Hedging exposed

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newschool
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Hedging exposed

Postby newschool » Fri Mar 12, 2010 2:05 pm

Hedging was never interesting to me, I just didnt see the advantage. Except now I think theres a practical way to use it.
Let me explain with this morning release of Employment rate on CAD.

Image

In the first picture, we have an usual hedge. In blue you buy, and in red you sell at the same time.
Now when the news is out, and its start going down, you close your buy and you are now only selling. But at this moment, there is no difference between you than the next Joe who just opened is sell order... Except maybe, you saved a little on the spread.

Image

Now in the second picture, you start trading earlier before the release. You buy when price is low, and sell when its high. Its really not that difficult because price will always do this before a big release.
Now the advantage here, beside entering on a low spread, is that once you close your hedge (either way) you will be protected from a pullback.

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Postby tmanbone » Fri Mar 12, 2010 10:26 pm

http://www.dailyfx.com/how_to_trade_for ... se/#player

This may be of interest to you, check out the video on trading the news. Are you familar with the breakout/pullback entry order?
"The simplicity of the markets is it's greatest disguise"

T

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newschool
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Postby newschool » Sun Mar 14, 2010 7:11 pm

Interesting video, pointing out 2 strategies, perhaps in an attempt to be always right.. I prefer to trade the news only 1 time, and if I go breakeven I wont try again.

Anyways here is my hedging strategies applied to the price action they showed in the video. Ignore the text comments in white.


Image



EDIT : I know its way easier to talk about it than to trade it, so I will try to apply this method on the following big news.
Last edited by newschool on Tue Mar 16, 2010 1:41 am, edited 1 time in total.

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Postby TygerKrane » Tue Mar 16, 2010 12:11 am

Hey newschool, glad you put this topic out there. I had actually just recently thought about hedging, in an attempt to "always be right." Unfortunately, I can't hedge with my US FXCM account, and I don't have enough reason yet to switch over to their London branch for hedging.

--Oh! just realizing from your chart that you use FXCM too! That's nice to know--

But by the looks of your chart, looks like you will totally be hanging out with the other pirates in Monte Carlo in May.

**Krane catches Tyger** !>I'm here to chew bubble gum and make major pips...and I'm all out of bubble gum.<!

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newschool
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Postby newschool » Tue Mar 16, 2010 1:39 am

Hmm where do you see FXCM in my charts? Here we have a saying : "the best medicines in small pots", I find this is true for many things... a small unknown restaurant or a forex broker from Russia ;)

Also I hope you understand the point I'm trying to make here : hedging at the same price has no real advantage. Except in some cases avoiding high volatily spread.

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Postby tmanbone » Tue Mar 16, 2010 4:20 am

The chart was copied from the above link I posted. Read back a few post, you'll figure it out.
"The simplicity of the markets is it's greatest disguise"



T

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Postby newschool » Wed Mar 17, 2010 2:53 pm

Here is the "method" applied to recent UK unemployment release :

Basically, I say that before a big news, price will not make major B/Os and WILL bounce on S&R, because nobody wants to get caught on the wrong side.

True that in that screenshot the hedging wasnt really necessary, because price made a clean move, but we never know. Plus its always good to have a small protection due to the hedging.

Image

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leonyde
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Postby leonyde » Thu Mar 18, 2010 5:26 am

Don't you find a bit difficult to manage hedge trades in live situation?

I try a similar (but not so similar) system some time back, and it became very messy in no time. At the end I lost money, and decided hedging was not for me...

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Postby newschool » Fri Apr 02, 2010 12:52 pm

Tried it today with the Employment news on USD.

It really helped because the spread went crazy for a good 15 minutes since liquidites were low (banks holidays).
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newschool
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Postby newschool » Fri Apr 02, 2010 1:03 pm

Just closed my hedge, with my Buy at -7pips.

My sell order is now at +50 pips, so a net of +43.

It seems like a small price to pay for a greatly reduced risk on news trading...

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