Hedging or spreads
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Thread: Hedging or spreads

  1. #1

    Hedging or spreads

    Very often I read the new traders discourse about the hedging.
    Following their logic, it is possible to hedge the risk of the rate of EURUSD sell, by GBPUSD buying, etc., there can be lots of examples.

    In fact, that statement is irrelevant to hedging. Trader using this method, only shifts the risks from one currency to another. In reality, the risk is floating and changing are depending on the currencies correlation as well as on its course variance.
    It's called spread-trading (spreads, in slang), also called the pair trading.

    From Wikipedia:

    The pairs trade or pair trading is a market neutral trading strategy enabling traders to profit from virtually any market conditions: uptrend, downtrend, or sideways movement. This strategy is categorized as a statistical arbitrage and convergence trading strategy. The pair trading was pioneered by Gerry Bamberger and later led by Nunzio Tartaglia’s quantitative group at Morgan Stanley in the 1980s.
    The strategy monitors performance of two historically correlated securities. When the correlation between the two securities temporarily weakens, i.e. one stock moves up while the other moves down, the pairs trade would be to short the outperforming stock and to long the underperforming one, betting that the "spread" between the two would eventually converge. The divergence within a pair can be caused by temporary supply/demand changes, large buy/sell orders for one security, reaction for important news about one of the companies, and so on.
    Pairs trading strategy demands good position sizing, market timing, and decision making skill. Although the strategy does not have much downside risk, there is a scarcity of opportunities, and, for profiting, the trader must be one of the first to capitalize on the opportunity.
    Quintessence of spreads: buy EURUSD, sell GBPUSD, we get Long position by EURGBP.
    In reality, we have several positions:
    Having bought EURUSD we get two positions: one is long by EUR, the second is short by USD.
    Having sold GBPUSD we get two positions: one is short by GBP, second is long by USD.
    As a result, we get 4 positions (in spread trading each position is called the spread foot, in this case we have four spread feet ):

    1. Long EUR.
    2. Short USD.
    3. Short GBP.
    4. Long USD.

    Please note, we have two positions by the dollar, one is for sale, the second is for buying. It means we’ve locked the both position by USD. That is a hedging, it’s equal to zero due to the lock.
    Last edited by RoboForex Trader; 08-20-2013 at 11:23 AM.

  2. #2

    What’s happening in case of spread trading?

    We get a long position by synthetic EURGBP spread. In this case it’s very important for trader to monitor the correlation between the two instruments: EURUSD and GBPUSD. In fact, he is trying to make money out of a correlation. You can hedge the long position by EURGBP spread, selling the market cross rate of EURGBP. Here will be hedge which risk will be equal to zero.

    For those who do not know what the correlation is, the designation of the term look at wikipedia:

    Correlation*refers to any of a broad class of statistical relationships involving dependence. In loose usage,*correlation*can refer to any departure of two or more random variables from independence, but technically it refers to any of several more specialized types of relationship between*mean values. There are several*correlation coefficients, often denoted*ρ*or*r, measuring the degree of correlation. The most common of these is the*Pearson correlation coefficient, which is sensitive only to a linear relationship between two variables (which may exist even if one is a nonlinear function of the other). Other correlation coefficients have been developed to be more*robust*than the Pearson correlation*– that is, more sensitive to nonlinear relationships.
    Hedge can be of different types, but we will not cut a feather. Because, in any case, the meaning of hedging without access to the derivatives markets (ie, futures and options), makes absolutely no sense.

    If you are interested, you can find some information in Wikipedia: _http://en.wikipedia.org/wiki/Hedge_(finance)

    There is also an explanation of the hedge term.
    A hedge is an investment position intended to offset potential losses/gains that may be incurred by a companion investment. In simple language, a hedge is used to reduce any substantial losses/gains suffered by an individual or an organization.
    In fact, the Forex trader has only two variants of hedging: lock and spread.

  3. #3
    Spreads on small intervals are traded mainly by robots, because of such high speed of calculations and order making.
    Spreads over large intervals are not used for a Forex tradingt, because the robots have reduced this spread to a minimum. In most cases, the market cross rate and spreads traded go one by one. But it can not be said about other markets, because there you can make a spread of share index and oil futures, as well as gold and oil. But such positions are long-term, and the trader is confined to wait until the position is realized, and it may happen in a month or in a year. Nobody knows.

    In the past year the main popular such position as a spread of Brent / WTI

    Pay attention to the picture: traders constructed the spread on the descent, had to hold the position since November 2012 to March 2013goda.

    You can also make spreads from various currency pairs.
    For example, we sell EURGBP and EURJPY, in this case, we have four spread feet, two positions are short for EUR, another two are long for GBP and JPY. Such structures do not reduce spreads, but rather increase the risk for some items. In our case, we have doubled the risk for EUR against the other spread feet. USA traders, trading options, call such structures as "Texas hedge".

    Texas Hedge - transactions that increase the initial risk, not compensating each other’s risk as in a traditional hedge, for example., "Call" option buying with long position by the same asset opened.
    The number of spread feet is unlimited, depends on Your wallet and fantasy only.

  4. #4
    Registered user
    Join Date
    Jul 2013
    I agree with you dear moderator, it is good to use hedge and we can save our money from the lose.forex is good opportunity for work and earn online good money from the market.forex is risky and uncertain business and we can earn good profit from the market with experience and strong skill.

  5. #5
    nomi5, Hedging is not possible without options and futures!

  6. #6
    With the latest movements a lot of investors are asking about fast ways to protect their present credit distribute choice techniques. As with all protect roles or.

  7. #7
    Dear Moderator, I agree with you, it is better to use hedging to loss and we can save our money. Forex market online business and earn good money for a good opportunity. Forex trading risky and uncertain and we have strong expertise and experience in the market, is can be useful.

  8. #8
    Personally, i will say that hedging have a big risk as well because not only you will lock the position when the loss will keep increasing, but you will learn that it will be hard to get out from the market. Surely that you will feel the terror of fear that you will leave one position in loss when you cut off a position. And in the end more losses will only came and if you decide to leave it be, the swap will hurt you and the price is very unstable.

  9. #9
    Registered user
    Join Date
    Aug 2013
    Both hedging and stop loss are great means to control our risk and can be used depending upon our trading style and methods. Both of these have great features which can yield excellent results in the hands of a knowledgeable trader. However without good knowledge they are useless for a trader.

  10. #10
    Registered user
    Join Date
    Mar 2013
    Hedging is a means by which we can lock our trading situation. I usually hedge my position with the same trading pair. suppose if I am long in eurusd and my trade is going in loss. Then If I believe that the loss would increase then i can sell the same volume of eurusd and lock my losses.

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