If our roles had be reversed, would you not have felt frustrated?

      Now consider that I have been asking over and over and over in these comments for someone to explain to me what they are doing and getting little more than “You just don’t get it.” Mostly I get people dancing around the issue with conspiracy theories and all that. Be they true or not, they don’t address the functional aspect of what’s going on with hedging and what it means to people’s trading.

      The “their keeping the little man down” stuff that I keep seeing from commentators here is a victim mentality. It suggests that somehow the changing of this rule means people are having their ability to trade profitably taken away from them. I reject that utterly. You made money on that trade because you picked the right spots to buy and sell. You did – not the hedging. If you had told me exactly where and when to buy and sell, and at what size, I would have made exactly the same amount you did without having a hedge on. If I am wrong there, please show me how I am.

      On the FIFO thing making swing trading impossible, let’s not get carried away. It may force some changes in the way people put in orders, but so long as the broker provides some kind of OCO functionality it won’t actually impact executions and where orders get placed. Brokers who don’t offer the OCO, however, will create problems for their customers and probably lose accounts because of it.

      As for the rest of the lovely personal attacks, you’ve already clearly drawn incorrect conclusions from what you’ve read. Maybe you should hold off until you actually know me before passing judgement.

  • http://www.neocortechs.com Marjorie Miller

    I have written a poem for the occasion. Ahem. Quiet Please.

    A Run on the Money
    Can make a Bank
    A Lotta Lot of Money

    But when Traders hedge
    They escape the ledge
    A Game of David and Goliath

    It’s copy writed, ;) , but you can post it here. :) .

    Madame Pen :)

  • http://www.fxretracer.blogspot.com fxretracer

    Nic e Marjorie..thats it in a nutshell.

    John..which order came first is not the point. The point is this kind of trade would not be possible. Not fair!

    Also the first in first out policy as you have so aptly pointed out in your blog, will hurt more than just scalpers. It will make swing trades impossible unless your with a broker like OANDA.
    OANDA! I cant believe OANDA is the new standerd in forex brokers in good ol USA now.

  • http://www.neocortechs.com Marjorie Miller

    What if they had told David he couldn’t use his slingshot?

    I’m rolling on the floor now…ow stomach pains…intense laughter…:D!!!!! :) !!!!! ow ow!!!!

    That does it, I’m quitting Forex and going into Type-Up Comedy…

    Hey, speaking of, how come no emoticons on this website? I’m being oppressed, I’m being oppressed…

    Madame Pen :>)’

  • Bourn

    My trading partner has been systematically using hedging strategy similar to fxretracer’s one. For the last 2 years he had about 6000 positions – ALL with PROFIT, making him approx. 350000 pips. This may not be so impressive for you, John, but was for one of his brokers – account was closed…

    Fxretrace and Marjorie,
    The retail forex is a bubble with some way to inflate (it is advertised even in the jungles of Vietnam) = making money for brokers, the useless NFA and all sorts of associated people. Hedging strategies are like the needle for this bubble…

    • http://www.theessentialsoftrading.com John

      My trading partner has been systematically using hedging strategy similar to fxretracer’s one. For the last 2 years he had about 6000 positions – ALL with PROFIT, making him approx. 350000 pips.

      Good for her/him, though I don’t know what kind of return that represents. My point would be that if they had made the same trades (meaning buy/sell executions) in a non-hedging account they would have made exactly the same amount. They’d no doubt show some losers, but the bottom line would be exactly the same, and the bottom line is all that really matters.

  • Adrian

    @fxretracer – Is it too much to ask you to post the execution details? Your lines cross price many times and I’m afraid I can’t be sure what was an entry, an exit, the start of a hedge or the close. I’d like to understand your point at least.

  • http://www.fxretracer.blogspot.com fxretracer

    Adrian- I thought that request might come up. The answer is no I do not have the execution record in in table format.

    I do know brokers differ, but charts dont really. I still find it amazing this chart I posted could leave any questions in any experienced traders mind.

    The order numbers are there showing the sequence, along with blown up text to explain how large the order was and what kind of order(ie. long/short) it was. The positions in the chart are not closed at the time of the picture. I closed soon after with about 4 dollars profit as mentioned before. As far as price crossing the lines many times…what your asking is somewhat nit picking in my opinion and has nothing to do with the point demonstrated.

    Just put aside the scholarly thinking cap for one minute folks, and see the forest for the trees for once.

    Frankly and with utmost respect Adrian and et al, anyone who cant understand my chart might not have any business trading, much less supporting or opsing any rules regarding such activity.

    Just got this email from fxcm and it says the follwing:

    “customers do not understand either the lack of financial benefit or the financial costs involved”

    Translation: “your to dumb a hick to know what your getting into or doing, so my elite circle will protect you from your poor uneducated self”.

    Why do they care? Sounds like its just a way to cut out some small competition to me. Frankly I find the language nanny state offensive; not to mention insulting to my intelligence. It is no ones business what kind of costs or risks I incur on myself when I trade but mine; last time I checked it was still my money.

    Needless to say I am having the account transfered to the UK. Never thought I would see this day in my whole life, quite unthinkable.

  • Adrian

    @fxretracer – no, sorry, didn’t mean to imply that I wanted a big list of your executions. I just see two lines, each of which cross price 10-14 times along the chart. Which is supposed to be the hedge? Does this represent two orders, one long & one short, or three (one long and a short hedge which you closed), or four (a long which you closed and a short hedge, also closed), or more or less? Are any positions open at the end of the chart?

    I don’t need a table, but something like:

    Long 0.10 lots at X
    Short 0.15 lots at Y
    Covered 0.15 lots at Z

    I can take a guess but as this whole discussion seems to be about how two groups aren’t communicating I’d rather that we were clear on each other’s position rather than trying to make guesses. You’ve gone to some trouble to provide this example, can you please take an extra minute to flesh out some more details?

  • http://www.neocortechs.com Marjorie Miller

    Hi guys,

    Well, it’s no longer a conspiracy THEORY. I was cruising around the NFA website and look what I found. The NFA doesn’t work for the Banks, IT IS THE BANK. Look at who the Chairman of the Board is:

    pasted from: http://www.nfa.futures.org/aboutnfa/board.asp

    Board of Directors

    A 25-member Board of Directors is the principal governing and policy-development body of NFA.

    Chairman of the Board
    W. Robert Felker*
    Chairman
    JPMorgan Futures, Inc.
    Chase Tower
    10 South Dearborn Street
    19th Floor
    Mail Code IL 1-0401
    Chicago, Illinois 60603
    (312) 732-4174

    • http://www.theessentialsoftrading.com John

      W. Robert Felker – Chairman, JPMorgan Futures

      Imagine that. The National Futures Association, which is basically the equivalent for futures (and now forex) of what the National Association of Securities Dealers (NASD) is for stocks, has an executive from a futures broker on the board. This is hardly surprising or earth shattering news.

      And Felker is not the CEO of JPMorgan Chase. That’s Jamie Dimon. I’m guessing there are a few levels between those two on that org chart.

  • http://www.neocortechs.com Marjorie Miller

    Well I finally found the original proposition document from Dec 9, 2008 at:

    http://www.nfa.futures.org/news/PDF/CFTC/CR2_43_ForexPriceAdj_112408.pdf

    reached from: http://www.nfa.futures.org/news/newsNotice.asp?ArticleID=2273

    reached from: http://info.fxcm.com/?elqPURLPage=95

    so now we have the names of all involved and their affiliations.

    I find it interesting that they decided it was necessary to ban hedging in December when the market was going wild and the EURUSD was going to $1:45 with everybody looking at margining out. But the banks didn’t get to keep everyone’s money because they hedged. And now they wan to make sure that doesn’t happen the next time.

    The text of their reasoning is disgusting, and implies that ordinary Americans do not know how to do basic algebra.

    edasso@nfa.futures.org or 312-781-1551) or Lauren Brinati, Senior Manager, Compliance (lbrinati@nfa.futures.org or 312-781-1215, are apparently the two people assigned to keep the public at bay, the official “Run Around Department”.

    The NFA needs to be sued for conflict of interest if you ask me. They say they are protecting the consumer, but it appears very obvious that no one but the banks are going to benefit from the hedge ban. The banks are basically saying they don’t want you to be able to hedge your risk because they want to be able to take it all when the banks “curiously fail to intervene”.

    Seriously, are we suppose the REALLY believe that the Chairman of JPMorgan, who is also Chairman of the NFA, has passed this hedge ban rule because he wants traders to make more money? Oh yeah, this will be followed by free banking for all with no bounce charges ever, because the banks don’t want any of their customers money. If the banks think people are going to fall for this, they’ve got to be living in LA-LA-LAND….

    Apparently the FSA in England has been around longer than the NFA, and will probably be around after the NFA has destroyed itself.

    The Santa Clause

    • http://www.theessentialsoftrading.com John

      I find it interesting that they decided it was necessary to ban hedging in December when the market was going wild and the EURUSD was going to $1:45 with everybody looking at margining out. But the banks didn’t get to keep everyone’s money because they hedged.

      Marjorie – I’m still waiting for you to explain to me what the margin difference is between a hedged and un-hedged account when doing the same trades.

  • http://www.neocortechs.com Marjorie Miller

    John et al,

    Here’s the reply from Joe giving me the ok to repost articles he sends to me. His article is reposted below his permission email. It is entitled, “The Curious Case of Missing Intervention”, exactly the situation the banks are looking for with hedging banned, which should enable them to come up with the extra capital they need, with all the margin calls they will be able to trigger unabated. Luckily my money will be in England.

    Ben Franklin

    from Joseph Trevisani
    to Marjorie Miller
    date Wed, May 6, 2009 at 2:29 PM
    subject RE: Market Directions: The Curious Case of Missing Intervention
    mailed-by fxsol.com

    Ms Miller,

    You may post the column and any others that you find instructive. I am interested where did you come across the column, are you an FX Solutions client?

    Regards,

    Joseph Trevisani
    Chief Market Analyst
    FX Solutions,LLC
    1 Route 17 South, Suite 260
    Saddle River, NJ 07458
    Phone: 201-345-2227
    N. America Toll Free: 800-969-8365
    For a List of International Toll Free Numbers: Click here
    Email: JoeT@fxsol.com
    http://www.FXSolutions.com

    Market Directions May 03, 2009 Forward to a friend
    The Curious Case of Missing Intervention

    Has central bank currency intervention gone out of style? Two extreme cases in the past year should have beckoned intervention: the all time high of the euro against the dollar last summer and the 15 year high of the yen in late January. But despite the damage that was being done to the European and Japanese exports by their strong currencies, neither central bank intervened. Why have central bankers eschewed one of their primary tools for effecting violent change in the currency markets?

    At the time, Jean Claude Trichet, the President of the European Central Bank (ECB), certainly tried to talk the euro down. He was ‘concerned’ about ‘disorderly’ currency movements: a central bank euphemism for what they see as incorrect trading rates. There was also no shortage of European complaints about the level of the euro and praise for the ostensibly strong United States dollar policy.

    The Japanese on the other hand had little to say when the yen was at 87 in January besides noting that the level was bad for exports.

    Central bank interventions in the currency markets have a checquered history. One only has to remember George Soros’ great bear raid on the pound in 1992 or the violent gyrations of interest rates in defense of the European Rate Mechanism to know that even central banks cannot stand against the combined weight of the world’s currency traders.

    But there are also several instances of successful central bank interventions in the currency markets since 1985, including the Plaza Accord of that year, the Louvre Accord two years later, the intervention by the US and Japan in 1995 and 1997, and the G7 support of the euro in 2000.

    This brings us to the two most crucial attributes for successful currency intervention. By successful we mean that the targeted exchange rate continued to move in the direction desired by the banks even after the pressure of direct invervention was withdrawn.

    The primary condition for successful currency intervention is that it must align with central bank rate policy and the supporting macro economic conditions.

    For example if the banks are trying to boost the value of the dollar it cannot be done if the Federal Reserve is reducing rates relative to other countries. When bank intervention is aligned with rates or is a credible precursor to a change in rate policy then the powerful nudge of intervention can galvanize the entire currency market.

    The second condition, coordinated efforts by several central banks, is operational but nevertheless essential in convincing the currency markets of the serious intent of the banks. When the US and Japan intervened together in 1995 and 1997 to affect the value of the dollar the yen the markets listened. When Japan has intervened alone, the markets ignored the effort.
    No country has more experience with unsupported intervention in the currency markets than the Japanese and the Bank of Japan. The British defense of the pound in 1992 was also unsupported and a failure. Intervention by one bank is almost always futile. Coordinated intervention is needed to impress the banks desire on the 24 hour three trillion dollar a day currency markets. One bank in one market is simply not enough.

    Prior to Trichet’s July 2008 admission that European growth was suspect, the ECB focus had been inflation. The governors had raised rates a few weeks earlier; the American Federal Reserve had been lowering rates since the previous fall. No amount of bank intervention would have permanently dented the value of the euro against the dollar if the rate equation had remained unchanged.

    Before the change in ECB economic outlook both the Europeans and the Americans had repeated the strong dollar US policy to no avail. Many traders had met the US assertions with skepticism because rising US exports, largely due to the weak US dollar, were the only positive sector of the American economy at the time.

    Despite the desire of the Europeans and perhaps the Americans as well to bolster the dollar in mid-2008, it was clear that conditions for successful intervention did not then exist. It is also possible that by mid-July the ECB had become aware of the actual condition of the European economies. The governors and the president must have known that as soon as they made their knowledge public the likelihood that the currency markets would drive the euro down on their own was very high. Better to speak and wait than to try to force the issue.

    There is a further complication to bank intervention that has evolved since the last successful bout in 2000. In the decade since much of the world’s spare FX reserves have gone to China and the oil producing countries. Without their cooperation it is doubtful another round of intervention would succeed.

    There is also the quandary that for over a decade western governments have been accusing the Chinese of manipulating the yuan for trade advantage. It would be difficult and embarrassing for the same western governments to ask China to help them to manipulate their own currencies for exactly the same reason.

    Central banks have not sworn off intervention in the currency markets but they have taken a more rational view of the ingredients for success. The economic and financial crisis simply did not provide the necessary conditions for successful intervention. Coordinated central bank intervention is waiting for a more auspicious moment. The dislike of the bankers for the volatility of the currency markets has not dissipated; they will be back.

    Joseph Trevisani
    FX Solutions, LLC
    Chief Market Analyst
    Joe@fxsol.com

    • http://www.theessentialsoftrading.com John

      Re: The Trevisani article on central bank interventions.

      I’m not sure at all what that has to do with anything in this hedging discussion. Aside from that, when the central banks aren’t playing in the markets the banks and hedge funds and such just trade with each other and their big multi-national customers who need to do cross-border transactions or hedge currency exposures. For the most part they are just making or losing money from each other. When the CBs come into play the aforementioned players then have the opportunity to make money off the CBs if they don’t get their intervention right.

  • http://www.fxretracer.blogspot.com fxretracer

    Just got this email from fxcm and it says the following:

    “customers do not understand either the lack of financial benefit or the financial costs involved”

    Why do they care? Sounds like its just a way to cut out some small compitition to me.

    John said: “Long first then short. Not that it really changes the bottom line, of course.”

    Right, thats what I have already said John:
    fxretracer said:”John..which order came first is not the point. The point is this kind of trade would not be possible. Not fair! ”

    John why do you steal my thunder like this?

    John said: “One of the reasons I teach is because it’s one of the best ways to learn. I’ll learn from anyone who’s willing to show me something new and take the time to explain it. I definitely don’t know it all and have admitted as much many times on this blog. I asked you to teach me, but all you did was tell me to look at the chart and then belittle me for not seeing things right away. If our roles had be reversed, would you not have felt frustrated?”

    I am sorry for this John, I have lost my patience with this thread. I will lighten up. However I would like to know when and where you admitted to being wrong on this thread. I could easily have missed it. So much round and round here.

    John said: “All I did was attempt to walk through the trades you executed – granted somewhat erroneously – to understand what went on. I made no comment on when you could have or should have closed the long position. My only comment was that by lining up a 0.10 long with a 0.15 short you ended up with a net 0.05 short position. Can you deny that fact? Am I wrong that the reason you made money on the trade is because you had a net short position and closed things out at a price below your net entry? If so, please correct my errors.”

    This is true. I also would have made more trades. Is this not a fact? But I also did not KNOW for sure the net short would be a good trade, so I kept the longs just in case the shorts went bad. But the fact is also that I felt more comfortable with having .10 long while I had .15 short. This way if the .15 lot became negative I would still be able to make some pips on the .10 lots long without having to manage the trade or make anymore executions or place stops/limits ect. I know you just think this is some sort of hick style trading that should not be allowed; but I dont know why you think it is so important to protect me from this. It works. It gives me peace of mind as well.

    John said: “If you had told me exactly where and when to buy and sell, and at what size, I would have made exactly the same amount you did without having a hedge on. If I am wrong there, please show me how I am.”

    After listening to you, I am pretty sure this is correct. Not to say I would not appreciate some evidence on your side that is as graphic as mine. But I thought you said you were not going to tell me how you could have done it the same, only better and thus so could have I. But anyway, setting aside you are such a fantastic trader for a moment; here is my best effort yet again:
    Thats the point of the hedge, I did not know exactly when and what to buy/sell. Look at the right of the chart where the candles end. See the steep decline just before this area where the candles end? Then you will see the green dashed lines that represent my entries around where this decline starts. Right before this area in the candles is a up down move in the price around the MA`s and dashed green lines.The price action looks a bit like a small head and shoulder pattern in this area. I longed .10 lots right before the spike up, then the price moved up. Then the price moved below my entry for the longs. So I shorted .15 lots. After the aforementioned steep decline near the end of the candles to the right of the chart was finished, and the price flattened out and started to move up again (seen on the chart right before the candles stop appearing) I closed the positions with profit. Aproximately I longed .10 lots at about 1.3408 and then shorted .15 lots at about 1.3406 is my best guess from looking at the chart. Two trades total for the record. I then closed a total .25 lots for profit at about 1.3391. That was three trades total. With the new reg I wiould have had to make four trades total. Is this not a fact?
    I really hope I did not confuse anyone with this description. I really have reservations about saying anything, because the chart speaks for itself and I dont want to say anything that will be missunderstood. After all I am no expert or teacher by any stretch of the imagination.
    John, I may have said your not right about p&l, but that was the heat of the moment. I do now understand what your saying. I could have closed the long and gone short .05 and had the same result, except for that extra pesky fourth trade that could have killed me do to countless possibilities to complex to go into here. But I also could have closed the short with profit and held on to the long indefinelty and waited for the price to come back into positive which as of the publishing of this comment happened this morning, but thats not the point. Perahps I have enough margin to hold a long eu no matter how low it goes first. But with the new reg, guess what? The eu long swing will be canceled like in OANDA if I take a short at anytime while long eu. Even you admitted this new reg is going to make swing trading more complex. Exactly what we need, more complexity.
    I just dont like someone(the gov) telling me I cant trade a certain way because I am not smart enough to know how costly it is and they need to protect me. Thats all this is about for me is principle. Also if I am correct in my analysis here, then I will have to make more trades more often. This is clearly good for the brokers, but there is no way anyone can convince me it will be better for me. At least not so far.

    John said: ” Now consider that I have been asking over and over and over in these comments for someone to explain to me what they are doing and getting little more than “You just don’t get it.” Mostly I get people dancing around the issue with conspiracy theories and all that. Be they true or not, they don’t address the functional aspect of what’s going on with hedging and what it means to people’s trading.”

    Well…I have TRIED to produce examples and evidence of how it will change our trading, but it keeps getting tons of questions. I actually thought I was going to quite a bit of trouble to help provide you with some example and evidence.As far as conspiracy, your the one who brought that up, I have stuck to facts as I know them on this thread.

    I find this statement of yours John to be dismissive and undervaluates my honest efforts here on this thread.

    I am not having this discussion for my health, I am doing this because it appears this is what I am supposed to do for my country right now. I am just trying to help explain why this reg will affect me. I have tried to do the best I can. What have I got in response?” Its just on the surface and cosmetic nothing is really going to change.” or “You wont be affected, you will just have trade differently.” Thats my point exactly. I dont like being told how to trade.
    Do you know what a scary notion it is to traders that someone is forcing them to trade differently than the way they find comfortable and have put so much hard work, man hours plus money, blood, sweat and even tears in some cases I am sure into learning already?

    My first post ever on this thread was very cival. I do apologize for snarling and attacking you Adrian and John and et al.
    I dont condone hedging, or reccomend it to traders. I try to avoid it. Why I am here on this thread is simply to clarify that hedging as we are used to it will not be allowed. Also that I do not like the gov protecting me from myself. Thats all.
    I do want to thank you John for setting my mind at ease about the p&l. I do see your point at last.
    But it does not change the fact that now I may hold onto a losing position much longer because I cant lock the losses with an opposite position resulting in more margin calls no doubt till I learn my lesson. I will be forced to close the losing trade with loss, and no chance ever of recovering it unles I enter a NEW trade with all NEW risks all over AGAIN. Are you starting to see my point yet?I also dont like the fact it stops me from being able to lock in profits on a trade without closing it altogether. I also am very dismayed I will have to make even more trades now.

    Well, I put a ton of work inot this effort, I sure hope someone out there gets it. If they do then my job has been done.

    Adrian-
    Hopefully the above has the answers you were looking for.

  • http://www.fxretracer.blogspot.com fxretracer

    John, my apologies: yopu did admit that you were wrong about the order numbers. But thats not the kind of small things I am talking about.

  • Dkoop

    Teh new rule is a travisty and am thinking a LOT of money is going to be going over to the European Forex brokers in the next week.

    More than likely I will move mine.

    What about traders who trade different time frames?

    If I have a long term long trade placed and want to trade an interday short term trade short, I’m going to loose my long with the good positioning and stop.

    This rule sucks and is not what I signed up for.

  • Adrian

    @fxretracer – that’s a wealth of information, thank you very much, it was most helpful.

    I’m still trying to figure out where we’re differing.

    But with the new reg, guess what? The eu long swing will be canceled like in OANDA if I take a short at anytime while long eu

    I don’t think that’s what the reg changes. My understanding is that this will just bring forex in line with options, stocks and futures trading. I could be long 1000 SPY as a swing trade and then see an opportunity to play a retrace. I could sell 200, 500, or 2000 shares which would leave me with 800, 500, or -1000 shares. Selling doesn’t “cancel” anything, it just reduces my long exposure or, if I sell more than my swing position, it will reverse my exposure. Since this is just a day trade, I’d buy the 200, 500 or 2000 shares back at the end of the day leaving me with the original 1,000 shares.

    You could say that I “hedged” (though no equity trader would say that), that I closed my swing position and bought back, or that I took a second day trade. The results are the same and I as the trader can think of it however I wish but my broker is going to only show the net outstanding shares, it won’t show both a long and a short position. This is how all equities, futures and options traders work and now forex will be the same.

    It sounds to me like your p&l will be unchanged, the number of orders you execute will be unchanged (or reduced), and if you want to think of buying 0.10 lots then selling 0.15 lots as two separate trades then you’re still free to do so.

    I get the feeling that you agree with this.

    The one place it sounds like we differ is when you talk about brokers cancelling your positions:

    But it does not change the fact that now I may hold onto a losing position much longer because I cant lock the losses with an opposite position resulting in more margin calls no doubt till I learn my lesson. I will be forced to close the losing trade with loss, and no chance ever of recovering it unles I enter a NEW trade with all NEW risks all over AGAIN. Are you starting to see my point yet?

    I think I may be missing something here. If a trade goes against you, you can lock the losses with an opposite order just as before. This will now show up as a net loss. If that loss was big enough to result in margin calls, wouldn’t you get market calls under the former system since your positions would all be marked to the market? I know that I’ve had times when I’ve been leveraged fully and had positions go against me and I’ve gotten margin calls because of this, even though the positions weren’t closed yet.

    If you have a loser and you “hedge”, you still don’t have any way to recover those losses until you close one of the sides and regain some market exposure, potentially losing more money. I don’t see what’s changed here.

    If you have a long position which is going against you and you find you submit a short to hedge more quickly than you would an order to close the position, could you just think of the close order as a hedge and carry on?

  • http://www.fxretracer.blogspot.com fxretracer

    Adrian, very nice response. I hate to be the spoiler here, but the rule is first in first out. So that means the long swing will be cancelled. For example: If I have a long eurusd from 1.16 say .01 lots in size using FXDD, then as soon as I want to enter a short trade in eu at say the current price of around 1.33, the long in eu at 1.16 will be cancelled and closed. I really thought we had established this.

    As for the last question posed…sigh…no I have explained myself blue here….holding the losing position with a hedge gives me a chance to hold on w/o risk of the margin call so I can ride it out till the price comes back.
    So no I cant find anything in your response that I actually agree with..so sorry…

    Personaly I find this thread an exhausting wast of time, even my Mom says its just hear to distract people…I could not agree more….

    By the way …today I just got through another amazing messed up hedge again lololol

    Look at dkoop comments above…he shares my pain and he put it well…but what do me and him know right?

    Remember, the emperor was not really wearing any clothes, it took a child to point it out too.

    I dont see what I can possibly contribute here anymore…cyanara!!

  • Adrian

    @fxretracer,

    So that means the long swing will be cancelled. For example: If I have a long eurusd from 1.16 say .01 lots in size using FXDD, then as soon as I want to enter a short trade in eu at say the current price of around 1.33, the long in eu at 1.16 will be cancelled and closed. I really thought we had established this.

    I think I get it, at least I hope I do. :)

    I think the naming might be confusing but first in-first out (FIFO) is what we have with futures, options and stocks so you can look to them to see what the future will bring to forex. It doesn’t mean that if you buy 0.15 lots that any sells must be for 0.15 lots or that any sell automatically closes the full 0.15 lots. You can still scale in and out, orders don’t cancel others and positions never get cancelled or closed unless you take an opposite position with exactly the same size. It means they will have their own way of defining a trade which starts and ends when you have zero net market exposure but so what, you’re free to think about it differently (I certainly do).

    Similar to your example, if you start with 0.15 lots long, you can sell/short 0.10 lots which will leave you net 0.05 long. The long isn’t “cancelled”, your position is just reduced to reflect your net exposure.

    This is something that the rest of the financial world has come to terms with ages ago and doesn’t change any of the mechanics of how we trade, just how we think about it. That’s the great thing – you can continue thinking about your trades however you wish.

  • http://www.fxretracer.blogspot.com fxretracer

    Adiran said-” The long isn’t “cancelled”, your position is just reduced to reflect your net exposure.”

    I think you read more into what I said than what I meant. But you have effectively confimred my point here.

    Adrian said-”….your position is just reduced….”

    Thats it in a nutshell Adrian….exactly what I said: in the above example I was using FXDD, the minimum trade size there in a micro account is .01 lot. So if I have a .01 lot long in eurusd at 1.16, then as soon as I sell a eurusd short of minimum trade size ie .01 lot the long in eurusd at 1.16 willl be closed. Lost forever, never will I be able to get that .01 long at 1.16 again unless I am there when the price goes back to that level.

    Worse, say I have .02 lots long eurusd, if I decide to short .01 lots then my net long is .01 lots and I have lost that first .01 lot at the price I bought it for, whenever that was. The problem with this is then I lose .01 lots of the .02 lots of good position I did have. I never wanted to close any part of it, and am only left with .01 lots. This is very unhelpfull. Especially when that .02 lots was a swing trade from eurusd 1.16.
    Neeedless to say if I had sold .03 lots then I would be net short .01 lots and all of my .02 lots long would be gone…no way to get it back, unless I long .02 lots again at a new price different from the original .02 lots. Which of course is a new order and a whole new position with nothing to do with the now long gone closed .02 long.

    Quite simply, the new reg will make brokers in the US like OANDA, if you wonder how that works try a OANDA demo out at http://www.fxtrade.com.

    Adrian I thought I was done here, but I saw your post and thought we might be pretty close to being on the same page. So I decided to go that extra mile and respond.
    I think the reason you missunderstood some was I was not complet in every last detail…I am used to talking to traders who know the type of platforms I use and how they work, my apologies.

    Hope this clears it up for you:-)

  • DB

    fxretracer –

    As a friend, I would advise you to take your own advice and walk away. You’re just beating your head against the wall while your words fall on deaf ears. I decided to get out of this thread long ago. I still get the emails and I have to say they are amusing. I only rejoin to help save a fellow trader.

    John, Adrian, et. al. are entrenched in their positions and at this point will likely never admit there is a valid case for hedging no matter what scenarios and evidence are presented.

    So, for you own sanity, walk away.

    -DB

  • Adrian

    @fxretracer – Worse, say I have .02 lots long eurusd, if I decide to short .01 lots then my net long is .01 lots and I have lost that first .01 lot at the price I bought it for, whenever that was.

    This is all true but I don’t see why it’s so important. Whatever decision-making process you used to sell the 0.01 (and buy it back) is still there and still valid, your P&L is unchanged so what’s the problem? Yes, if you buy at one price and then you sell, you won’t get that price back but when you re-enter (formerly “closing your hedge”) you could have a much better price.

    If your P&L stays the same but the price you see in your positions window will change (up or down), is this really such a big deal? With your experience trading, surely you’ll be able to adapt quickly or am I still missing something?

    @DB – the person that has presented the best case for hedging has been fxretracer and even in this best case his P&L was unaffected. I understand that some people prefer the current style and I say “more power to ‘em” and if it was up to me I’d let them have their wish. My position is merely that the change won’t negatively affect anyone’s P&L and all the evidence presented has supported this position so yeah, when even the opponents agree with me you can see how it can get entrenched. But please, if you can think of a scenario where you’d make money with a hedge and lose without, I would happily change my view and join you guys. After a hundred comments, no one has thought of such an example which says something.

  • http://www.fxretracer.blogspot.com fxretracer

    DB- Yes your so right, this just like I said before: it`s like talking to rocks. There is no way to ever really prove if my my p&l would have been affected, since who knows how I might have traded when it was all said and done. But I guess thats a fact these guys would never be able to get their minds around…
    Also its amazing these pro traders here think holding trades for months at a time is just “not important”. I thought scalpers were the small fish and the big traders do more swing and position style trading….

    LOL

    • http://www.theessentialsoftrading.com John

      fxretracer – Again you jump up and tag folks as “pro traders” who aren’t. I’ve already indicated my own status and I suspect that most, if not all, of the other commentators here are non-professionals as well. But that has nothing to do with anything. There are pros who hold positions for seconds and those who hold for months or even years – just as there are among the non-professional ranks. I personally tend to do best with positions held weeks to months. Your scenario of having a long-term position and going against it in the shorter-term term is something position traders in all markets do. They often call it trading around their core position, and they do it in the markets like stocks and futures where hedging as retail forex folks define it has never been doable. If they can do it, there’s no reason you cannot.

      As for what your performance would have been without hedging, it’s true that you’d never know. Imagine this scenario. You’re making the trade calls – all of them – but I’m actually doing the trading on your behalf, but you don’t know whether I’m using a hedging permissible broker or not. All you know is the trade executions and the running P&L. What’s the impact on the trades you tell me to do?

  • Yuksel O’den

    John,
    You are an educator and trainer and having a very valuable platform for traders, traders-to-be to learn and also speak out. I am a non US educator myself (in a totally different area), and I am really surprised to see an educator arguing for the sake of argument and and always trying to be the one who says the last word. Don’t you simply see that people are screaming for their democratic rights here, rather than trying to win a debate?

    You can technically believe that hedging would not provide anything different (I am not commenting on this), but what falls on your part would normally be to defend people’s right to choose, freedom to risk in an informed environment. At least you could have been impartial to be fair.

    It seems that you also know best what is good for others and you just want to win. It’s a pity to see an educator “imposing”.

    • http://www.theessentialsoftrading.com John

      Yuskel – While I readily admit that I do enjoy a good debate as a way to refine and sharpen my own thoughts and improve my communication, and have perhaps been known to argue for arguement’s sake at times, this is not one of those cases. I do understand that part of what’s been going on here on this thread has been venting, and I do understand that part of the exchange has been about feeling trampled upon by an over-protective big brother. Perhaps you haven’t read all the comments here (and I wouldn’t blame you), but a couple of points along the way I have agreed with commentors on the whole “nanny state” thing, and I’ve commented on the same elsewhere in the blog. Those are not things I am contesting at all, though admittedly I’m also not one in opposition to the NFA ruling either. I think they could have avoided a lot of the anger had they left out the whole “to protect the consumer from himself” type of arguement. They had plenty of other reasonable justifications for making the change, not the least of which was simply to get retail forex accounting in line with that of futures, which is really what this is doing when it all gets boiled down.

      Aside from making sure the facts are kept straight, the thing I have been trying to do is get people to see that it’s their trade decisions – where they do their buying and selling – not the hedging, which is what’s defining their success. It’s a shift from an educator focus (presenting information) to a coach focus. I want them to realize that they are making money not because of hedging but because they are picking the right points to buy and sell – that it’s their analysis or trading system which is the deciding factor in their performance, not the way their broker is doing the bookkeeping. They should feel good about that. It will help them put this rule change behind them with the knowledge that they have the ability to be a profitable trader, no matter whether the broker allows hedging or not.

      As for the whole “know best what is good for others”, there is a massive gap between forcing someone to do something because you think it’s best for them and presenting them with information that they lack so they can make an educated decision. I have neither the power nor the desire to force people to do anything, so I do the best I can in terms of the latter because I feel I would be failing in my role as educator to do otherwise.

  • http://www.fxretracer.blogspot.com fxretracer

    Yuskel: well said. Its a sad day when someone outside the US has to point this kind of truth out.

    I also find it amazing that 20 yrs trading does not make one a pro…hmm what am I doing then? My definition of a “pro” is somone who makes a living from forex and is good enough to teach others and yes even write books on the subject. Give me a break! Even I have to convince some folks I am not a pro. So nice try, but your not going to convince me that you Adrian are not pros. Whats new? Wont be the first time you did not sway me;-)
    I thought that some in this thread came off as pros. You know…the whole book thing and the 20 yrs trading bit. O well, lots of missunderstandings here. Goes with the whole forex “hedging” topic. Happens everytime:-)

    John, you dont have to worry about “coaching” us into realizing how good a traders we are; “big brother” is taking care of that for all of us.

    As for as getting forex inline with futures..well I already said thats what makes forex so good for so many; is the fact it is less regulated than traditional markets.

    Now thanks to the enforcers at the NFA, I will have to have hundreds maybe even thousands to open up an account in the US.

    • http://www.theessentialsoftrading.com John

      fxretracer – Why would you need “hundreds maybe even thousands to open up an account in the US.”?

      As for the whole professional thing, we obviously have different definitions of that term. I consider a professional trader as someone who is paid and/or makes a living from trading. If you want to call it someone with a lot of experience in the markets, that’s fine too, just so long as we avoid the pro=big which was a source of misinterpretations earlier.

      …what makes forex so good for so many; is the fact it is less regulated than traditional markets.

      From my perspective, it’s not the lack of regulation that makes forex good. It’s the flexibility to trade much smaller positions and more pairs than you can in futures, and to readily be able to do it 24 hours a day. The futures exchanges have only just started address this by introducing smaller contracts that are roughly akin to mini contracts. Even that, though, is still too big for a lot of folks, and volumes are thin, especially outside normal exchange hours.

  • http://www.fxretracer.blogspot.com fxretracer

    Just for the record, I DID say a Pro is one who makes living at trading.

    You are hysterical John.

    As far as the rest of your counterpoints: mwa, mwa…ma…mwa mwa….like the adults in Charlie Brown.

    • http://www.theessentialsoftrading.com John

      fxretracer – Just for the record, I DID say a Pro is one who makes living at trading.

      Check again. You said “My definition of a “pro” is somone who makes a living from forex and is good enough to teach others and yes even write books on the subject. ” Nothing said about trading in there. Based on your definition I would be considered a pro on all counts because I do make a living as a forex market analyst, thus “from forex”. That’s fine. I can accept this definition. I just don’t like to use it myself because the whole “professional trader” thing brings in implications which don’t always apply to me and I’d rather not give people a false impression.

  • Adrian

    As far as the rest of your counterpoints: mwa, mwa…ma…mwa mwa….like the adults in Charely Brown.

    Yes, John has consistently acted like an adult, one of the few of us who has. I think that’s to his credit.

    Anyway, I am curious, have you given any thought to the question he raised earlier, about how your trading would be affected if you used a broker which only told you when and where your trades got filled but didn’t tell you if they supported multiple positions (“hedging”) or were using the FIFO style?

    I thought that was a very perceptive question and really cuts to the heart of the issue between the two of you.

  • http://www.neocortechs.com Marjorie Miller

    Yuksel,

    Yes, I must say thank you saying what I was thinking. :) . John, you act like a stubborn horse with blinders on. But I have to say one reason I never said it, is because I thought you’d never print it, so I must give you accolades for no censorship John!!!!

    That said, let us move on, and by that I mean, continue hedging!!!! :D !!! :) !!!!

    Yes, as my mom always said, where there’s a will there’s a way!!!! :D !!! :) !!!

    So there’s more than one way to hedge :) . I’ve been experimenting the last few days on the currency round trip hedge. Try it quick before they make it illegal. ;) .

    For instance, I have open EURUSD positions at IBFX which started no hedging yesterdaym and if there is “no intervention” and I have any margin problems, I have come up with a hedge solution, in a “no-hedging” environment. Each currency pair has a round-trip price which must stay in equillibrium, or their will be a price advantage on net conversion cost between currencies. They call this the “Triangulation” and negative correlation between currencies, “natural currency hedges”.

    So for instance, with the EURUSD, a trade of the same size in the USDCHF and the EURCHF will nearly identically hedge the opposite trade in the EURUSD. Similarly, if you want to trade the “I’m always right” tactic, which going long and short in the EURUSD at the same time allowed you to do, just do the same trade in the round trip pairs. So if you do a sell on the EURUSD and a sell on the USDCHF, one of them will go positive, as they usually go in opposite directions.

    Unfortunately, this makes the mathematics and timing of the hedges harder to calculate. So I currently testing out the software at this link http://www.4x-rox.com/hog2-snapshot.html. I don’t know if I agree with closing all the hedge positions at the same time, but I’m running their demo software to test out their idea. I usually like to close one side of the hedge and the let the other one unroll the other way and take the profit on the other side. On the Swing I guess you’d call it.

    For more hedging ideas, like Forex Options opposite your spot trade, check out http://forextrading.about.com/od/advancedtrading/a/forex_hedging.htm.

    As well, I’m composing a response to http://www.nfa.futures.org/news/.%5CPDF%5CCFTC%5CCR2_43_ForexPriceAdj_112408.pdf, to David Stawick and Tom Sexton. I’ll post it when I’m done. I have acquired Tom Sexton’s email, it is: tsexton@nfa.futures.org. Still looking for David Stawick’s email address. Let me know if you find it.

    Just wanted to say thanks to Yuksel for saying it, thanks to John for printing it, and a quick heads up of alternative “indirect hedging” strategies, to replace the temporarily stolen “direct-hedge”. I am also moving my other accounts to the UK, so as to not have this mathematical inconvenience. But we must not allow the NFA’s perverted ideas to grow. I personally find Tom Sexton’s letter moronic. I think it is Tom Sexton that doesn’t understand basic algebra. More research on the affiliations of these two people needs to be done. It’s funny how the letter says that it was not consumer complaints that initiated the rule but about 4 people chatting between each other.

    Do they think they can also outlaw Triangulation in the same account? “Virtual Hedging” cannot be “outlawed” and indeed, if was idiotic people like Tom Sexton who got the country into this mess. They went balls to the walls in their bets, never hedging a thing. Not having a “Hail Mary” play for the last two minutes of the game, when you’re behind, is just plain stupid. And now the NFA US Banking idiots are trying to make everybody else as irresponsible as they were. And that’s just plain wrong. And they’ve got to be stopped. Because those people who don’t know about triangulation/”indirect hedge”, are going to lose their margins because they won’t be able to do a “direct hedge”, which is the easiest and quickest, when you need time to think or get more margin into your account, which can sometimes take days, depending on the broker.

    Disgusted, but hedging anyways :)

    • http://www.theessentialsoftrading.com John

      Marjorie – How come you aren’t targetting the CFTC with your campaign. They are the ones with oversight of the NFA and from what I understand had final approval over the rule change – not that they probably did anything more than rubber stamp, mind you.

  • http://www.neocortechs.com Marjorie Miller

    Thanks John!

    Yeah I looked up David Stawick on the web. Apparently he’s just a secretariat, a fancy name for secretary. Which might explain alot. He also doesn’t list an email. Another sign of stupidity, or worse, considering their public communications responsibilities.

    As well, it appears that Tom Sexton is an attorney not a trader, so maybe in reality, two people who know nothing about trading, are making the rules.

    I believe Tom Sexton began the conversation of who is stupid. As many people as possible need to tell Tom Sexton that it is he that is stupid. I personally think he and his letter are an embarrassment to their agencies and should be fired for this.

    Will keep you posted! ;) !

    The Pony Express :)

  • http://www.neocortechs.com Marjorie Miller

    hey guys,

    Sorry for the length below, but I sure feel better! Just finished transferring my http://www.forex.com to UK. It was really easy. Well done, http://www.forex.com! I’m breathing easier already… :) …

    from Marjorie Miller
    to tsexton@nfa.futures.org
    bcc Marjorie Miller
    date Tue, May 12, 2009 at 6:09 PM
    subject Notice of Pending Class Action Lawsuit
    mailed-by gmail.com

    Tom Sexton,

    I read your letter in which you basically said ordinary American do not understand basic algebra, so you are “outlawing hedging”. First off, all you have outlawed is “direct hedging”, with the idiotic reasoning that, since the teapot wastes water when the whistle goes off, you should remove the whistle. What hedging does is prevent the teapot from blowing up. You seem to want to save a dime to lose a dollar. I don’t get your reasoning. So let me ask you a question: What advice you would give to a trader, which apparently you are not, you are an attorney. But let’s just pretend you’re a trader. Let say you are approaching a margin call, or the market started moving fast and you needed a moment to think, or say, your bank and broker takes 2 days to add to the margin in your account. Now that you’ve outlawed “direct hedging”, the solution is not as easy or as simple. Before Tom Sexton came along with his great idea to ban hedging, you could just hedge and take care of business and then unhedge, not losing your margin or alot of money in the process.

    You have not prevented that from happening. You’ve just made it so it’s going to happen to the very people you say you are protecting: the inexperienced. Indeed, I certainly needed the direct-hedge “Hail Mary” play when I first started out, glad it was there, and have continued to use it profitably. But now I have been forced to figure out how to do “indirect hedging”, by triangulation and negatively correlated currencies, much more difficult mathematics and timing between many different currencies to get a “hedge”, to temporarily stop the bleeding while you think of a new strategy, Plan B. Indeed, the hedge is Plan B, the new strategy is then Plan C. You have just stolen Plan B. So I guess this is just your plan to steal from the newbies. Or your own stupidity of the consequences.

    Any loss by the EURUSD must be equal to the gain in the USDCHF and the EURCHF, or any other roundtrip currency. This cannot be outlawed any more than E=mc2. It is a mathematical fact. So the hedge can always be done. Except by newbies now in your new scenario. And the rest of us will be wasting our time and money on complicated hedging formulas like http://www.4x-rox.com/hog2-snapshot.html. Just because you and a few people in your office either don’t like hedging, or do not understand. You may just say put more money in your account, but that is not always an option for people who cannot legally print money, or even possible to transfer in the timeframe of the bank and broker, and the fast moving market. Sometimes you’ve got just enough time to do the hedge before a margin call, or perhaps you’d just like to stop the bleeding so you can think about whether you should “amputate” the trade, or wait for it to grow back, as the case may be. Or do little trades to build up your margin while waiting for the market to turn around on the bigger temporarily losing “hedged” trade.

    And though your new rule against bad feeds works in my favor, I still find your “logic” and “solution” nothing short of stupid. So again, I shall only ask you a question which always begins with, “What would you do if you were in someone else’s shoes?” Do you just pass regulation, or do you try to fix problems? Let’s say the brokers tell you they get “bad feeds” so sometimes they have to requote customers. So you just outlaw bad feeds and any requotes after 15 minutes. So let’s say you’re a broker and you get a bad feed, which means you owe 5 zillion dollars to alot of people. Now this was caused by a spike by the electric company or Internet provider, external in origin. Your IT guy is in the bathroom, 15 minutes goes by and you are out of business. Now I would have thought a more appropriate response would be to investigate the “bad feeds” problem, and a methodology of reporting them and investigating them and limiting their occurrence. A minimum “standard” for feeds perhaps. Customer reparations for a “bad feed”, which would discourage them.

    I find no constructive thinking in your entire letter and I think you should be fired for this fiasco. Indeed, you haven’t even achieved your goal of outlawing hedging. In order to do that, you would have to outlaw having two positions in the same account which are going in the opposite directions, one taking a profit and the other taking a loss. And what about if someone takes a forex option in the opposite direction as their spot, thereby achieving a “virtual hedge”?

    Indeed, it is stupidity like yours that got this country into the situation it’s in, companies going balls to the walls with no hedge whatsoever. Not having a “Hail Mary” play for the last two minutes of the game, when you’re behind, it just plain stupid. So now the NFA is trying to make everybody else as irresponsible as the banks have been.

    Well in order to fully outlaw hedging, you will have to outlaw carrying a negative and a positive position in the same account. You’d have to outlaw owning negatively correlated currencies in the same account. To not be a hedged account, all positions would have to be losing, or all would have to be winning. Always. Since this could not be guaranreed, mathematically this means that you will have to outlaw having more than one trade open at a time in any account. Don’t you have anyone at your office with any critical thinking skills?

    This is what I mean. Simply by assuming you are correct, that all hedging should be outlawed, leads to preposterous contradiction, so the proposition has to be insanely incorrect. You cannot even succeed, nor would it be logical to even want to try to prevent all hedging. You have only made it more difficult for the beginner to hedge quickly, thereby putting them in more danger not less.

    When the teapot whistles, you should listen, not kill the messenger. I suggest you put yourself in the shoes of a trader or a broker next time you think of regulations. Try to think of regulation which becomes good advice, not bad advice. You’ve basically told traders that it is better to lose your entire margin in a market panic, than to hedge and trade another day. Ask yourself, what would I do in that situation, instead of outlawing the moon to prevent werewolves.

    Did you see the history channel show on how Robert E Lee lost the Civil War? He didn’t take his Lieutenant’s advice and return to fight another day. You need to restore the “direct-hedge” capabililty to NFA brokers, and re-think the draconian “bad feeds” solution which could put brokers and ironically then the traders which you are supposedly protecting out of business.

    Speaking of, will brokers also not be allowed to hedge? OMG. I’m afraid that someone like you has passed a draconian regulation like this with so little forethought, and might I add, no place for “consumer input and discussion” anywhere on your website. I will be copying this email to the CFTC and David Stawick, and I will even submit your stupid letter and diarretic regulation wording to http://www.whitehouse.gov. And don’t forget, the Presisdent appoints the CFTC commissioners to which you and David Stawick report to.

    Not to mention, President Obama will wonder why the NFA can’t even write in plain english like the credit card companies. Just take a look at this blog, http://www.theessentialsoftrading.com/Blog/index.php/2009/04/14/no-more-hedging-for-forex-traders/#comment-14177, or the ForexPeaceArmy or a google, to see the kind of confusion the NFAs diarretic language has caused. I have a degree in Math and Physics and have been a computer programmer for over 25 years, and I find it interesting that the NFA chose language to attempt to cloak what it was doing. People and companies are still trying to figure out what the new idiotic NFA no hedging rule means. I personally and many other have started shifting our accounts to non-NFA and/or FSA UK accounts. The FSA has been around longer than the NFA and will be around long after the NFA self-destructs. I find it funny that Americans are now running back to England to get their rights back from unreasonable and unresponsive dictatorial agency like the NFA.

    Go ahead and read about why people would want to hedge and will continue to hedge, at http://forextrading.about.com/od/advancedtrading/a/forex_hedging.htm. And to read about the really confusing cross-currency hedges mathenatics and timings that people will have to do now, rather than simple direct hedging, at http://www.nfa.futures.org/news/.%5CPDF%5CCFTC%5CCR2_43_ForexPriceAdj_112408.pdf.

    It appears you Tom Sexton, do not understand either the lack of economic benefit or the financial costs involved, in NOT hedging. Indeed, I think the reason “hedging” got banned is because of the “Hedge Funds” losing money and becoming a bad word. The word “Hedge” means “to limit risk”. The fact that the “Hedge Funds” did not do a good job of “limiting risk” does not mean “limiting risk” is a bad idea, or, that you can or should outlaw “limiting risk”, or “limited risk funds”, as they should and probably will be called, in order to make terms more clear.

    I also note that according to your letter, the “hedge ban” was not initiated because of any customer complaints. Well, it seems you are getting alot now for banning what no one was complaining about, and you’re going to get alot more when people start margining out and losing thousands of dollars to save a few dollars in your interest charges, which I see as insurance loss charges. I will tell you right now, Thomas W Sexton, General Counsel and Vice President, if I margin out, because of your new no hedge rule, I will sue the NFA, and you personally. Indeed, it will be a class-action lawsuit. So I suggest you listen to your customer complaints, and while we’re discussing that, I am also reporting the NFA website to http://www.whitehouse.gov. Why is there no customer feedback/discussion/forum page on the NFA website? You tell of random, unnamed “commentators” from whom you got your advice. I’d like to see a copy of all the advice and discussion/emails from people that you received from people, and I don’t know why you don’t have more on your website, for an issue than is currently burning across the web. Is the NFA oblivious to the unrest and displeasure it has caused it’s supposed customers? You’re not going to get just complaints, you’re going to get lawsuits.

    I don’t call many people morons, but this is beyond stupid. You are plain dangerous and need to resign from your job Mr Sexton. Or get better advisors.

    I have just finished moving one account to the UK. I feel better already. I wonder how many US forex workers will be laid off because of your decision to not listen to what the brokers were telling you, and even ask your “retail customers” what they thought.

    I’m sorry, I am thoroughly disgusted. You have wasted alot of my and everyone else’s time. Please submit your resignation, or “unfix” what you have just broken. I still don’t know if I’d trust you at the wheel again though. But maybe, just maybe, you could learn to listen, and then maybe you would learn alot.

    Marjorie Miller

  • Bourn

    Very well written, Marjorie,

    although they still can answer like John (stubbornly) does: “Basically what the NFA is doing is forcing forex brokers to treat offsetting trades in fx the same way they are treated in all other markets”…

    As far as for the “indirect hedging” – it works okay. I used it for about 5000 trades before the “direct hedging” was introduced in Europe some years ago…

    If you want to open accounts in Europe – try dukascopy or Alpari UK…

  • http://presentationshelving.awardspace.com JT

    After reading many of the posts about this topic, it made me realize that it is a matter of time before the big dogs jump in and make forex trading more difficult to make any money. If you think about it, government, society, businesses, the rich… they all want to keep you in the middle class, or poor. If the common people find a way to get wealthy it would disrupt everything, and I mean seriously disrupt everything. Could you imagine everyone with over $2M??? You don’t have to work, rich movie stars suddenly become your equal, the dynamics of business would change, too many things to go on with here… It would not surprise me if more regulations start to pop up just to keep everyone in their place.
    Example story:
    My Pappy years ago got involved in a 401K trading plan he heard his co-workers were doing. His co-workers found a great way to take a look at a Janus fund and determine whether to put money in or pull it out for the day. For a couple of years these guys did this to the point where they were moving Millions in and out. My dad got in for a year and made some very quick money, before finally the “big dogs” jumped in and said “I don’t think so”. Trades were limited to a couple a month and funds could not be switched in and out until a 60 day period.

    This is the type of thing I see happening to forex eventually. The more regulations they restrict on us the less money we will make. Keep us in our place…

  • http://www.neocortechs.com Marjorie Miller

    hey All!

    Well, I’ve gone to the top! I’ve also asked Tom Sexton’s advice on what he would do if he was approaching a margin call. Let’s see what he has to say. Maybe as a lawyer, he’ll just make margin calls illegal, that fixes everything, right?

    Citizen Jane :)

    —————————————————————————————————-

    Hi President Obama,

    I know with your quick mind, this will appear obvious on first read. Please explain this to the CFTC and the NFA. Apparently, Michael Dunn and CFTC Commissioners report to you directly.

    In particular, I thought you would find interesting the analysis of how the words “Hedge Fund” has become a bad word, ironically because they didn’t hedge. To Hedge means “to limit risk”. One way to do that is have investments that go in opposite directions, one making money while the other loses money, until the losing position recovers, never being left with an empty basket. But unfortunately, due to the fact that “hedging” has now become a bad word, the CFTC and NFA want to ban “hedging”. They want to ban “limiting your risk”, when we should be demanding that risk should be limited.

    Thanks again for your hard work. I’m trying to participate, though I am way too busy!!!! :D !!!

    Marjorie Miller

    p.s. Loved the poetry jam. Michelle’s outfit was gorgeous too!!! :) !!!!

    ———- Forwarded message ———-
    From: Marjorie Miller
    - Hide quoted text -
    Date: Thu, May 14, 2009 at 4:06 PM
    Subject: Postpone “direct-hedge ban”, add discussion forums to NFA and CFTC websites, and Listen
    To: questions@cftc.gov
    Cc: tsexton@nfa.futures.org

    Hello,

    I just spoke with Delores at Michael Dunn’s phone number. I do not understand why the NFA or the CFTC websites do not have discussion forums on their websites, and this appears to explain why the NFA and CFTC are so out of the loop as far as the opinions of their “customers”. I would suggest you add one immediately. As a software engineer, I can tell you, a discussion forum can be added to a website in less than a day. There’s no reason not to have one, unless of course, you don’t care what people think.

    Attached is my email to Tom Sexton. Pardon the insulting tone of the email, but the letter from Tom Sexton of the NFA to David Stawick of the CFTC, that is all over the web now, began the insulting tone. Tom Sexton does not appear to understand hedging and trading algebra, and so he has accused ordinary American Traders of not understanding the basic algebra of hedging. He passed draconian regulations, with absurb notions of “banning hedging”, which is mathematically impossible and undesirable. Hedging has ironically become a bad word, because hedge funds did not hedge.

    The CFTC needs to stop this absurd “direct-hedge ban” only, or take it to the limit and restrict accounts to only one trade at a time, because mathematically, that is the only way to ban hedging. Banning the “direct-hedge”, as describe below, will hurt the inexperienced traders the most, as they will not know how to do an “indirect hedge”, and will lose every cent they have with a margin call. The rest of us will frantically be calculating “indirect hedge” positions, or buying software that does it, because it is just plain stupid to not have a “Hail Mary” hedge strategy. Period. Unless you don’t mind losing everything you own, as Tom Sexton appears to be advocating.

    Tom Sexton and Davic Stawick are apparently not traders and do not understand trading. I challenge them to say what a trader should do when approaching a margin call, not eliminate one of their options, “direct hedging”. If his answer is to “not hedge”, then it is this stupidity which has caused the economic collapse of this country. I think anyone making regulations about trading should be forced to have a trading account, and show their results and strategy. Let’s give Tom Sexton an account approaching a margin call, and see what he does. Will he lose all his money, or live to trade another day? Has he an alternative strategy besides hedging that he’d like to suggest? We’re all waiting to hear it, but according to another letter on a net discussion forum link below, the NFA representaitve merely says “we’ve decided protecting the consumer from hedging is worth any burdens they are forced to bear.” I kid you not. Now let’s parse that. To Hedge means to “limit risk”. Losing every cent in your account in a margin call, is worth protecting the consumer from “limiting their risk”. I will be describing this to President Obama. I’m sure he’ll understand the contradiction in 2 seconds.

    Please postpone this ridiculous regulation, add discussion forums to your websites, and let us find logical solutions to whatever problem Tom Sexton thinks he’s fixing, with feedback from the community. Why is it that I can go to http://www.whitehouse.gov and interact with the President of the United States, easier than I can communicate with the NFA and CFTC?

    Marjorie Miller

    p.s. Why only phone numbers and no email addresses on the CFTC website? Please get a copy to David Stawick, who appears to only accept Federal Express, in the 21st century.

  • http://www.neocortechs.com Marjorie Miller

    hey All,

    Last one, gotta do some other work after this. But I’m furious, can you tell?

    I’ve just laid down the gauntlet with the NFA regulation experts. Let’s give them an account approaching a margin call and see how they handle it. That should explain alot. Email pasted below.

    Citizen Jane :)

    from Marjorie Miller
    to edasso@nfa.futures.org,
    lbrinati@nfa.futures.org,
    tsexton@nfa.futures.org
    date Thu, May 14, 2009 at 5:35 PM
    subject Postpone “direct-hedge ban”, add discussion forums to NFA and CFTC websites, and Listen
    mailed-by gmail.com

    hide details 5:35 PM (0 minutes ago)

    Reply

    Follow up message
    Hello Tom, Edward and Lauren,

    I hope everyone of you is fired for the cavalier and incompetent way you have addressed the concerns which your hastily proposed and undebated no “direct hedge” regulation. Attached is an email to the CFTC and President Obama. Let’s take this debate out into the sunshine and see how stupid you now look. Your words are being laughed at and scorned all over the internet.

    I have one question and only one question to you 3 people, Tom Sexton, Edward Dasso and Lauren Brinati: What do you now recommend for someone to do when approaching a margin call? People able to understand basic algebra, which you think ordinary Americans are unable to understand, will merely do a round-trip hedge incurring many more charges than you have “saved” us. The people you are supposedly helping will lose every cent in their account.

    I want each of you to be given an account approaching a margin call, with no hedging allowed. If you lose the principal with a margin call, you’re fired.

    Come one, put your money where your mouth is.

    Marjorie Miller

    Questions concerning these changes should be directed to Edward Dasso, Managing Director, Compliance (edasso@nfa.futures.org or 312-781-1551) or Lauren Brinati, Senior Manager, Compliance (lbrinati@nfa.futures.org or 312-781-1215).

  • robieee

    I have read the majority of the comments.Perhaps the true reasons lay in taxes, the one issue not previously addressed. The new rule forces everyonein to the First In First Out (FIFO) accounting procedure, like having to use dollar cost averaging (and eliminating the ability to perform tax planning). Long term trades on long term tends book the the greatest profits, at the lowest tax rate, (one year) at what should also be less risk of losses, hedging further reduces the risks. Short Term (< 1 year) Trades have the lower percentage profits, at a higher tax rate probably higher risk/reward ratio. Basically, let your winners run, cut off your losers. The new rule seems to force one to sell long term winners (get taxed), Yes, it does increase the “book work” of the broker (it’s all in the computer, memory is so cheap it not an economic issue for brokers). Basically, it reduces the traders capital base forcing one to take long term profits, and basically eliminating the long term tax bracket, if one wants to trade a currency pair more than once per year. Also, If one is sitting on a large winner, and one is within a short period to it becoming booked as a long term gain, the holder might consider it worth the risk to hold it for 30 days to reduce the tax bite; with FIFO (the new rule), you can’t trade the currency in the opposite direction to hedge for tax purposes.

  • robieee

    Hedging can be used to minimize taxes, and ideally defer them for a prolonged period of time. Although it impossible to perform 100% one can optimize it’s effects. Most people using this optimization will move accounts overseas.

    An overly simplified example: Assume the currency pair is a triangle waveform superimposed (added to) or upon a horizontal line – (i.e., the price oscillated about a fixed constant exchange rate )
    Reference: http://en.wikipedia.org/wiki/Triangle_wave

    For the sake of simplicity, let the peaks occur on even days, bottoms occur on odd days. (the “frequency is two days”).

    Day one, buy one lot
    Day two, sell two lots (first lot – negates risk of day one buy – locks in profits)
    Day three buy three lots (flats position on previous days, locks in profits)
    Day four sell four lots, again flat position on previous days, locks in profits
    Day five buy five lots, ……..
    Day six sell six lots, ……….

    Since I never close a position – I never realize any taxable profits, all the profit are on paper.

    • http://www.theessentialsoftrading.com John

      robieee – If your example strategy were employed in a hedging permissible account you would quickly run out of available margin because you’d have a rapidly (factorially?) increasing number of trades open.

      But to the tax question, it depends on the way your profits are treated. For US futures traders, for example, profits and losses for the year are 100% based on mark-to-market at year-end. That means you don’t need to have closed a trade to have a gain or loss for tax purposes. Also, to your earlier comment about short/long term gains, how long or short you hold a futures trade doesn’t matter because the gains or losses are split on a fixed ratio between short-term and long-term gains.

      I’m no tax expert, though, and I certainly don’t know anything about the taxation rules for folks outside the US. Traders should definitely find out from someone with the proper qualifications what their tax liabilities would be under whatever strategy they intend to employ if there’s a likelihood that it will make any real difference.

  • Adrian

    Basically, it reduces the traders capital base forcing one to take long term profits, and basically eliminating the long term tax bracket, if one wants to trade a currency pair more than once per year.

    If this is what you’re doing, it’s called going “Short Against the Box” and is tax fraud.

  • robieee

    Shorting Against the Box (please read the last four or so lines of the provided link … exceptions) and thank you for the link. The frequency of the Triangle wave would have to go to 30 days or so, daily was an example – over simplified. In the above “example” I was treating lots buy or sell as option to buy or sell – with no expiration date, to “close the position; one has to exercise the “option(s)” and prior to the expiration, date if any.

    Also, per the IRS publication 550, page 54 Short Sales, page 58 Straddles … there are special exceptions. I currently am not that interested in optimizing (minimizing) my taxes.

    I don’t see any effect of this new rule unless it is related to taxes and effects of currency options (excluding record keeping for tracking specific trades); and YES before transferring or even opening any accounts in any jurisdiction ; one should check this out with the applicable jurisdictions tax laws with a tax expert —not doing so would be pure folly, along with jurisdictions regulations and regulatory bodies (if any).

    The maximum ” risk exposure” or investment/risk in the previous example of the series of trades occurs on the first day; and diminishes thereafter, one is locking in profits daily with the premise the triangular wave form is present. This is a purely theoretical example to simplify –the search for what reason the new rule was established, and forms a “concrete” premise to start the analysis.

    As for the mark to market for individuals . at the end of the year for tax purposes for an individual, I having a tough time locating mark to market capital gains/losses for current unrealized (capital gain/losses) holdings. For a business … broker, bank, financial institution – etc … yes — they have to maintain a minimum capital requirements, at least on a periodic basis. Mark to market is used to regulate financial institutions.

    • http://www.theessentialsoftrading.com John

      As for the mark to market for individuals . at the end of the year for tax purposes for an individual, I having a tough time locating mark to market capital gains/losses for current unrealized (capital gain/losses) holdings.

      Robiee – It’s not just a business thing. Brokers send a form (one of the 1099 variety) which accounts for the mark-to-market of your positions as of the end of the year. They are considered Section 1256 contracts.

      Visit this link for more info: http://www.armencomp.com/futures-trading.html

  • diego

    this new no edging rule is just ridiculous. this is too obvious, that they don’t want ordinary citizens to be succesful in the forex. there should be no trying to explain to anyone that this is a clear conspiracy. there should already be a lawsuit against these theives.

  • http://www.neocortechs.com Marjorie Miller

    hello All,

    ahem, I have written another poem…entitled “..l..”

    “..l..”

    A Hedge a day
    Keeps the margin at bay
    But the NFA
    Says we must just pray
    Or take a loss and pay
    But no matter what they say
    The round-trip hedge
    Will never go away
    Because direct-hedge or indirect
    Let’s you trade another day

    I will be selling Trader T-shirts and cups…with a “..l..” on the front-side of the t-shirt, and the poem on the other…I’ll send one to Tom Sexton (COD), Michael Dunn and President Obama. Place your order today!!!!! :) !!!!! :D !!!!! But wait!!!! If you act now…

  • Frank

    well ive been reading all this jargon and quite honestly i can tell you. I am a hedge trader, where i was reaping 15 percent to 75 percent yeilds in one week im now down to about 3 to 5 percent yeilds on a trend move. its called averaging, set a buy sell, ride it, pull your winning trade, wait for the market to turn half way, and viola!. so market moves a hundred pips lets say, on your buy you take the hundred pip profit, then the market turns around, comes down 50 pips you exit the trade, give or take compensating factors for spread differences and such. either way safe run, locked in profits, and half movement for exit. market can trend up or down for weeks but it always consolidates. Secondly, this is complete crap cause the united states are the only ones not allowed to do it. So now all of who do believe and use hedge trading are now going to send our money elsewhere. all the guessing is out, you go out have a few drinks come home see the market movement and bamm, money in the front, not the back. no hedge is riding on the seat of your pants wondering if you got maximum profits, but since you never know you guess to close your trade and watch another hundred pips go that you could of had. I’ll do that in vegas, now that i have to hedge in another country, feels great to be american.

  • http://www.fxretracer.blogspot.com fxretracer

    Had my first margin call this year in my fxcm account that allowed hedging last week. The fact speaks for itself. Thanks alot NFA. Almost six months down the drain.

    • http://www.theessentialsoftrading.com John

      fxretracer – I just want to make sure I’ve got this right. Rather than selling (or buying if you were short) at some point when the market had move against you as you normally would have in a hedging-permissible account you just let the position run and hoped it would come back?

  • http://www.neocortechs.com Marjorie Miller

    fxretracer,

    Sorry to hear about your margin. Ever since the ban, I only trade UK accounts, and with the http://www.forex.com UK transfers, hedging was immediate, not 2 week delay like FXCM. Withdrew all my money from IBFX, the NFA ass-et-wipes. Also FXDD just put a “hedging accounting” frontend on their system. Dividing back end up into 2 servers, one for buys and one for sells, and a margin manager to share the margin between the 2 accounts. But the front-end looks the same, I’m hedging on a single margin, seeing the market thru my hedge-lens!!!

    Indeed, John was basically right in that it is just an accounting change. But some people like to see things thru a hedge. and FXDD was brilliant enough to figure that out, and just continue offering that continued interface to their customers. Other companies like FXSolutions, said that you can hedge if you have 2 different accounts with 2 separate margins, which is not the hedging we seek. FXDD took it to the full definition and divides the back-end beautifully into 2 accounts with one margin, tho you see it as one account and one margin.

    It’s basically like 2 cheeks of a butt. It’s all one butt. :) .

    FXDD Rules.

    Marjie :)

    copy of my message to the world…;)…I have not given up the battle fxretracer, and don’t you give up either!!!! :) !

    **************
    Hey Victoria, Foram, all of IGMarkets, Tom Sexton and the NFA, MIchael Dunn and the CFTC, and President Obama,

    As a mathematician, all this talk of defining open to mean close, or close to mean open, seems to me to be a definition of insanity. Why don’t we just define addition to be subtraction, and multiplication to be division?

    I think I like what ithe email below is trying to say, for it seems to refuse to do the insanity that the NFA has propagated. But I think the NFA’s strange redefinition of open and close has infested IGMarkets. Your email is incomprehensible.

    Just say no to the NFA redefining the meaning of the words open and close. It is not a reasonable thing to do. Ask to speak to their supervisor, the CFTC and President Obama.

    Indeed, I am about to call the WhiteHouse about this. Not write an email. I want to know why Tom Sexton thinks he is bringing clarity to the confused by redefining the words open and close.

    What if you did that with a door? What if you defined Push to be Pull and Pull to be Push?

    If Hitler told you to kill a Jew, would you do it? Who is Tom Sexton and why is he doing this to the consumer, and calling smart people stupid? Has he redefined smart to be stupid and stupid to be smart? Well, one is as stupid as the orders they take. Unfortunately, I am already hearing stories of people losing everything on a margin call. I do not think it is a coincidence that the EURUSD and GOLD started to completely spike right after Tom Sexton and the NFA’s “same-currency-hedge-ban” went in place. Boy, that really protected everyone, didn’t it? In contrast, I paid about 30 cents for a complete same currency hedge and took 2 days off. Very happy with the way my same-currency hedges saved my ass-ets.

    Speaking of saving ass-ets, has anyone at the CFTC and NFA heard of John Rusnak?…This could be indicative of the problem…quick recap, John Rusnak was very bullish on the Yen and so he didn’t hedge, and then had to hide $691 million loss from his bank employer. Funny, John Rusnak got 8 years in prison for not hedging, and then hiding it. Are you listening Tom Sexton? Do you understand that a hedge is insurance against loss? And a same-currency-hedge, is the cheapest and quickest hedge you can get.

    I’ve got it!!! Why don’t we just redefine loss to mean profit and profit to mean loss?

    Please rewrite this email, in plain english, where open means to open and close means to close. Indeed, I think that could be the entire email. Open means Open and Close means Close.

    Refuse to let Tom Sexton make you sound stupid. Indeed, I want to see a copy of Tom Sexton’s resume. If anyone finds a copy of it, please send it to me. It will be interesting to see who Tom Sexton is really working for. Because I’ve got an a feeling he’s not as stupid as he’s acting. Indeed, I want to know why it’s legal for optionsXpress to charge me $30 a trade, and it’s illegal for an “NFA-approved forex broker” to charge me the 30 cents that I have been charged to hedge my EURUSD and GOLD positions while the market goes wild? My margins are just fine thank you. I do not trade with brokers who don’t allow same-currency-hedging, because if a broker, or the NFA, or the CFTC doesn’t allow same-currency-hedging, they are either stupid, dishonest or up to no good.

    Every cent of my money is now in the UK or in FXDD, who told the NFA it was not illegal to offer front end accounting services to clients, which is what I love about hedging. It is indeed just an accounting front-end way of looking at the market. I can feel/get to know the market from the changing values of same-currency-hedged positions, without losing my shirt. And when the market has settled on my hedges, I then make my move. Basically it’s like practicing your shooting, without wasting any ammo. Your ammo being money. Am-mo-ney.

    Yes, that it! If you think of a dollar as a bullet, and the marketplace as the battlefield, you can can definitely see why you might want to hide behind a hedge and watch the action, before wasting your bullets. Hedging as a concept, cannot and should not be outlawed, Tom Sexton. It is your rock in a bloody battlefield.

    Thanks,

    Marjorie Miller

    On Tue, Jun 2, 2009 at 9:36 AM, IG Markets wrote:

    IG Markets
    IG Markets
    Important Trading Notice

    Greetings from IG Markets.

    As you are aware, IG Markets recently eliminated the Force Open functionality on trades to comply with new NFA regulations.

    However, the Orders to Open function will still remain on the IG Markets trading platform until further technical work is completed.

    Please be aware that if you have an existing position and you open another position – using Order to Open – on the same market in the opposite direction, the trading platform will not close your existing position. Rather, it will open a position in the opposite direction.

    If you wish to leave an order to close an open position, you should use the stops and limits functionality.

    The Orders to Open function should only be used to open a new order.

    If you do have open positions on the same market in the opposite directions, it is your responsibility to close the position in the proper manner, via the Open Positions box.

    If you have any questions please contact our Client Services department using the details below.

    Kind regards,

    IG Markets Client Services

    U.S Toll Free: 866 748 1341
    Email: clientservices@igmarkets.com
    http://www.igmarkets.com/fx

  • http://www.neocortechs.com Marjorie Miller

    John,

    That is exactly what I did, and I made $500 last night and my margin is fine.

    I’m surprised John. FXDD implemented “your no accounting” difference and yet you still claim you do not understand?

    I also set up a demo account, did not hedge anything and the balance is now negative $300, says it can’t open anymore trades, which I assume is a margin call for a demo account.

    And what’s more amazing and infuriating to me, is the redefinition of the words open and close. No fury for that John? Can you say anything different? Are you are a recording John?

    What a joke. Pardon my anger, but stay tuned for a class action lawsuit against the NFA. ANY ANGER AT ALL THAT i CAN DO HEDGED OPTIONS AND GET CHARGED $30 PER ROUND TRIP TRADE AT OPTIONSXPRESS?

    As far as my Gold account, you watch the hedge, find the max value and figure out the required margin to take the profit, after the fact. Or just have fun watching it, getting to know the volitility and values associated with the XAUUSD hedge and when the market returns to normal I haven’t lost a cent, but learned alot.

    I AGREED with you JOHN. It is the same IF the same margin is used for a buy and a sell account on the back end, as FXDD has done, and YET YOU CLAIM NOT TO UNDERSTAND, AFTER I AGREED WITH YOU?

    John, would you disagree with a robber who has decided not to kill you?

    OR do you seriously seriously, not understand your own position?

    Marjie

    • http://www.theessentialsoftrading.com John

      I AGREED with you JOHN. It is the same IF the same margin is used for a buy and a sell account on the back end, as FXDD has done, and YET YOU CLAIM NOT TO UNDERSTAND, AFTER I AGREED WITH YOU?

      Marjorie – What exactly did I claim not to understand? You seem to be reading something I did’t write, or reading something into my words which I didn’t say.

  • http://www.neocortechs.com Marjorie Miller

    oh and by the way, if you didn’t notice, BOTH THE EURUSD AND XAUUSD, spiked last night and RETURNED to almost exactly where they were yesterday.

    WHY DO YOU THINK HIS NAME IS fxREtracer? re-trace. get it? John, do you ever use fibonnacci retracement indicators? If it’s not in your book, you’d better study up and put it in there. the EURUSD did an exact 161.8 fibonnacci extension and retrace yesterday and last night.

    I read that even if you don’t believe in fibonacci retracement, alot of traders do, so they watch the fibonacci indicator, and so whether it’s true or not, that’s what happens, because other traders act on it.

    WHY WOULD YOU THINK THAT THE EURUSD WOULD NOT COME BACK DOWN?

    I heard a joke last and the North Korea nuke spike down on the EURUSD: The North Korean trading philosophy: what goes up, must come down. har har.

    Anyways, John, I’m angry because fxtracer would not have lost his margin had he been hedged yesterday. It is WAY BACK DOWN today.

    John, do you know what a margin call is? I am really beginning to wonder.

    Marjie

  • http://www.neocortechs.com Marjorie Miller

    looky here – 2 hegded options on gold are still legal – here’s my account values today at OptionsXpress…I assume Tom Sexton wants me to pay $60 to do this instead of hedging spot forex for less than a dollar. I therefore assume Tom Sexton and the National FUTURES Association works for the Options/Futures market, who are upset that people are choosing to trade the lowcost forex market rather that their high priced options/futures market.

    And I doubt the algebra challenge will EVER understand options and futures. With a degree in Math and Physics, I can barely understand enough to input trade signals. Talk about a crap shoot. An EXPENSIVE DANGEROUS crap shoot that Tom Sexton wants us to take. Why? So he and his can win, no steal, our money.

    If you can read options, here are my current gold option hedge values on gold below. Why is this still legal John? Didn’t you say they were just standardizing the rules? Apparently, not so.

    .AUGG AU JUL 35 Call $39.58 2 $4.45 $890.00 5.8 $1,160.00 $270.00 Trade | Roll | Notes
    .AURH AU JUN 40 Put 2 $1.50 $300.00 2.15 $430.00 $130.00 Trade | Roll | Notes

  • Adrian

    Marjorie,

    Anyways, John, I’m angry because fxtracer would not have lost his margin had he been hedged yesterday. It is WAY BACK DOWN today.

    If he bought and sold at the same places & same times without asking whether he was closing & reopening or hedging, would he still have lost his margin? Like John, I’m confused by what’s happening. Are you still placing the same orders as before or are you now holding & hoping without any protection?

    Why is this still legal John? Didn’t you say they were just standardizing the rules?

    Actually, using options are a true hedge and are what the rest of the financial world has used for decades. They protect from downside losses while still allowing you to capture the upside, unlike the so-called “hedge” in forex which totally eliminates market exposure.

    When trading futures or options, they use the FIFO-style of position tracking that forex uses so yes, they have standardized the rules. Instead of buying then shorting the same instrument, to hedge here you go long the futures contract and buy a put in a corresponding option, a separate and distinct trading instrument.

  • http://www.neocortechs.com Marjorie Miller

    Adrian,

    I like opening 2 buys and 2 sells. then I open and close one at a time, being able to watch the numbers for the relative position of the hedge. When I snip off profit, one one hedge at a time, I am indeed open with no protection on one trade.

    What hedging allows me to do, is for less than a dollar charge, have a side by side counter, which shows me the amount I would have made, did make, didn’t lose, or might lose. It does the computation for me. That’s what I’m paying for.

    i Guess you could say, I do not hedge to make money on the trade, but to see the counter, to assist in my decision of when to act, i.e. unhedge one position, ie. take profits, and bet with 20-20 hindsight on what direction it’s going, ONCE IT REACHES ANOTHER STABLE AVERAGE PRICE AND YOU KNOW WHERE THE SINE WAVE LIES.

    And I have a little hedged counter to tell me where I am. I can glance at the screen, know in a second based on the hedge values, and not have to do any computations in my head.

    As far as options and futures, too difficult. Forex hedging is so simple a 5 year old could do it. What is wrong with simplicity? And please Let Open mean Open and Close mean close.

    The problem I find most difficult is making decisions at 2 in morning when I’m half asleep. I do not want to be doing computations live, in my head when I’m half asleep. So I have an extra hedged pair, to do the computation for me.

    Gotta go no mo time…

  • Adrian

    Marjorie,

    I do something similar, just use different tools. In QuoteTracker I keep one “portfolio” window which I use to keep track of trades which have been stopped out. I can set the prices and sizes to be whatever I wish and it automatically keeps track of these stats for me. I also use this trick in my watchlist, marking support & resistance levels for breakouts as the “buy price” so I can quickly see which trades are close to interesting levels.

    Maybe you can find some easy way to get the same thing? As you said, it’s an accounting & frame-of-mind thing so it’s a matter of finding tools to manage these for us.

    Luck.

  • Bourn

    As I said earlier, the use of hedging is the only way for a day trader against stop hunting. The easiest way to do that is the direct hedging. John has posted results of his experimtes and claimed that stop hunting in the retail forex market does not exist… Ha-ha-ha !!!

    Because of this unusual duality of the FX market (high leverage and almost universal use of stops), stop hunting is a very common practice. Although it may have negative connotations to some readers, stop hunting is a legitimate form of trading. It is nothing more than the art of flushing the losing players out of the market. In forex-speak they are known as weak longs or weak shorts. Much like a strong poker player may take out less capable opponents by raising stakes and “buying the pot”, large speculative players (like investment banks, hedge funds and money center banks) like to gun stops in the hope of generating further directional momentum. In fact, the practice is so common in FX that any trader unaware of these price dynamics will probably suffer unnecessary losses.

    John – what about you?

    More interesting, however, is the possibility of profit from this unique dynamic of the currency market. The fact that the FX market is so stop driven gives scope to several opportunistic setups for short-term traders.

    One of them – hedging… Why the NFA does not want it – very clear to any professional day trader…

    • http://www.theessentialsoftrading.com John

      Bourn – Before making critical comments you might actually want to check to make sure you’ve got your facts straight. Firstly, the experiment you’re referring to was not done by myself, but by someone else, and I have no specific knowledge of it’s methodology or outcomes other than what he’s stated. Second, that test was looking for broker-specific, not general market stop running, meaning he was checking for individual broker price anomolies. Thirdly, I have repeatedly noted in this blog and elsewhere that stop running is a feature of all markets and won’t change any time soon.

      As for hedging preventing stop hunting, answer me this: How does hedging, which requires a counter trade execution at some price based on some plan, alter whether or not that counter trade is executed? My point being, if you put your counter trade entry point at a common stop level, how is that any different at all from putting your position exit trade at that same point? And if you are not putting it at that same point when hedging, they why would you put it there when you aren’t hedging?

  • fxretracer

    Marjorie,
    You`re the best:-) I already concluded John and others dont know jack about Margin calls or what we go through…they have just concluded I am a really dumb trader. Thats why I dont entertain the acinine questions they always ask.
    I have to admit…I am really glad you are here fighting the good fight, I have dial up and run a farm so dont have time. Not that I have not already made my case.
    Also, if you need help with that class action law suite please let me know:-)
    I think my 5 months of trading transcripts could go a long way to proving the point;-)

    PS I find it wonderfull to see you were not even in my exact position, but you could look at the day and see how it would have worked out for me. That my galiant friend is true proof that you are about the only real trader in this thread.

  • fxretracer

    Here is a link to whats really behind all this:
    http://www.globalresearch.ca/index.php?context=va&aid=13773

    It was just too much for these goons to see the little ol retracer`s figuring out how to milk their system;-)

    Well, to bad for them we have a passion and desire to win that rivals the suicide bombers seeking 75 virgins in heaven.

    Never Give Up, Never Surrender!
    Semper Phi
    ( no I am not in the marines)

  • fxretracer

    I have no desire to use options(to hard to understand for me), what I desire is to use hedging as we are explaining it here in this thread.
    One thing I find really annoying also, is the way some in this thread always come up with some convulated question that seems to bruise my brain.
    We have establish the fact that those of us who use hedging are not as smart as John or other traders like him who seem to be able to spout trading jargon like a second language and yet dont see how hedging works for us. Some folks can only calculate the math. They are hopeless to contend with, they are not capable of admitting they can`t tag the variable and will spend endless hours crunching math that will never give them a real answer to the feelings involved. Though they will never admit the math failed them and will just conclude we are an aberation of some sort or just plain dumb and dont derserve anything but failer anway I guess.
    I for one have no desire to think about trading too much, I just want to get in and out as quickly as possible with some pips. I can see as Bourn said why this would infuriate professional day traders who have so many limits and rules imposed on them.
    What gets me upset the most when I am around the house doing my work and think of whats happened is this: I had a way to stop margin calls when trading, period. Now they took that away from me. WHY? WHY did they take away a tool I had used to bring a 50 dollar balance to 70 bucks in 5 months? It was just mean of them; they wiped out 5 months of my life. Not to mention some hopes and dreams.
    I also clearly understand now why the 3 years at OANDA never worked out for me.

    It called “empiracle” evidence. So no fancy shmancy techy messy question will throw me off my thought process here. Thats funny how they always throw a question at you to get you off your thought process(passive agressive)thats an elementary tactic lolololol.

    PS I might be a good enough trader to trade without hedging, but the empiracle evidence suggests otherwise at this point. I am getting closer though:-) I did last about a week with that small balance LOL.

  • Adrian

    One thing I find really annoying also, is the way some in this thread always come up with some convulated question that seems to bruise my brain.

    You say that you’re losing money because hedging is gone. I don’t think it’s very convoluted to ask how the changes have affected your trading since you speak as if you’re totally convinced that the hedging is the cause of your problems.

    So how did the lack of a hedge cause you to lose money? Did you, as John guessed, hold a loser and hope for it to return instead of sending in an order to close (formerly “hedge”)?

    Why are you blaming the accounting changes (and even Marjorie is now admitting that it’s merely an accounting change)?

  • http://www.theessentialsoftrading.com John

    For what it’s worth, I spoke with a couple of NFA representatives at the Traders Expo last week. Though they were surprised at the aggressiveness of the response to the no-hedge rule, they were not surprised by the fact that there are folks who don’t like it. They are regulators and having a thick skin is a job requirement since they spend most of their time telling independently-minded people what they can and cannot do. They’ve been tasked with forex oversight by the CFTC and they are taking in seriously.

    In other words, all the letters and threats of lawsuits aren’t going to sway them from their course with this.

    Also, I found out that FXDD is not yet an NFA member. As such the anti-hedging thing doesn’t apply to them. That’s for now. They are in the process of becoming a member, so it will apply to them soon enough as well.

  • Marjorie Miller

    hey All,

    I haven’t had time in a week to read these posts or trade. So I am hedged on all. And look at the circus once in a while. When things stabilize, ie. in technical terms, reach a stable moving average/sine wave, I will play again. But all my money is safely hedged right now.

    Thanks forexREtracer for the kind words. my email is marjiemiller@gmail.com. Please do send me yours as well. I’d love to compare hedging profit statements, and indeed, good for the lawsuit.

    Big Hey Hello shout-out to Bourne in the MotherLand too!!! :D !!! :) !!! The Bluecoats are coming!!!! The Bluecoats are coming!!!! :D !!!! :) !!!!

    Adrian, you misquoteth me. You apparently didn’t understand when I agreed it was an accounting change. Dual buy-sell accounts on the back end with the same margin, with front end direct-hedging accounting, as is. I like watching the numbers go up and down, and I will gladly pay 2 cents for the service. I will not pay $30 for a roundtrip trade. Ok I did. But I’m still pissed about it….

    And John Darling, so sorry to snap at you, but sometimes honesty is the best policy…I will say thank you for having this thread as I’ve met some great people, discussed and learned many things!!! Please support our right to direct hedge. How does it benefit you to support taking away that risk-protection tool, that IS available to Options and Futures Traders. Contrary to your initial post, it is NOT standardizing trading across the board, it is giving Forex traders one LESS tool than Options and Futures traders.

    Thanks for being our beating bag. But we really need to beat up Tom Sexton and the NFA/CFTC. But isn’t it funny, they won’t host a forum like this to discuss their policies, meant to protect us.

    Mere coincidence, or one more part of the architecture of their deceit?

    Thanks for being man enough to post opinions which differ from yours John. I will give you that! :D !!! :) !!!! You have kept the discussion going!!! Now please comprehend it!!!! ;) !!!!!

    Marjie :)

    • http://www.theessentialsoftrading.com John

      Marjorie – Your previous comment has been deleted. I’m generally pretty laid back about the exchanges here knowing that some topics (like hedging) can generate some serious emotion. I will not, however, tolerate name-calling no matter to whom it’s directed. It’s infantile and serves no worthwhile purpose in the furthering the discussion. Refrain from doing so again please.

      As for direct hedging being available in futures and options – and I’m taking direct to mean simultaneous long and short the same instrument (if you mean otherwise then let me know) – you are most definitely incorrect.

  • http://www.neocortechs.com Marjorie Miller

    John,

    You can’t be serious. oh well, so much for being man enough.

    At any rate, I am have a call and put options right now on a Gold company. They are posted above in a previous comment. Placed them at OptionsXpress.com. YOU are most definitely incorrect.

    You defeat yourself.

    • http://www.theessentialsoftrading.com John

      Marjorie – Puts and calls are not the same instrument – not as each other, and not as their underlying market – so it’s not the direct hedge you mentioned before. They certainly can be part of a hedge (and a good one at that), but they are not the complete hedge being long and short the same instrument is because they do not track 100% either with each other or with the underlying market due to things like time decay and changing implied volatility.

  • Bourn

    John,

    options/futures and forex have very different leveraging, thus – should not be standardised. Think about it.

    • http://www.theessentialsoftrading.com John

      Bourn – It’s the trader who decides leverage used, not the market. The market only sets the top end permissible. But what does that have to do with anything? Are you attempting to suggest that the accounting for forex futures and spot forex contracts should be handled differently? They are virtually the same derivative instruments with the difference being mainly duration of contract life.

  • http://www.neocortechs.com Marjorie Miller

    John,

    I don’t care what you call it. All I know is it cost my $60 roundtrip to hedge – $15 four times.

    And yet, for my own protection, I can’t pay 2 cents to hedge in forex.

    Could it be any clearer who benefits from the arrangement John?

    Why don’t you just say, “I support your right to hedge, and like having the tool there, even if I myself choose not to use it?”

    I don’t understand your point: for my own good, I should have to pay $60 roundtrip trade fees at OptionsDistressed.com, instead of doing a cheaper hedge at any spot forex broker? Don’t you see this is the battle of the Rum Runners?

    Al Capone

  • http://www.neocortechs.com Marjorie Miller

    John,

    When did m*r*n become a 4-letter word?

    M*rjie :)

    • http://www.theessentialsoftrading.com John

      Marjorie – Who said anything about 4-letter words? I said “name-calling”, not cursing or swearing (though I frown on that when directed toward a specific individual as well).

      As for your hedge, I’m not following what you’re doing. You’ve got an underlying position in gold that you’re looking to hedge, right? What sort of option position(s) are you using for your hedging? Are you long a put and a call? Long a put and short a call?

  • Bourn

    Well, John, most of the folks in retail forex do not have money wallets of Mr Soros, so they chose higher lever to make anything reasonable…

    • http://www.theessentialsoftrading.com John

      Bourn – And this relates to your standardization point how?

  • http://www.fxretracer.blogspot.com fxretracer

    Good, I see many in here talking about having the same experience as me now.
    What this rule did was make it so you have to trade more, and you cant take long term positions. This does make taxes alot higher, good point. I had not thought of that one yet. That simple.

    The tax thing makes all the sense in the world. This is excactly why they did this. Silly me, cant believe I missed that one. No conspiracy, just the politicians in their infinite wisdom chasing money away into extinction in an effort to raise more of it via taxes.Now there will just be less money to tax in the forex period in the USA. When will they ever learn?

    Or, better yet when will WE ever learn…the next step is to create a global tax on the forex exchange, lord knows they need money bad to back up this new world ODOR they are pushing down our throats.

    Heh, maybe John and his possie are right, I dont deserve to be able too trade if I cant do it without hedging.

    I can see it now…15 pips a day limit for earnings caps and a 5 pip tax on that…..so we are allowed only to make 10 pips a day. In a 3-4 trillion dollar market per day, that would reft a pretty penny from the pockets of everyone trading no matter who they are. Of course the big brokers will be able to find away around it so it will be the small end retail traders taking the brunt of the new taxes.
    Folks like myself who try and crawl out of the sewers with a mere $50 will never have a prayer. Not that banning hedging has not already effectively insured that.

    “We Will Survive”…”We Will Get By”

  • Tom

    Hail to the Queen of Hedges!
    I share the same view on hedges as you do. I discovered the hedge from a bond trader some years ago and that technique saved my hide a few times.

    I was daytrading the s&p emini with a small account and got stopped out several times, Looking to go short, and out $500, then some strange news came into the market and it blew through my stop straight up, I couldnt even get any stop order to take, and I was too scared to use a market order for fear of it waiting untill the top was in.
    So, I remembered the hedge strategy, and went long with twice the contracts the emini nasdaq, (not a perfect hedge, but worked, $20per pt vs $50 per pt).
    and worked the other side of the trade. I brought my loss from over $1200 down to about $700. Still a loss, but not a stinking loss.

    Does hedging work? I would have to say yes when the market gets range bound or goes to hell in a handcart, But not when the trend is running.
    I wil never trade a market that you cannot hedge in some fashion or other,

  • Peter

    Hi,
    Just wanted to clarify, in my opinion, why I believe that ‘same market hedging’, (managing multiple positions in both directions within one market), is absolutely crucial for my style of trading.
    Firstly, I live in Australia and now use FXCM Australia, which is unaffected by the draconian elites latest act of financial terrorism.

    I have even built a special tool that allows me to trade this methodology, with one-click ease, managing multiple positions in both directions, and even on multiple markets and frames, within multiple accounts too.

    These tools were designed to be used with Ninja Trader, but now that the US brokers no longer allow my custom tools to function, I had to change brokers..
    FXCM have stated that they will have a NinjaTrader data feed connection available by end of third quarter..
    This cant happen fast enough, as I am now entering positions manually..
    My strategy/tools allowed me to enter trades semi-automatically, with computer generated criteria, removing hesitation & procrastination, eliminating hand-eye coordination error, timing issues and false signals..

    Now that the NFA in their infinite wisdom has taken further steps to fleece hard earned money from the retail trader, I have lost many of my advantages, but only temporarily…

    eg). I will use round numbers where possible for easier calculation.
    This is a strategy I use when the market is starting to trend..
    The moves usually start with isolating a reversal point intraday on a 13range candle chart. I only trade intra day and never hold overnight positions..

    I go long 5 lots on the gbp/usd at 1.6000, with expectation of follow through to 1.6200.
    Market reaches 1.6030, with no signs of turning around yet, other than a small retracement to catch its breath..
    So, I now go long 3 lots following retracement entering on a continuation long signal.
    I am now long 8 lots spead over 2 trades.
    The market continues to move higher, now reaching 1.6070, once again with a small retracement being signalled, but with no action required yet.
    I once again buy the retracement, adding to my position another 3 lots.
    I am now long 11 lots on 3 trades.
    The market moves up to 1.6100 and signals a moderate turn down.
    At this point, I am hopeful the market will continue higher but dont want to give back any profits, (in case I am wrong), nor do I want to surrender any of my positions yet (in case I am right).
    So, I take a short at the trigger, for 11 lots, effectively locking in all my profit less the spread on the 11 shorted lots.. My broker averages down my margin to accomodate the now reduced risk (my short cant lose as I am still long – and broker acknowledges this). If market moves up from here I am no longer making any profit on the longs as they are being cancelled out by the shorts..

    Now, the market moves down 30 pips, before signalling another continuation long, whereby I now take profit on the 11 short lots (close out), and add to my position again. Market keeps rising.. So far, the market has done as the signals suggested..
    So, I am now in large paper profit on the original 11 lots. I converted a 30pip paper profit short to cash, midway through the trend.
    And have added another 3 lots which is also showing small paper profit.
    I am now long 14 lots with a major turn on the horizon that is falling short of expected target of 1.6200.

    Turn approaches at 1.6110, and I have figure this for the reversal of current advance, but I am cautious, just in case the trend continues. The weakness may be temporary… so…
    I take a short at that level for 17 lots, (once again my margin is adjusted).
    So I have now locked in profit on 14 lots, plus making up profit on 3 lots for the short…
    What happens next…..
    Well, if the trend resumes under preferred circumstances (signal), I exit all shorts and add to longs again…
    If the trend reverses, at failure to continue higher, I exit longs and start adding to profitable short hedge trade, and do the same thing in the other direction, if conditions allow..

    There are also conditions that permit me to scale out on these trades before and during the pyramiding process. Not all positions are held for the turn.. Only strong trends permit this.. Choppy markets have a tendancy to play on my nerves, and I find scaling out pre-turns, keep me sane.
    But with the new FIFO ruling, my tools or old broker wont allow me to exit new positions before older ones…. I cant be on the phone to the broker all the time asking to overlook off-set trades… What a joke..

    What is the benefit of doing this?
    There are many…

    1. I did not have to surrender my long positions to take profits.
    2. Psychology.. Seeing an existing position/s in profit helps foster the mentality and confidence required to pyramid a trade. Yes, I was adding to my positions along the way, but I was not as fearful of doing so, as any losses could be absorbed by the existing profitable trades.
    3. Spread is less. If I was to exit at the high points and by the time I had scaled in on my position, I would be having to reenter the market each time with that size position. eg. By the time I had 14 lots, had I exited at the turn and not shorted, I would have had to re-enter after the turn with another 14 lots, to resume my position… So I have now paid more spread to move my positions back through the area I had already paid to move through..
    4. If I am wrong on the hedge? Then I am only wrong a little bit, if the market does not move immediately in the fashion I expect it to, then I pull the trade, with a small loss, which the existing long quickly negates as it moves higher.
    5.It allows me to always be in the market. My system is sensitive enough to pick majority of turns made in most moderately volatile/liquid market. eg. I am in the market for most break outs, reversals and continuations.

    However, I rarely, if ever, hedge a losing position, and take stops when deemed necessary. I only pyramid winning positions, and never average down a losing trade. (I dont know any one who can do that consistently).

    Admit when u are wrong and fear big losses…
    Know when u are right and hope for bigger profits.
    When ur right…sit tight.

    Its time to hold hands and force these Satanic fools into allowing the ‘free market’, to be just that.. FREE… Long live capitalism….

    Cheers

    • http://www.theessentialsoftrading.com John

      Peter – You’ve got a couple of things I need to correct in your comment.

      First, there’s no such thing as “paper” profits in forex unless you’re trading a paper/demo account. Every dollar you make or lose on an open position is real money added to or substracted from your account in the mark-to-market. It’s not like stocks where you have to sell the position to take your gains because your capital is actually in the stocks.

      Second, whether you “hedge” or “close” a trade you are paying the same spread. They are the exact same transaction with the exact same implications for pricing. If you are long 14 contracts and you short 14 contracts to hedge them it’s identical to exiting the 14 long contracts, unless you’re trying to say that you get different prices. You say you would have to “re-enter” the trade if you closed out your long rather than gone short, but it’s the exact same thing. You’re “buying” the 14 contracts. It doesn’t matter whether it’s done to initiate a new long or to exit the short hedge.

      Let’s walk through it. You’re long 14 contracts and see a turn coming. You short 14 to hedge. The market goes down. You cover the short to go back long. So you sold 14 at the bid then bought 14 at the offer. Now, lets look at it if instead you didn’t short to hedge you instead closed your long, then bought back at the lower point to get long against. You sold 14 at the bid then bought 14 at the offer. It all nets out the same. There is no difference either way.

      This, to me, is an example of a perfectly good strategy (assuming good entry and exit points) in which “hedging” is used not for any actual P&L benefit, but for a psychological one only.

  • Marjorie Miller

    Hi All!!! :D !!! :) !!! Tis the Queen of Hedges!!!! :D !!! :) !!!

    So sorry to be out of touch for so long!!! I’m so behind!!!! BUT I’ve been testing out some new stuff!!! So I thought I’d share it with you on oh such a gloomy NFA day. :) !!!

    Of course, I haven’t really been listening to the NFA, as I no longer use any brokers that affiliate with the NFA. But my recent successes show why the NFA same currency hedge ban is even more ridiculous. Say you have an account getting signals from multiple providers or robots. What happens when these multiple providers have different strategies in the same currency? The NFA stupidity makes it impossible to even have multiple signals on a single account.

    I just read the most amazing short article in my email which uncovers that the new NFA rules are only for RETAIL customers, not institutional traders…So what we’ve been told is stupid to do, is not stupid to do if you are an institutional trader…I see…

    So, screw them. Here’s how I’ve made $2400 off $5000 in the last month:

    Go to smartmoney.zulutrade.com and get an account with http://www.forex.com or http://www.fxdd.com (both NFA-Free, for you and me :) ) . Then choose signal providers LowestDD and Auto-fx. You can test it out with a demo account first if you’d like. Demo account defaults to $50,000 and only mini-lots, but with http://www.forex.com and http://www.fxdd.com you can use microlots on real zulutrade accounts. I put in about $2500 in each account to start, specifying a trade size of 5 microlots and 4 max trades per signal provider, to be margin-safe.

    The new absurd FIFO rules would also shut-down multiple trade signal providers to a single account. I hear they are also outlawing stop-losses and take profits. I also hear the CME wants everybody to pay $15 a trade to trade the new “Futures Minis”. So they are screwing up the NFA Forex brokers businesses so that everybody with go to the CME, which is who the NFA works for, the National Futures Association. Now that’s funny. All the NFA brokers fell for it. Now IBFX is begging me to come back offering me money to put money back with them and saying they have changed their back office servers to make the NFA changes transparent to the user, i.e. Metatrader functionality unchanged. Too little too late baby…;)…

    So ha I say. The NFA game is becoming apparent. I will post an email later that I got this morning which puts it in a nutshell.

    But, until the game subsides and the perps put in jail for illegal market manipulation, which is what I think the NFA is doing, mafia-style, just do as described above, and you will be a happy camper, as I am.

    I love the zulutrade architecture: it keeps the trader separated from your money. Only the signals are allowed to touch your account, and you control the signals. Way cool. check it out… smartmoney.zulutrade.com :) . LowestDD and Auto-fx are my fav signal providers…mucho bucks, very few losing trades…and I don’t have to do a thing, but watch very good traders work on my account, in front of my eyes, no lies, all traders accounts FXCM verified…very educational to watch their methods in real time as well…

    Senorita Marjie :) La Queen de Hedges…

    • http://www.theessentialsoftrading.com John

      Marjorie: I hate to break your rant here, but “the new NFA rules are only for RETAIL customers, not institutional traders” is the case because institutional traders do not use “hedge” accounting and never have. They use net position accounting, which is what the NFA has now forced on the retail market.

      Oh, and I’m pretty sure FXDD is moving toward NFA membership. That’s based on my recollection of a conversation I had with one of their folks at the June Traders Expo. Don’t know about forex.com’s plans.

      While I agree that the FIFO rules are pain in the arse (I’m glad to see the OTO orders being made available), and no-hedge rules make multiple system trading awkward, if you actually do the math for all the buy/sell signals you’ll find out that it all nets out the same in the end regardless of whether you account for “hedging” or FIFO or none of the above.

      And no, the NFA is not “outlawing stop-losses and take profits”. Some unscrupulous marketer has been making that claim when it’s patently false. You can still use stops and limits. You just cannot associate with with specific open positions as you could before because of the FIFO rule.

      As for the CME and their micro futures, it’s the brokers that charge the $15 commission, not the CME. The exchange has their own little transaction fee that the broker will probably tag on to the commission they charge you. That’s generally been what futures brokers do. I personally don’t think the CME is going to grab overly much of the retail forex business with these new contracts. Their micros are what we would normally call mini contracts (10,000 units). That make’s them too big for smaller traders.

      I’m with you on the Zulu thing. I’m not using it right now, but I do find the set up very interesting with loads of potential. There are some others doing the same sort of thing.

  • Marjorie Miller

    Very important!!! YOU MUST start your accounts thru the http://smartmoney.zulutrade.com link, or you will get a long delay, while they switch your account to a zulutrade account afterwards. I already had accounts with forex.com and fxdd.com so I had to do it the harder way, with a switch to new account and transfer money with a Texas Two-Step. Much faster if you do the One-Step. :) The zulutrade trade commission is taken out of the spread. It costs like 5 cents a trade. I’m sure the CME is going to have fit about that. :) . I’m sure it’s in our best interest to pay $15.00 a trade….

    As well, the smartmoney part of the link, is linking you to me, and I think there may be a way for you to link to my signal providers choices through this, if you wanted, in real time, though I’m still investigating those settings….

    So, stay linked…

    Marjie :)

  • Marjorie Miller

    John,

    I’ve finally figured out what NFA stands for: Now you’re F*cked Association. :) .

    Marjie :)

    • http://www.theessentialsoftrading.com John

      Marjorie – I’m extremely disappointed. That’s the best you could come up with?

  • Marjorie Miller

    How about “No Forex profits Allowed”?…:)…

    • http://www.theessentialsoftrading.com John

      No good. Come on. You know you can’t have extra words in their – articles like a, an, the, etc., but no actual nouns, verbs, or adjectives.

  • Peter

    John,
    I understand the whole paper profits… its just a figure of speech. I started trading CFD’s on Aussie and US stocks so I get that…. and until u close the trade, anything can happen., so what appears as profit on ur screen one minute can disappear the next… Hence why I call it paper profits.. It only takes on push in the wrong direction and its gone so….
    Actually, there is a difference with the hedging outcomes.
    If u read my original post again, you will see that I am trying to avoid reentering my original position all over again.
    Once I am long the 14 lots, (remembering I have copped the spread once on the 14 lots, why would i pay it again?
    You say there is no difference!… Look again.

    If I am long 14 lots then take a short against it also with 14 lots, then that is a separate trade. (hedge or off-set) At this point, there would be no benefit to stay in the long and I could quite easily just reverse the position, closing the long to go short…
    Which would satisfy the dark overlords at the NFA.

    However, If I am certain the market is going to go back up (resulting in the short being a separate profitable trade), then It is best that i hold the long…
    If I had exited the 14 lots long, I would have to pay the spread again when I reenter the 14 lots long for the second time.

    Providing the long continues through my short entry, I am profiting again without having to compromise my position or pay the spread again.
    All i did was add another 3 lots to my 14 lots when I closed the short, Not reestablishing the 14 lots all over again which I have paid for once.

    If the market was to keep going up and I was to keep pyramiding on continuation signals, and reverse my entire line (close long and enter short), everytime the market went against me, I would be reestablishing the whole line every time and paying spread every time I entered long again.
    Why do that when I can just keep adding to my position, and scalp/hedge the retracements for extra profit/profit protection.
    Depending on market movement, I dont always take equal opposing positions…
    I have been long on some large scale in efforts in the past and taken smaller positions against myself just to scalp extra pips from the market and certainly would not have been any benefit to exit a 45 lot long, just to take a 5 lot short.
    My favourite is what i call the ‘Superhedge’.
    I described this briefly in the last post..
    It involves taking a larger position against a winning trade. Not an equal position to negate loss/profit, or a smaller position to reduce risk/loss, but a larger position, usually 1/4 of the size again.
    I do this when I think I have found the ‘bend at the end of the trend’.
    If I was long 20 lots, I would short 25 lots, which is same as closing the 20 long and going short 5 lots, but with a couple of advantages.
    The profit is in the bag, and if price falls, I am making profit on 5 lots and have locked in all the profit on the 20 long… This gives me time to access the situation more closely without pressure. If price goes down i make money, if price goes back up, i scale out of short and leave some in, depending on severity or determination of rising price, And still make money..
    If I stay in on a couple of short lots, they are quickly absorbed by the rising 20 long should market keep moving up beyond my short entry.
    If the market reverses to the downside, then I am still in with 25 (5) lots… So, now I can exit the longs, and when the time is right, I can start adding to my already winning short trade.

    Does this make sense now?
    Or am I still failing to show the advantage of this exercise?

    Cheers

    • http://www.theessentialsoftrading.com John

      Peter – Let’s say you’re long 10 contracts with an average entry at 1.6000. Let’s also say the market’s rallied up to 1.6100 (we’ll call the spread 2 pips and say the market is 1.6100/02). At this point you expect a retracement down to 1.6050/52, then a turn back up for a run to 1.6200/02 where you will close the long once and for all. There are three ways you can play this.

      1) Put on a short hedge at 1.6100 for 10 contracts, lift the hedge at 1.6052 (accounting for the spread), then take final profits on the long at 1.6200. Your long position makes a net profit of 200 pips (1.6200-1.6000). Your short hedge makes 48 pips (1.6100-1.6052). In total you net 248 pips.

      2) Exit the 10 contract long position at 1.6100, re-enter the long after the dip at 1.6052, then exit at the 1.6200 final target. The first long makes 100 pips (1.6100-1.6000). The second long makes 148 pips (1.6200-1.6052). Total net is 248 pips.

      3) Go net short at 1.6100, return to net long at 1.6052, then exit the long at 1.6200. The final profit would depend on how far short you got, but the long would still make 248 pips on the 10 contracts.

      Taking #3 out because it’s not a direction comparission, you can see the point I’m trying to make – that there is no P&L difference between using the hedge (#1) and exiting and re-entering the long (#2). It’s because you’re doing the exact same number of transactions, so you lose the spread the same number of times.

      Do you get what I’m driving at?

  • Marjorie Miller

    How about “No F*cking wAy”, F*cking being used as a noun, not a verb of course…:)…

    As far as your constant argument that there is no difference between hedging and no-hedging, and it’s only an accounting change, I’d like to say as a mathematician, I hole-heartedly support the commutative property. Perhaps we could shift to discussing the fragile psychology of the Trader, needing sleep and so needing assurance that pending doom is not right around the corner, or spike shall we say…;)…

    And all other arguments aside, multiple trading signals on the same account, trumps all. And speaking of, :) , I added another Zulutrade account yesterday and made $300 last night while I was sleeping. A Trader needs sleep. I REST my case. :) .

    Judge Marjie :)

    • http://www.theessentialsoftrading.com John

      Marjorie – You go from supporting the cummulative property to overlooking it. Multiple trading signals certainly fall into the cummulative properly discussion as your performance is nothing but the aggregate of all the trades you do. If you have three systems running on 3 accounts the outcome must be the same if you have three systems running on one account (assuming sufficient margin) given the same trade executions.

      As for fragile trader psychology, since an exit order does the same thing as a hedge order to protect one’s account, I see no reason why one should cause a lack of sleep and the other not. Is it perhaps a question of “I lost..” vs. “I’m down..”?

  • Marjorie Miller

    John –

    In short: Commutative Property: a + b = b + a

    In long: “In mathematics, commutativity is the property that changing the order of something does not change the end result. It is a fundamental property of many binary operations, and many mathematical proofs depend on it. The commutativity of simple operations, such as multiplication and addition of numbers, was for many years implicitly assumed and the property was not named until the 19th century when mathematicians began to formalize the theory of mathematics.”

    ref – http://en.wikipedia.org/wiki/Commutativity

    Professor Miller
    This I do Profess

  • Marjorie Miller

    I do like your comparison between “I lost” and “I’m down” though…

    With “I’m down”, you’re not out. Also, I like watching the numbers go up and down. Indeed, a couple of months ago I took some advice on Gold and got into a bad sell at $918. It went way up. Hedged at $951. And I pondered as I watched the numbers changed before my eyes in a safe hedge. Each day I would spend time with my hedged gold trades, getting to know them and their quirks.

    Then one day it happened. I woke up, and Gold had gone down to $904. Both of my sell hedges were in like $200 profit. So I took profit on the sells. Then I put an additional $500 in to cover what I saw as the possible margin risk of unhedging 2 minilots of a $1000 account.

    Then like the rubber(band) returning to it’s unstretched state, or perhaps stretched in this case, ;) , Gold returned to $954 and more…I pulled out of both unhedged buys at $945, and returned a modest profit with no loss. It cost me $4 in swaps fees, for two months of fun!!! :D !!! :) !!! Watching a hedge is better than TV sometimes…many things can be learned about the numerical ramifications and graph characteristics by watching a hedge, even if you don’t want to do hedge trading in the long run. :) .

    And this I say unto you. :) .

    So, yes for too months, I had a big ego because I was trading Gold but I really wasn’t. So what’s wrong with that? I call that safe sex. :) . And then I made a profit. :) .

    I’m going to get 8 Zulutrade accounts. Then I will become a signal trader provider…

    Octopussy :O

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  • http://www.theessentialsoftrading.com John

    Everyone’s friends at the NFA are back in action: New NFA Retail Forex Leverage Restrictions

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