Am I correct in saying that hedging is not allowed at Collective2? I get messages saying my trade has been rejected when entering a trade in a direction opposite my current position.
That is correct. You cannot open a position in the opposite direction as a currently existing position.
Mathematically, opening a “hedge” position is identical to closing a unit of the original position. This is what you’ll need to do if you want to hedge.
> Am I correct in saying that hedging is not allowed at Collective2? I get messages saying my trade has been rejected when entering a trade in a direction opposite my current position.
I’m curious what you mean “entering a trade in a direction opposite my current position.” Are you buying symbol A and then selling symbol A?
Or are you buying symbol A and then selling symbol B as a hedge?
Yes, buying symbol A and selling symbol A.
don’t see why you consider that hedging. As MK said, selling an A that you bought means you are flat. Maybe if you used an option or a similar instrument you could hedge, but there is no point hedging with the same thing. And why confuse subscribers by complicating it?
> Yes, buying symbol A and selling symbol A.
As Matthew points out this is the same thing as closing the
position. In this case the real world works the same way as
C2: you can’t “hedge” this way. What you can do is:
buy symbol A / month A
sell symbol A / month B
This often doesn’t do squat either, except create additional
commissions and slippage…but at least you don’t have to “take a
loss” ;-)… and the guys at Howie, Burnham, and Steel love you.
In forex systems this kind of heding is not unusual. Look at the most successful system on fx-auto. Many of them use these techniques.
For my side I would like to program my strategy once for the long trades and once for the short trades. Both parts of the system have their “view” of the market, and of course it can be different and the long and short trades can overlap at some point of time (being long and short at the same time). This happens typically in a sideways market.
So for forex systems this approach makes very much sense IMHO.
If it’s possible to add it in C2, please do so.
(BTW: forex accounts usually allow to have such positions.)
> Look at the most successful system on fx-auto. Many of them use these techniques.
Do you have a link please?
> Many of them use these techniques.
Are we talking the same thing?
Buy 100 EURUSD
Sell 100 EURUSD
How is this anything other than net flat? Even if a platform allows
it the net movement is zero and you once again double your costs (you get hit for the spread twice). What am I missing?
I think this is the problem:
Long part of my system is 100 EURUSD long. Then the short element of my system generates a signal: SELL 20 EURUSD short. If I try to send this as STO it is not accepted by C2. I need to send it as STC.
I had a managed forex account once (late 2005) where virtually every position in the account was done this way (ie. buy 100 EURUSD and sell 100 EURUSD to use your symbols), and it is fairly common in forex. The account I had never made any money and I eventually closed it, but the manager continuously tried to explain how he could pair off different positions taken on at different times, and take advantage of swap and rollover mechanics to make money while always being net flat (hedged) in terms of overall positions.
I never quite followed it all but FXDD where my account was allow these trades, as do FXSolutions and many other forex brokers. I can only assume that there is some strategy where swap and rollover mechanics (which don’t exist for stocks, options, futures, etc.) can (in theory) be manipulated somehow to make these types of offsetting trades useful.
I completely agree. I do not see how being long 100 and short 20 is functionally any different than being long 80. All it does is fuzz up the results, which leads to subscriber confusion.
Just because an industry allows a little sleight of hand does not change the field of mathematics. That reminds me of the well-known proof that +1 = -1 [via a series of calculations, one of which violates a rule by using the square root of an imaginary number]. That is what the Hold&Hope (APD), Sharpe and other indicators are about; cut out the smoke and mirrors that many use to prime their equity curve or winning%.
I prefer C2 stick to methods that involve clarity. There is little value in C2 systems that “hedge.” This isn’t Goldman-Sachs or Morgan-Stanley and few of us are major corporations or the ultrawealthy who need baskets or other methodologies. This is a simple site where traders can study, test and follow systems that attempt to offer outperformance. Go read the C2 self-description.
If you want to increase your position, then add to it. If you want to “hedge,” then shrink or close the position or use options, etc… What is so damned hard about this???
>Do you have a link please?
www.fx-performance.com
>Are we talking the same thing?
>Buy 100 EURUSD
>Sell 100 EURUSD
>How is this anything other than net flat?
That’s true. It is. But from a programmer’s view I would like to look at the long strategy and at the short strategy separately. You can also consider using different timeframes for the same forex symbol, if you want.
This is nothing else than diversification, applied on one symbol.
So the two orders are opened by a different (part of the) strategy.
In a sideways market, maybe both will reach target. But as I said, every part has its own “view” of the market. The long strategy would like to make money with long trades, the short strategy with short trades. So why not use this possibility diversification?
BTW: If you hedge a position in forex in this way, no margin is used.
I would like to look at the long strategy and at the short strategy separately.
Then just start 2 systems on C2: One called XYZ_long, the other XYZ_short. You can split the original subscription fee in half.
You cannot hedge in that way. In fact, most brokers don’t even allow it in the platform software as it just leads to closing of the initial position rather than holding both.
There are 2 ways to hedge in a valid way. 1) Holding one expiry short while holding another expiry long of the same contract. example, Long March 2007 ES and short the June 2007 ES. 2) One can also hedge by taking opposing positions in similar products. example, long the S&P and short the DOW, or long oil and short gasoline, etc.
******
And to those others here who keep insisting that hedging is a wrong or worthless thing to do, it would really be a good idea to stop showing your ignorance and lack of knowledge about the futures and trading industry. Hedging is a valid strategy to reduce risk short term while maintaining exposure and a lot of funds do it. Just because YOU don’t like to, doesn’t mean it is incorrect. I find it to be comic relief from those who think they know everything.
An example:
You have a “strategy” for GBPUSD. You have 4 different setups.
1) long, average trade length 6 h
2) long, average trade length 24 h
3) short, average trade length 6 h
4) short, average trade length 24 h
All of these setups give good positive results.
Which setup will you choose?
Best is to use all of them, for diversification on the same forex symbol. You will get a far more consistent and smooth equity curve in your strategy.
Unfortunately C2 is limited in this aspect. I don’t understand why. Forex accounts allow exactly this way of diversification, so why not support it in C2 too?
In fact it would be very simple to add support for this in C2, since with STO and STC it’s clear, if I would like to close a trade or to open a new short trade.
@Matthew: What do you think?
"In fact, most brokers don’t even allow it in the platform software as it just leads to closing of the initial position rather than holding both."
Some forex brokers do allow this type of trade to be entered and hold both trades open separately. Although I never saw the utility of it myself, there must be a reason that is very specific to forex (swap/rollover?) which makes it a useful tool in some trading strategies (otherwise it is not likely the broker would go to the trouble of building it into the trading platform).
I’d be curious to know how this can be useful for forex as I never understood the explanations from my managed account manager, who would wax on ad nauseum about its benefits for risk control (which, in his case, apparently had no relationship to making money from the trades).
I have received a lot of requests for this.
I built the underlying software for C2 before forex trading was added, so there are a ton of changes that need to be made to allow “hedging” (or what forex traders call “hedging,” anyway) within forex systems.
I’m not against it in principle; but it’s a huge job – not just a simple flipping of some switch. I’ll look into it, and see what I can do.
"Some forex brokers do allow this type of trade to be entered and hold both trades open separately. Although I never saw the utility of it myself, there must be a reason that is very specific to forex (swap/rollover?)"
If a forex account is not allowing this, it’s not a real forex account.
What I told before is true for one strategy, but even more if you run strategies from different system vendors in your account. This is the way you want to go.
Else you would need for every system a new account, since most systems use the same symbols!
That’s not what you want.
"Else you would need for every system a new account, since most systems use the same symbols!"
I am subscribed to several stock systems in the same account that sometimes trade the same symbol, and there was never a problem. I don’t see why that would be different for forex.
I understand what you say about having a long and a short strategy, but is it so difficult to add the two positions within your own program?
"If a forex account is not allowing this, it’s not a real forex account."
Perhaps, but then many subscribers may not have what you call a “real” forex account. In order to follow your system they would have to open another account. This leads to a less optimal and less flexible use of their money, because they cannot use money that is unused in one account for margin in the other account.
>There are 2 ways to hedge in a valid way. 1) Holding one expiry short while holding another expiry long of the same contract. example, Long March 2007 ES and short the June 2007 ES.
OK, let’s say there is a 99% correlation between ESH07 and ESM07 (I think it’s actually higher). What is the most the spread can net? 1% right? Now, of course, once again, you have doubled commissions and you must be trading a thin back month. What is your average slippage in the back month? I’ll bet it can easily be more than the 1%. So, what is the benefit? You can’t possibly make more than the correlation differential. Show me an actual pure hedge where this isn’t so.
> 2) One can also hedge by taking opposing positions in similar products. example, long the S&P and short the DOW, or long oil and short gasoline, etc.
Well, now we are getting into semantics. I agree you can make money off spreads. Doing seasonals like long HO and short HU can make (or lose) money. Being long the Dow short the NQ or S&P can make you money on the spread as well as being a potential hedge, but that is very different from example one.
Show me ONE real trade (not a paper trade) where being long the front and short the back (or vice versa) stock index made money over costs and slippage. If it just kept equity flat then why isn’t that EXACTLY the same as being flat (ie. out) except for the additional costs.
