http://www.elitetrader.com/vb/showthread.php?threadid=233773 "To be effective, the overlay system will use an options-based model. The most simple approach is to buy long puts and constantly keep a long put position all the time, 24 hours/7 days/ 12 months. " http://en.wikipedia.org/wiki/Parrondo's_paradox "Parrondo's paradox, a paradox in game theory, has been described as: A losing strategy that wins. It is named after its creator, Spanish physicist Juan Parrondo, who discovered the paradox in 1996. A more explanatory description is: Given two games, each with a higher probability of losing than winning, it is possible to construct a winning strategy by playing the games alternately. Parrondo devised the paradox in connection with his analysis of the Brownian ratchet, a thought experiment about a machine that can purportedly extract energy from random heat motions popularized by physicist Richard Feynman."
Stop loss and hedging are effective in different situations Stop loss help us to protect account from bigger loss . In hedging we can recover some loss if it is placed at proper position.Stop loss is easy to use and hedging need some experience and certain position of trade.
Good thread and thanks to all posters. The best way forward for newbies (3< years full time screen time) is to get as many outright trades done as possible, on something that has decent volatility, like the aussie$. All you need is a 5min chart for your intra-day entry and a separate hourly chart to reference the bigger picture. The sooner you've made 100 trades and come to understand risk:reward; the better. If you got some down-time then work out how much you're paying your broker, implicitly via the spread and slippage, to get those 100 trades done, lol. Your reward in a trade is related to the best price you can get & the risk you're willing to take on the deal... it's not like the real world where you can prepare something on paper like your homework essay and have sure fired success! Forget about looking to cheat the market and get trading.
In my opinion, and experience, hedging is a far superior strategy to manage risk than using a stop but to be successful at it you have to have a thorough understanding of the mathematical relationships between the various instruments. One of the best markets to do this in is the bond market. As a very basic example, you can determine the correlation between two instruments and examine how or if they are changing with time. Once you have that information you have to calculate the difference between the instruments for leverage, $'s per tick, and most importantly, volatility, relative to each other. Anything beyond this requires some fairly advanced statistical analysis and experience in programming. Regardless of the strategy you use you have to realize someone else is doing something similar, which reduces your edge if you have one. Hedging also allows you to make adjustments to the position as it moves with time. Opportunities in hedging are limited only by your imagination and your mathematical acumen. Using stops essentially ends in "death by 1000 cuts."
First the only reason would be to protect a longer-running trade, which could be hours or days. In the case of using a "hedge" for day trading, TIME is the key aspect of consideration with respect to the resumption of the trend. The time of resumption of a trend could be minutes or hours and is difficult to know until the structure of the retracement wave is determined. This is complicated by the time of day. PRICE RETRACEMENT is the second. Resumption of a trend could be complex, offering several beneficial points of a good price for the removal of a hedge over a lengthy period of time, or it could be a simple zig zag wave. To assess the nature and structure of the retracement gives a prudent way to navigate an assumed resumption of a trend by reducing contracts against the primary directional entry without compromising the integrity of the primary trade---specifically, the higher (or lower) price action swings where a motive wave stop won't be tagged. Once the time is allowed for the retracement structure to develop, it gives more knowledge as to what kind of a retracement structure will unfold and provides a way to keep the benefit of the existing trade and it's structure, while taking off positions that reach and confirm the retracement zone or range is completed for that retracement wave. When to use in day trading: Position: 1) The end of the third motive wave (primary) 2) There is still a 100% MOVE into a third wave move (assumed because of market structure) and the third wave still will have to do another 100% before reaching wave 4 retracement. TIME is key here because it could take an unknown amount of time while the price ping pongs up and down in a Narrow range. Once the structure is determined, it is easier to know when to remove the hedge entirely or understand the high and low areas of the narrow range to consider the best removal of the hedge and/or the breakout zone. TIME is key and it is an unknown factor. 3) The end of the first motive wave where wave 2 is not known whether it will be complex or simple. The main purpose is to let the "runner run" for a potential long trending trade in either the 1st wave (trend direction change) or the 3rd wave (longer motive wave where wave 2 is where the stop would be reapplied after the hedge is removed). The benefit to using the hedge vs eliminating and resuming the initial trade is that you never can re-establish the beneficial position of a motive wave trade where the stop can be re-implemented after the retracement period has become more visible and is able to be assessed as to highs/lows and breakout point to the resumption of the primary trend. With each removal of the hedge in spots that are beneficial, the same amount of stop can be applied to protect the un-hedged position, thus never leaving the trade exposed, but also keeping the beneficial portion.
I think I want to clarify one very important thing with respect to hedging, and I don't think I emphasized this at all. My approach is guided by market structure. Time gets in the way. I have found that using a hedge on the same instrument is only beneficial at certain points after a motive wave is recognized and it is protecting existing profit at certain junctures of retracement but, specifically where time and the end of the day gets in the way of the trend. Replacing the stop loss with a hedge is temporary and is valuable when there is a known wave structure, strong indication of expected target zone, and, a known past wave structure that provides a very good stop-loss zone (e.g. previous high if a short) for resuming the trend when the hedge is taken off. Someone mentioned flash crashes. Most of the time, from my experience with all of the ones that I have seen, (May 6, 2010, Brexit, Trump Election, and a few other FOMC/ or other news driven events) I have either seen the potential coming and didn't trade (e.g. US elections) or I was with the primary trend because it was already heading in that direction. In the case of a black swan event, there are some certain circumstances where having the hedge (vs. holding a stop loss) can be of great advantage when it comes to a black swan event: 1) Protection of profit in a motive THIRD wave move (GIVEN) because of an expected news event (e.g. French Elections) and not wanting to rely upon a stop loss to protect the trade, but the expectation is a resumption of the trade after re-opening of the markets or the next day session. 2) Being part of an existing profitable position in a motive THIRD wave and coming up to an expected retracement zone with the idea that (a) stop loss at the previous high (assuming a short trend) is where you want to keep the stop loss, but you don't want to give up the profit from the potential retracement zone to the stop point AND (b) there is an end-of-day coming up and the market is stuck in a moment of indecision doing nothing before the end of market and the next expected trend down after the retracement zone has completed. In this case, (a) put in the hedge, remove the stop loss at the previous high spot and (b) wait for the resumption of trading and the end of the retracement zone. No worries about any sort of unexpected opening move from news events or miscalculation of the wave structure. If normal wave structure resumes (which is most of the time) then, with each "edge off the hedge" after it is determined the type of retracement or the breakout zone back into the trend. Whatever is taken off of the hedge, that SAME amount of contracts is added back to the PREVIOUS high stop area in order to never have the trade exposed. This keeps all the profit locked in place at the bottom of the retracement zone---with the end of day noise, evening noise AND eliminates the unexpected. Once the retracement wave is recognized, (e.g. narrow range of compression, flat corrective, zig zag, etc. and that it fits into the expected wave structure) the hedge can begin to be taken out at the peak points or at the breakout spot. The whole of the existing profit is stall intact and the stop is back to where it was ready to be brought down into the next previous high OR at the top of the retracement zone that just completed. Since the market often doesn't move in US time perfectly, and cutoff times for the overnight bring the markets either to a crawl or provide great trend resumption, the ability to take off the stop loss and replace it with a hedge eliminates the black swan situation of earnings events or buyouts (e.g. Amazon/Wholefoods) and gives time for the resumption of trading with motive (versus the market just having no volume after resuming overnight).
Also, the ES and Forex are completely opposite when considering margin. With hedging in the futures market, regardless of the symbol, hedging DOUBLES your margin that you are using. As opposed to FX, where it gives you back your margin. Wish it wasn't this way, but it is. But then, I also wish someone revamped holiday schedules to actually BE a holiday. Who, in their right mind thought it would be a good idea to have 4th of July trading resume in the early afternoon?? Why not just let it trade till normal cut off, then reopen the next morning.....eliminating Globex? So much for fireworks....
Maybe the Asians, who do not celebrate the US holiday? Just as the US does not celebrate the Asian holidays? But considering that most of the trading equity takes place on the U.S. exchanges each day, it could be considered a "real" holiday? *shrugs*