I would be interested if anyone employs a strategy to hedge their forex positions. It has been expressed to me one way is to have multiple accounts and take a long and short on the same pair. Anyone will to share ideas?
Hedge funds exploit the ability to go long and short in order to seek profits while only being exposed to minimal risk. The strategy relies on the assumption that prices will eventually revert to the mean, yielding a profit.
If you try to trade the way hedge funds do, you should expect a similar result to what they get. They make a very small percentage of profit, maybe about 5% a year. They do not benefit in proportion with outperformance by their selected markets, though they have very little risk of wipe-out. Why would you want this?
My idea is that you don't have the first clue of what you're doing so you should run not walk away from this. Buying equal and opposite positions on the same forex pair ensure is exactly the same as owning nothing, except you lose money in the roll every day as well as the spreads you pay to enter and exit the position. There may be no such thing as a dumb question, but this is a question that certainly shows a significant lack of even the most tenuous grasp on basic math. Sorry for the brutal honesty.
Hedging is risky and I don't wish to encourage inexperienced traders to do so with real money until your comfortable with it on a demo. Newer traders need to keep things as simple as possible, in fact we all do.
Hedging is done to reduce risk, reducing leverage also works. More to the point, I was thinking about letting a breakout develop and then closing the losing pair once a trend has been established. Seems like this could work to eliminate noise, and might even produce some arbitrage opportunities here and there. It might even be more efficient in capital requirements? If you setup a strategy that you would be watching over a couple of months, it would seem that you could sleep better at night until you reach confirmation?
Hedging is a two-step process. A gain or loss in the cash position due to changes in price levels will be countered by changes in the value of a futures position.
Its a risky strategy, as its possible for both break-out trades, long and short, to be triggered in volatile conditions and for both to be stopped out. However, with widely spaced entry orders it could be the only practical way to capture the break-out from an established range as an example. But is the break-out from a range the best way to use your capital?
Once you understand basic FIFO accounting and how a made/dealer market spread works, you'll realize that nedging (newbie-hedging) on the same symbol is just a psychological crutch that comes at a rather high cost.