NFA and the Hedging Ban: Do-gooder or Well-intentioned Moron?

Discussion in 'Forex Trading' started by pqt, May 16, 2009.

  1. pqt

    pqt

    The recent decision by the NFA in the US to ban "hedging" is arguably the most controversial measure put forward by this organization in an attempt to tighten regulation in a notoriously unregulated area of trading.
    "Hedging" is defined in this context as having 2 open trades in opposite direction of a same instrument (i.e.buying and selling at the same time).

    The argument put forward by the NFA after listening to some "commenters" is that "hedging" is not beneficial to the traders since "mathmatically" speaking, when you are hedged your chance of making any profits is zero, while the costs of the transactions and rollovers will gradually eat up your account.
    If you visit various forums on the web, those arguments have been rehashed ad nauseam, with some posters gleefully deriding those who defend "hedging" as "noobies" and worse.

    I think the NFA decision is wrong for several reasons.

    First off, if the NFA is thinking that " traders do not know what they are doing, so we have to protect them from themselves", that attitude would be qualified as paternalistic at best and bordering on fascism at worse. After all, cigarette and alcohol are much more detrimental to some people and they are not banned, are they? Hedging is just a tool, like a kitchen knife, and would it be logical to ban its use to save a few from hurting themselves? There are of course those who argument the same result could be achieved with different tools, and so much the better, but in that case woudn't it be discriminatory to disallow the use of free choice? To illustrate further the absurdity of it all, should we ban the use of chopsticks in Chinatown since forks and spoons could be used for the same purpose (getting food into your mouth)?

    The second reason is that the assertion that you can not gain when "hedged" is rather simplistic. Trading is not static in nature, and the ebb and flow is what make "hedging" an effective tool for those who know how to use it. Personally, I don't use hedging all the times, but when I do use it, I always end the trading session in profits. Isn't it what counts after all?

    Thirdly, an (unintended?) consequence of the NFA decision is that it has pushed a number of traders who want to keep hedging into transferring their accounts offshore, possibly into the arms of non-regulated brokers and thus putting their money at risk. Those who want to stay have been offered some types of "workaround" by the brokers, like one using 2 different accounts, one to buy and one to sell, with possibility to transfer money back and forth between the accounts as needed. This method changes nothing to the fact the trader still has to pay the extra spread, rollovers and MARGIN (which usually did not apply under the old type hedging), and increased risk of BLOWING BOTH ACCOUNTS, which certainly is counter to what the NFA is aiming to achieve, i.e. protecting the traders from themselves and from the big, bad brokers.
     
  2. Cigarettes, alcohol, chopsticks, kitchen utensils.....lol, wtf are you talking about!

    Poorly presented naiive, not to mention pointless, argument.

    It's done, stop whinging and get over it :p
     
  3. pqt

    pqt

    If you don't understand my post, maybe you should go back to highschool, learn to talk like a grown-up and check your grammar ...
     
  4. mockney

    mockney

    please elaborate how you can make more money when you're long and short the same instrument at the same time?

    forex fools somehow thing that being hedged is different than being flat, without understanding that they are paying two spreads and interest on two open positions whilst effectively being flat.

    why could you not achieve the exact same results by closing your trade instead of hedging it, and reopening a new trade when you'd have closed the hedge part? (aside from saving some money on the spread)
     
  5. lol right, and yours is perfect of course....


    "not beneficial to the traders"

    "There are of course those who argument"

    "I don't use hedging all the times"

    "like one using 2 different accounts"

    "with possibility"

    "This method changes nothing to the fact"




    So far so good, indisputable facts unless you're going to argue with some very basic math. Brokers know it, the NFA know it, traders know it. The only ones who seem blissfully ignorant of the fact that they're being conned are the gullible fools who think it's giving them some sort of advantage!



    When did the NFA suggest that was the reason for banning this type of 'hedging'? The NFA regulate brokers not mollycoddle traders, and seeing as brokers were knowingly offering a facility which gave traders absolutely no financial advantages yet costs them money they decided, quite rightly, to ban the deceitful practice.



    What a ridiculous argument. Governments around the world ban retailers from selling cigarettes and alcohol to children because children don't understand the dangers, however they quite reasonably assume that adults are sensible enough to understand the dangers of smoking and drinking and so allow them freedom of choice. Governments therefore are regulating retailers not consumers, similarly the NFA are regulating brokers and not traders. Some traders (and I use the term loosely), like the children in the above example, obviously benefit from the NFA intervention.



    Another ridiculous analogy. Kitchen knives have a useful purpose, hedging in this way doesn't. Once purchased kitchen knives don't cost you money without any financial benefit, hedging does. Stupid comparison, couldn't you think of anything better than kitchen knives?



    You really are an idiot if you seriously think that's some kind of comparison to the NFA banning hedging or the alternative of hedging in separate accounts!



    The only reason you 'end the trading session in profits' is simply because at some point you were either net long or net short. While you were hedged, for every pip you gained you lost a pip, that's an indisputable fact. For some reason people like you have difficulty understanding a very simple mathematical concept and that's the very reason disreputable brokers have been able to get away with such a blatantly obvious, and for them profitable, illusionary trick for so long. They were exploiting the gullible newbs who think that by hedging they have some financial advantage when in actual fact they're just paying money to the broker by way of spread and swap for absolutely nothing. I bet brokers wondered how they got away with conning the gullible for so long without them even realizing it!



    I'm guessing the NFA would have expected the new rule to be a wake up call for 'hedgers' and maybe encouraged them to actually think about what they are doing but I guess they were wrong, you're a typical example. Those people who are hell bent on giving their money to brokers for nothing will always find a way to do it, and I have no doubt that brokers will do their very best to help them! If traders are stupid enough to believe hedging has a financial advantage then you're right, they're probably stupid enough to deposit money with an unregulated broker!



    I'm happy to debate this issue if you have anything sensible to bring but if your post is a typical example of your lack of common sense and debating skills then you're better off on FF with likeminded fools!


    Equally long and short 'hedging', lol, you couldn't make this stuff up! :D
     
  6. Eric215

    Eric215

    Forex hedging is the same as being flat except for the fact that the trader will always pay a negative daily roll. I used the hedging functionality once in a while to enter trades for two different strategies in the same currency. If I am long the Euro with a multi-month hold time and I want to trade a short term Euro strategy in the same account it is very likely that I would end up being long and short the Euro at some point. Sure, I could just exit part of my monthly Euro long and imagine that this is my shorter term strategies short trade, but it mentally is just not the same. I would prefer to have the option of hedging but, oh well, we must adapt.
     
  7. This will certainly affect the guys who run multiple EA's on their accounts.

    And I agree with the previous poster...I sometimes have a long term swing trade on a pair that might be looking for 300+ pips over a months time..while still trading in and out of it grabbing 10-20 pips...so adapt we must
     


  8. The only reason you 'end the trading session in profits' is simply because at some point you were either net long or net short. While you were hedged, for every pip you gained you lost a pip, that's an indisputable fact. For some reason people like you have difficulty understanding a very simple mathematical concept and that's the very reason disreputable brokers have been able to get away with such a blatantly obvious, and for them profitable, illusionary trick for so long. They were exploiting the gullible newbs who think that by hedging they gain some sort of financial advantage when in actual fact they're just paying money to the broker by way of spread and swap for absolutely nothing. I bet brokers wondered how they got away with conning the gullible for so long without them even realizing it!



    I'm guessing the NFA would have expected the new rule to be a wake up call for 'hedgers' and maybe encouraged them to actually think about what they are doing but I guess they were wrong, you're a typical example. Those people who are hell bent on giving their money to brokers for nothing will always find a way to do it, and I have no doubt that brokers will do their very best to help them! If traders are stupid enough to believe hedging has a financial advantage then you're right, they're probably stupid enough to deposit money with an unregulated broker!



    I'm happy to debate this issue if you have anything sensible to bring but if your post is a typical example of your lack of common sense and debating skills then you're better off on FF with likeminded fools!


    Equally long and short 'hedging', lol, you couldn't make this stuff up!
     
  9. I often have positional trades and intraday trades open on the same pair as well, but not on the same account.

    FIFO is a perfectly normal industry standard accounting method and it actually makes more sense than a system which allows you to be long and short at the same time.

    'Hedging' in this way was devised by marketmakers purely as a means to get more money out of their inexperienced clients, they're the only ones who benefit financially from it.
     
  10. Eric215

    Eric215

    I am a little confused why you are bashing those who like hedging to trade multiple strategies on the same pair. Your above quote says you are doing that exact thing except with two different accounts. I feel a little silly asking you this but, you do realize that you suffer the exact same financial drawbacks with two accounts as someone who has all his money in one account? So to clarify you say, "Those people who are hell bent on giving their money to brokers for nothing", and then you are doing the exact same thing? Hedging has the same financial costs whether it is with one account or with two. Actually with one account it allows for a more efficient use of capital. I can move money between strategies, which allows me to allocate the most money to the strategy that is producing the best opportunities in a given moment. Another words, sometimes I am not in a long term trade which allows me to use all my capital for short-term trading until a longer term opportunity presents itself. If I had two accounts the long term money would just be sitting there waiting for a trade, not working for me. So with all due respect, you might want to think through fully what you are stating as truth before you criticize everyone else.
     
    #10     May 17, 2009