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Bob, that's correct, effectively you would be flat with a locked in loss. I posted the video in the post above, one of examples how hedging can be used. There are other ways, some of them a version of a Martingale, which is not something that appeals to me.
I can see how hedging can have a psychological advantage over taking a loss, and it can be a valid alternative to a stop loss in ranging markets.
I am not an expert on this, that's why I started the thread.
Can you help answer these questions from other members on NexusFi?
The US does not allow hedging (being long and short at same time), because it costs more money(via extra trades) for the same financial outcome (before costs). Why others allow it, I do not know.
It is very easy to mimic being long/short this way in a spreadsheet (rather than in live market), and only enter net positions into the market - thereby saving you money on extra trade transaction costs and interest costs.
But make no mistake: simultaneously being long and short is positionally the same as being flat. For decades now, I have heard people say it isn't the same, but no one has ever shown me the math backing their claim up.
If someone wants to prove my assertion wrong, I'd love to see it and discuss it.
A long and short position at the same time (which can be acquired by having 2 different months) is of course the same as being flat against more costs.
But, I do see 2 psychological advantages:
- to avoid allowing a loss to run wild by moving / removing a stop-loss
- to buy time when the initial idea was correct, but the market did not agree on the timing.
I'm thinking how a fully automatic version would look like...
Being long one month and short the another month (like long December Crude, short Jan Crude) is definitely NOT a way to do this. You are not flat in your scenario.
LOL I see the guy in the video created the youtube channel a little over a year ago.
I suspect he has now blown up several accounts trading like that.
The problem with his method in the video is that he traded with FOMO.
He should have entered at the first reversal or at least at the second.
Entering where he did with his 'hedge' assumed too many unpredictable outcomes.
He assumes he knows the market will continue to fall and he can profit.
It may not.
Also, it would be easier just to scratch the trade and find a better edge for trading.
My brain would hurt after trying to predict his method and jumping though all the hoops/scenarios/calculations.
Just move on, this is not the trade you were looking for.
Rejoice in the Thunderstorms of Life . . .
Knowing it's not about Clouds or Wind. . .
But Learning to Dance in the Rain ! ! !
Yes the term is a highlighted term on NexisFI. (click it to see)
The reason the guy took the trade at the 3rd reversal is because he sat through three legs up and then decided the market was going higher and he was going to miss the trade. Typical "fear of missing out" because you are not in the market.
It seldom works that way (in my experience).
If you waited through 3 trend legs, you have missed the BEST entry and now want to jump in when everyone else is counting their money.
Because you are a better trader than I, perhaps you have a different idea?
Rejoice in the Thunderstorms of Life . . .
Knowing it's not about Clouds or Wind. . .
But Learning to Dance in the Rain ! ! !
Well, I suppose this discussion may go on for a while.
I somehow had overlooked the video, so I played it, or about half of it. I was interested to see how the math was supposed to work out. But frankly, I had to stop, because it made my head hurt. (I don't really mean this as negatively as it sounds, but it was early morning for me and I hadn't had enough coffee. I just didn't have the patience or the focus I would have needed to understand why in the world he wanted to do all that. )
What I did get was that he initiated the hedge in the first place by putting in a sell 30 pips down while he had a long position, and when price went down to that point, the sell would execute and the hedge would begin with a new short, while the long would still be open. (This would not happen in futures or stocks, but I suppose it does in CFD's. In futures or stocks, your sell would simply have closed your long and you'd be flat.) I followed his fairly intricate arithmetic for a while after that before giving up.
It is certainly true that, while both the long and the short are in effect, a trader is not losing anything beyond the initial 30 pips, so any price movement is neutralized, up or down. There's still the 30 pip net loss, but there won't be more, so the bleeding has been stopped. If price does turn around and go up, then if you close the short while keeping the long, you will now be net long, and you can now reduce the 30 pip loss and perhaps go to into a profit. It also will have cost another commission for the short trade.
If someone wants to do this instead of simply taking the limited loss with a stop loss when it happens, then power to them. If you just take the loss with a stop, then you would have to initiate a new long to get back in if price reverses, while with the hedge, you would already have the long sitting there and you'd just close the short. If you were not hedged, then the new long would cost you a commission, which would be the same as the commission on the short side of the hedge, so everything would be equal.
Except for the psychological effects of staying with a losing trade (if you were hedged) instead of just kicking it out (if you were stopped), and the wear and tear of hoping it will turn around, which is something I would not want. I don't move stops either, and I'm not worried about their being hit. Being hit means they did their job, and I am not still emotionally tied to the outcome of one trade decision that hasn't yet worked out. Someone else may be different. I do doubt that it is a good idea to be dealing with a lot of mental complexity while in an open trade, but that's just me. The dollars and cents are the same.
Six of one, half-dozen of the other.
Bob.
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Edit I'm just reading all the excellent replies that were made here while I was refilling my coffee and trying to wake up enough to write.
I endorse all of them. This may work out on a very threoretical basis, but I strongly doubt anyone will do well trading this way. If you're wrong, just admit it and move on. Doing anything else kills accounts quickly.
When one door closes, another opens.
-- Cervantes, Don Quixote
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