Trading Ideas/Potential Trades

"In fact, the greatest risk at any time is the point of initial execution "

"If hedge is applied, stay neutral until you can clearly decide which part of the trade you want to lift. "

Why is deciding to lift a hedge any less risky than deciding to take a position from a zero exposure starting point?

 

What is the benefit of hedging and lifting the part you don't want to be in.
Why not just get in the part you want to be in.

 

To answer both of your questions, the reason is really two-fold.

First, when scaling into a position that takes several days or sometimes weeks to set up, you do not have the luxury of just closing it out on a whim and then re-establishing. So what you do is while you are building up the position, you always have your "hedge cord" ready to be pulled if necessary.

If the cord is pulled, and the hedge is applied, you then have the benefit of changing your net direction from long to short as easily as it was to lay on the hedge. Usually, once a hedge is applied and you are mathematically neutral, you can begin unwinding one side of the trade, and then go net whichever direction you want. However, if the move that caused you to pull the cord ends up having been a false move, you can the resume your campaign of building your position. In fact, you can even keep the hedge and simply resume expanding the original position, so that if you have to hedge, you can just add. Of course this reduces your risk and hence your return, but it's a good way to approach a choppy market. Then when/if you're ready to totally directional without any hedge, you can do so.

But I hope you can see that there are so many dynamics involved in having to put on larger size, that you should be grateful you only have to worry about 25,000 shares at the absolute most at any time in a stock like CSCO.

This is really why I love trading currencies and in fact spend more time doing forex than I do equities. You want liquidity? There's real liquidity there. There's more liquidity in any given day in the majors than in ALL of the stock markets around the world combined.

Pejman Hamidi

 

Part 1 of 2 part post. This is the .chart of Nasdaq

Comments appreciated.....

I feel bearish here and am looking for arguments...

 

Part 2 of 2 part post. This is the commentary associated with chart...

Comments appreciated.....

I feel bearish here and am looking for arguments...

 

Hrm, im guessing its some sort of a secret than? Noone wants to explain what is meant by applying a hedge (what kind of it) and how does one actually go net something after you see where itll go...sigh

Alex

 

I'm getting confused too Neo. First Pejman told me

"To me, it takes at least 90 minutes to put on the full position.

My short term trades are approx. 2 days. My long term would be considered 3 months. However, I will ride a trend for as little or as long as it wants to go. I always unload 90% of my equity into cash for overnight purposes."

Now he is talking about

"First, when scaling into a position that takes several days or sometimes weeks to set up, you do not have the luxury of just closing it out on a whim and then re-establishing"

Perhaps he is talking about two different approaches.

My impression of his second approach is that he is trading such large size that he does not want to move the market while building up his position. Therefore he may have to be building it up at times when the market is not most favorable. e.g. he may be building a big position in a relatively illiquid Nasdaq stock when the index is drifting.

Therefore he is hedging the position in some way. He may calculate that Nasdaq futures move 20 points on average for every $1 move in his stock. Therefore he could sell enough futures so that theoretically if the market continues to drift, what he loses on the stock position is offset by his gains on the short futures position. Therefore, his position is hedged.

Then if market conditions change so that he thinks it is time for his stock to go up he can quickly buy back the Nasdaq futures, as they are very liquid, which is lifting the hedge, thus exposing his long stock position to the full potential of the market rise.

That is how I understand it in principle, but I suspect it is rather more complex in practice. I also suspect it is of limited interest here as few of us, I am sure, are in a position to trade 25,000 shares of CSCO ( something about which I am not the least bit grateful), let alone have to engage in complex hedging strategies for huge positions.

 

But Magna you have already shown your willingness to trust vendor motives, whereas I am ever the sceptic. Perhaps it's less about teaching people how to trade huge positions and more about publicizing in a place where people with money hang out, the fact that he has or is about to have a hedge fund , while emphasizing his cleverness in knowing all the theories about how to run a one.

But I'm probably just being paranoid again.

 

I have to disagree. I am very interested in hedge fund tactics, one reason being they are a major influence on the markets' daily movements. Who didn't love Todd Harrison's trading diary? My question though is whether Pej actually runs a fund or is just visualizing it through his posting.

Pej, a question. Why would it take weeks to put on a position but you could hedge it in a day? Also, I would like to hear your FX commentary.