hedging idea for trading your own $

[vankatav2003]

Hello traders,

I have been thinking from a long time how to use hedging to protect existing cash i have and i have come with the following idea which i believe is very good because there is almost no way you can lose any money using this strategy

Lets say you have $1.28m USD now which is equal to 1M EUR and you dont care if after 1 year you will have 1M EUR or 1.28M USD , in that case i have a hedge idea that its guaranteed you cannot lose money but you can only make money.

If you have 1.28M USD now in your bank and if you dont trade it , it will make at most 4-5% per year.

But if you believe the EUR/USD is going up you go ahead and you buy 1M units EUR/USD at 1.28 (you have $1.28m in your bank so you dont need any leverage for that)

If the EUR/USD goes up lets say 100 points you have just made $10 000 on this trade, you close the trade and you have 1.29M USD now.

IF the trade goes in the opposite way and you lose lets say 500 points, then you will have 1.28m - 0.05M = $1.23M

But then you will still have 1M EUR which at that time will cost 1.23

So if you have 52 trades per year and you make even 52 losing trades you can lose 1-2 pips spread per trade whcih is close to nothing and no matter what happens at the end of the 1 year you will always have 1M euro.. thats the worst case Scenario OR you will have more than 1.28M USD.

Lets say you make 30 profitable trades and you aim 70 points per trade thats 2100 points in 1 year , which in addition to the 4-5% from the bank will make total of 25%+ on the account.

Let me know what you think about this one, but i think it will work only if you have the cash and you dont use margin, i think if you use big margin the big daily rates will eat the profit no matter how big it is.

Reagrds,
Ivan

[cornellj]

Hallo Ivan,

I make use of a similar strategy in trading and hedging the two currencypairs USDCHF and EURUSD. I use the Swiss trade to earn interest with a carrytrade and hedge the position with the Euro trade for short term pip profits (using marketprice volatility ) while reducing the risk on my Swiss trade.

Last year there was a thread on which a number of people debated the pros and cons of hedging. The thread is listed at the bottom of this thread, it might of use to you with your own plans.

I make extensive use of hedging as part of my strategies and make good profits doing it. I use 1-100 leveraged accounts though, but regulate losses with trade size, trade management and hedging strategies.

You do not believe in the use of margin, I do. The money and trade management becomes important factors in your strategies when using margin and leverage. Judicious use of leverage and margin are good for growing your capital and profits.

Any form of hedge (or arbitrage) that can reduce the risk to your capital can be used when you take a position. The reason I use the USDCHF and the EURUSD is the 99% negative correlation between the pairs. One goes up the other goes down. The 99% correlation is the best "odds" I can get anywhere, so I use it to advantage.

I have been trading these strategies successful for more than 5 years and I keep a journal in the Journal section of this forum illustrating how I use these strategies.

[MickMason]

Originally Posted by vankatav2003

there is almost no way you can lose any money using this strategy

Lets say you have $1.28m USD now which is equal to 1M EUR

If you believe the EUR/USD is going up you go ahead and you buy 1M units EUR/USD at 1.28


If the EUR/USD goes up lets say 100 points you have just made $10 000 on this trade, you close the trade and you have 1.29M USD now.

IF the trade goes in the opposite way and you lose lets say 500 points, then you will have 1.28m - 0.05M = $1.23M

But then you will still have 1M EUR which at that time will cost 1.23

Surely that's a loss isn't it? Your euro originally cost you $1.28, they're now worth $1.23. Apart from that there's the loss of interest, Euro is at 2.75% and Dollar at 5.25%

Have I missed something obvious?


Mick

[MickMason]

....you could always sell 1m eur/usd and hang onto the position until you're in profit, at least that way you're earning interest.....assuming you have the cash to support the position if/when it goes against you and you're not in a hurry!


Mick

[FXGenius]

The real hedging which can make you money in forex would be as follows. The following strategy has the following characteristics:

a. There shouldn't be a single loosing trade.

b. You should not need to watch charts, read economic news and analyze them, etc.

c. You need not use a stoploss.

d. Only keep taking profits, of approx 100 pips every day.

e. The strategy is so simple that a robot can easily be programmed which will place 30 buy and 30 sell pending orders at the same price at a distance of 100 pips. Next, it will keep sending pending orders which have been closed with a profit of 100 pips.


Long Term Hedging Strategy:

1. Findout a reasonable range of the pair you want to trade, say GBPUSD.

2. The top ever achieved by GBPUSD as far as I can see on my weekly chart is 1.9550, for safety we can take 2.000

3. The bottom achieved by GBPUSD during past 3 years is 1.7050, let's say 1.7000.

4. Now, a safe range for hedging in GBPUSD is 3000 pips.

5. Since you will buy and sell after every 100 pips without a stoploss with a profit targedt of 100 pips, you should have enough equity in your account to run all 30 trades against you, each at the distance of 100 pips from Top to the Bottom. Now if you start off with 1 mni lot, you need $46,500 to use this strategy. And if you have $1.2M you can trade wit a lot size of 27 mini lots or 2.7 standard size lots.

6. If you keep trading this strategy you will definitely earn upto 51.5% of your equity per year, without increasing the trade size.

6. Say you are at the bottom of 1.7000, buy & Sell a lot at 1.7000, set the profit target of all trades 100 pips, because GBPUSD invariably moves more than 100 pips a day.

7. When the market moves to 1.7100, your long trade should be closed and once again 2 new pending orders will be activated, one buy and one sell.

8. Keep doing it and keep taking profits on your trades AND keep placing pending orders for the trades which have already been closed with 100 pips profit.

This strategy is based on the assumption that the market remains range bound 80% of the time and you will be making money during that time, but if the market starts to trend heavily, the best you can do is to stop placing counter trend trades and increase the size of your trades in the direction of the trend.

[Gamma_Jammer]

Originally Posted by vankatav2003

Hello traders,

I have been thinking from a long time how to use hedging to protect existing cash i have and i have come with the following idea which i believe is very good because there is almost no way you can lose any money using this strategy

Lets say you have $1.28m USD now which is equal to 1M EUR and you dont care if after 1 year you will have 1M EUR or 1.28M USD , in that case i have a hedge idea that its guaranteed you cannot lose money but you can only make money.

If you have 1.28M USD now in your bank and if you dont trade it , it will make at most 4-5% per year.

But if you believe the EUR/USD is going up you go ahead and you buy 1M units EUR/USD at 1.28 (you have $1.28m in your bank so you dont need any leverage for that)

If the EUR/USD goes up lets say 100 points you have just made $10 000 on this trade, you close the trade and you have 1.29M USD now.

IF the trade goes in the opposite way and you lose lets say 500 points, then you will have 1.28m - 0.05M = $1.23M

But then you will still have 1M EUR which at that time will cost 1.23

So if you have 52 trades per year and you make even 52 losing trades you can lose 1-2 pips spread per trade whcih is close to nothing and no matter what happens at the end of the 1 year you will always have 1M euro.. thats the worst case Scenario OR you will have more than 1.28M USD.

Lets say you make 30 profitable trades and you aim 70 points per trade thats 2100 points in 1 year , which in addition to the 4-5% from the bank will make total of 25%+ on the account.

Let me know what you think about this one, but i think it will work only if you have the cash and you dont use margin, i think if you use big margin the big daily rates will eat the profit no matter how big it is.

Reagrds,
Ivan

I'm not sure whether you're proposing to buy your 1M Eur in the spot market or the forward market, but either way it's ludicrous to suggest it's a no risk trade. If you buy now (i.e. in the spot market), you won't have those dollars in your account any more (and so you won't have the interest on them).

If you do it in the forward market instead, you will find that there is an exchange rate adjustment based on the interest rate differential between the two currencies you are trading.

But leaving all that aside, how can you possibly be so niave to assume that in a product as simple as FX there's this magical risk free pot of money out there that no-one else has spotted.

Lunacy.

GJ

[drayco]

FxGenius,
I like your explained method. Do you actually trade that way?
I was thinking of the (3 year high - current price) / 200 = #minis to buy and (current price - 3 year low) / 200 = #minis to sell. Each time one is in profit by 200 = exit that mini and keep doing it until a fib pullback gives a net profit for the entire trade. I was looking to use GBP/US for the 200 pip moves and to time my entries during the beginning of a narrow BB.
Your method sounds better because i don't have to buy and sell so many minis at the start.

[FXGenius]

Drayco,

I don't use this method so far, but I consider this to be the only way to be consistently profitable in forex, and if you do become consistenly profitable you can do long term or career planning.

If such method is employeed, one can even think of opening a registered firm which may offer 15-20% annual return on investments to its clients and the rest may be used to cover operating expenses and profits, etc.

This method would be my last resort, I am now trying my luck with one direction trading.