Comments on: Forex “Hedging” Continued

By: Book Review: Essentials of Foreign Exchange Trading | The Essentials of Trading

Mon, 12 Oct 2009 13:08:02 +0000

[...] Third, Chen actually talks about “hedging” in a way which suggests it can be a useful strategy (which perhaps shouldn’t be surprising given he works for a broker). The book was written prior to the NFA’s rules in opposition to this practice (see No more hedging for forex traders), but that is only for US brokers. Those in other countries can still employ “hedging”, which is something I have long argued is at best something which has no net impact on one’s account and at worst actually costs the trader money for no net advantage being provided (see Forex â€œHedgingâ€ Continued). [...]

By: Guy Woodward

Guy Woodward — Sun, 19 Apr 2009 01:03:52 +0000

I am sad to see Hedging going away. It is a good tool to have in your box if needed. If I have a position that I do not want to sell prior to going into a weekend or holiday. I may hedge my position. If I am long say 1 lot. I have 2 choices prior to the close on Friday. 1) close out the position and wait for trading to re-open and/or put a tight stop loss or 2) Hedge my position. Typically I do not go 1:1. I will sell .5 lots and hedge half of my position. If the market gaps down on Sunday/Monday I can typically lock in some profits prior to it reversing and going back with the main trend or take a small loss. The main idea is I don’t want to get stopped out of a knee jerk reaction. Which is what typically happens. To me this tradegy is like buying a protective Put. You own the pair long and I’m buying protection fir the downside in case the World War 3 breaks out or god for bid another 911. Keep in mind just having a stop loss in place doesn’t necessary protect you if the market gaps down. It will take you out at where ever the market opens up and not at your stop loss level. (Called slippage)

Honestly I can’t see how Hedging can be a problem for any enity. Its like Congress preventing shorting in the financial stocks. They are only wanting people to go Long in stocks. There thinking is if people only go long the stock will not go down anymore! which is just crazy.

By: tiago

tiago — Fri, 17 Apr 2009 02:58:33 +0000

Hedging works, i was averaging a profit of 40% per month in the past 7 months using a hedging strategy, without the hard and useles work of looking to charts, so dont tellme it dont work!! They are protecting the bucket shops, they can steal us but we cant get money from them …. i will stay away from nfa regulated brokers, all scams!!

By: nelson bara

nelson bara — Thu, 16 Apr 2009 18:51:27 +0000

hedging is great for people who do not analyse the market before making any trade. This is done in a way that when a position goes against them they hedge that position to cover up the losses. And in the long run hedging exposes ones account to depletion.

By: MN

MN — Wed, 15 Apr 2009 19:49:42 +0000

Maybe hedging is superior to closing a trade out and re-entering in a direction-less market?

I dunno.

By: Adrian

Adrian — Wed, 15 Apr 2009 18:36:39 +0000

I read the comments on the first post and I still don’t understand why these people think they’re “hedging” rather than closing their position and re-opening it. Yes, they explained why their actions work, what they didn’t do is explain why it’s different than closing the trade (or indeed why it’s different than using a stop). This “hedge” prevents all downside losses true, but it also prevents all upside gains. In fact, it totally eliminates all market exposure which is surely the definition of going flat or closing the position and not of a hedge.

If they had used options where, for a fee, they cut the downside risk while allowing for the upside or if they used a different, correlated instrument, possibly. With stocks you could, say, go long an oil driller but short oil futures or the oil ETF. With forex maybe you could use an option on the futures but if you just try something like going long USD/CAD and short USD/EUR, aren’t you really just taking an artificial but totally unhedged CAD/EUR position?

The only case I can see this being used “properly” is if your country gives some tax advantage to holding a position for a long period of time and you want to close the trade early without losing the tax credits so you hold your original position but take the inverse in a second account. That would actually work and in the stock world it’s called “shorting against the box”, but it’s illegal. Maybe some loopholes exist in currencies, I don’t know. Whatever it is, it ain’t a hedge.