lets talk about Forex Hedging

There are a number of traders, I dare say that even the majority, that clients can practice what is commonly referred to as hedging in the forex. What this means is that they enable customers both long and short positions on the currency pair opened at the same time. Other retailers on the other hand, automatically close your position when your order is exactly opposite of your open positions. There is a debate among retailers about whether the practice of "hedging" is useful or not. There are traders who swear by "cover" and others who think it is an absolute nonsense.

Firstly, we differentiate this type of blanket coverage in other markets.

"In finance, a hedge is a position in a market in an attempt to reduce exposure to price risk of an obligation or equal but opposite position in another market to compensate." (Wikipedia)

An example is someone who believes in the inherent weakness of the Canadian dollar (CAD), but fears that the escalating violence in the Middle East could push oil prices up. Since CAD is known that a fairly strong positive correlation with oil has, the investor decides to sell USD (long USD / CAD) based on its belief that the fundamentals of CAD is low, but it only covers position by buying a little oil. Thus, if peak oil is driving the value of the DAC, he loses his short position-CAD, but this loss will be offset somewhat by its position along the oil. Note that coverage is not intended to prevent, but only to soften. It is a form of insurance against the devastating loss. What it does, if done well, is smooth curve of the equity portfolio, which benefits outside the scope of this article.

The careful reader will immediately notice that the last words of the above definition to read "in a market otherwise," which automatically void the purchase and sale of the same currency pair as a hedge. He ' There is no other word to describe this practice, however, so you will see quotes when I talk to distinguish the actual recovery described in the example.

So far, we found that coverage is not the same thing to cover. To continue, we need a number of other terms:

Equity - an account specifically for retail forex, what means the word "value" of the account at the moment. It is calculated by dividing the total value of all open positions on the market and increase the value of the account balance. For example, if an account of $ 10,000 and an open position at the moment is losing $ 1,000, your capital is $ 10,000 - $ 1,000 = $ 9,000. If you have an opening, this value fluctuates each time your positions do. If you already have close positions on current prices, your balance is equal to your equity.

The balance - the amount of money you have in the account as margin. This amount varies only when positions are closed, but is not a good measure of the total value of your account because it does not account for open positions. To assess the value of an account, equity always be used instead of the balance.

Understanding the above conditions is crucial to determine if coverage is beneficial or not, because otherwise they will be affected by a hedge is applied.

So what happens when a "hedge" is applied? If an exact cover is used, which means you buy the same quantity of the same currency, your position of net selling market is zero (you're neutral to the market). You can buy and sell at exactly the same time, so no matter what direction the market moves, will enjoy a market is exactly offset by losses in another market. All that happened is that you pay the broker's commission or spread paid twice. This also applies to "covered" trades that are not exactly equal. If you buy shares x EUR / USD and simultaneously to sell shares of the EUR / USD, then your net position is composed of XY units of EUR / USD, where a negative value indicates a position net short and a positive value gives a net long position. You can see here that if x = y, then we have a net position of 0. Studies 2, where a contractor uses the hedge "option and another operator simply closes its business for NETural market is, its position at the close.

Case 1: No Cover

$ 10,000 account

Open 1 mini lot (10,000 units) long EUR / USD 1.2500/02 (1.2502 's asking price, whichever is used)

EUR / USD 1.2000/02 and we left to go (using 1.2000)

Total loss of 0.0502 or 502 pips

The total loss is 502 x € 1 = $ 502 ($ 1 is the EUR / USD pip value on a minigolf)

Equity = $ 9498



Case 2: "Cover"

$ 10,000 account

Open 1 package Mini Euro Long / USD 1.2500/02 (1.2502 's asking price, whichever is used)

EUR / USD is 1.2000/02 and we enter January 1 mini-lot short (to 1.2000)

Now, we are neutral to the market (our own funds, regardless of where EUR / USD is being modified). We actually closed our position.

However, our platform says we have 2 positions open:

1. = -502 Pips - $ 502
2. Hob = -2 - $ 2 (due to dispersal)

Equity = $ 9496

Then the price down to 1.1000 and we have:

1. Kernels -1502 = - $ 1502
2. 998 grain = $ 998

Equity = $ 9.496 (unchanged since we are "covered")

Adding the two positions of each engine has taken - $ 504. Compared with Case 1, where we lost only $ 502 and had no operations to worry over. Now we have lost $ 2 more due to pay a further spread, and we have to worry about having open positions.

It seems in May, has lost more than 2 cores in 1 case, but you're actually doubling your circulation and exchange is not a game where you can afford to throw good seed. Add to this the fact that you technically still have 2 routes to open and the inherent risk of derailment or other problems in the implementation when it is trying to close these 2 roads, and you have a potential drawback.



WARNING: The hypothetical performance results have many inherent limitations. No representation is made that any account or probable that the profits or losses similar to those presented achievement. In fact, there are often significant differences between hypothetical performance results and actual results achieved by following a particular trading program.

One of the limitations of hypothetical performance results is that they are generally prepared with the advantage of position. In addition, hypothetical trading any financial risk. Variables such as the ability to adhere to a particular trading program in spite of trading losses as well as maintaining adequate liquidity are material points which can cause actual results to real market.



Thus, we can say with certainty that the most appropriate coverage provides no benefit to the operator, and in fact adds to its costs, and should therefore be avoided.

There is a marginal example where one can argue that hedging provides a number of advantages. This scenario is sometimes found in the major economic releases such as the NFP, and banks on the fact that markets generally very volatile and illiquid at such moments. This could lead to a widening gap and can prevent you from your transactions, as against all potential parties to withdraw their market orders. Some operators argue that some market makers will allow you to enter transactions in times like these, but do not let the profits. One way is to actually open another "hedge" market neutral trade for himself during his benefit, then wait until the normal market conditions are restored to both transactions to close. Although very well be true, I would stay away from the activity of market makers in these practices, not only because it is unethical, but also because they are your trades will be settled when they discovered that you are doing is technically scalping, and most market makers, especially those with such dark practices, Scalper are not friendly. Remember, they have your money and can decide what is and what will not happen.

So in conclusion, covering your positions, you are doubling your transaction costs (spread), you are exposed to double the risk of execution (SLIP), and in return you get nothing. It seems that the only reason that traders can practice, they can fatten their wallets by taking advantage of inexperienced operators and collecting other application. Some traders say they are systematically money by using this technique may very well be true, but they make money, despite its use, not because they are used. There is a world of difference between the two. They can more easily money by not covering their extra income to donate to an organization of the sentence or give it to their broker.

You'll also be informed that as of May 15, 2009, the National Futures Association (NFA) can no longer regulated FCM coverage in the practice of exchange in an effort to prevent unscrupulous agents use the market participants inexperienced.