Hedging by Malcolm Morley

Hedging by Malcolm Morley

I’m going to stick my neck out on this one. While Qetu is absolutely right, in general hedging trades makes no sense at all. As fx traders we make our money by gaining exposure to the market. Quite simply, that is what we do! Any opposing trade(s) just reduces our exposure, while increasing our spread cost.

I’m going to stick my neck out on this one. While Qetu is absolutely right, in general hedging trades makes no sense at all. As fx traders we make our money by gaining exposure to the market. Quite simply, that is what we do! Any opposing trade(s) just reduces our exposure, while increasing our spread cost.

As with anything, there may be some occasions when you may want to do go against the pervasive logic, but these should be few and far between – for example my home currency is AUD, so I have a permanent hedge in place to protect my AUD investment at OANDA, which is held in USD. Likewise you may find it convenient to have opposing trades when you trade both long term and short term systems in the same currency pair, or different trading ideas for the same pair, but you pay for this luxury, with decreased overall exposure and increased costs. It’s far more cost effective to net your trades, but that takes a little more work.

A manufacturer can hedge their overseas currency exposure, but as f/x traders it’s generally counterproductive, because that’s how we get paid! At any given moment we have to decide the total amount of exposure we wish to have, and produce that position as efficiently as possible. Consider, a net position of zero produces no P/L no matter how much it costs to set up! Even Options are not a panacea, but let’s not get into that!

In a nutshell, we are in a risk business, and we manage that risk by determining the size of our net exposure, relative to our account size, while keeping costs to a minimum.

Anyway, it’ll be interesting to see who agrees and disagrees with me!

Good trading
~chaffcombe

The following is part of my first post on the OANDA discussion forums, mainly in response to the popular notion that it’s somehow beneficial to hold both long and short trades in the same pair at the same time. It also raised the point that with any trading platform there will be pros and cons that the client needs to be consider.
I’ve been lurking around this board for some time, and finally decided to join in. Let’s get this straight, any attempt to buy and sell the same currency pair at the same time on the OANDA platform, will result in you a) having the same position as you started with (ie Zero), and b) you will have paid the spread for the privilege. THAT WOULD BE NUTS! Michael Stumm will be dancing all the way to the Bank! It doesn’t matter if you have two accounts, the overall effect is the same. Don’t do it! (If you have too, imagine you have bought and sold, and set some limit orders at your t/p points, but DON’T physically go long and short at the same time!)

It must be remembered that OANDA is a Market Maker, not a Broker. They make their money from the spread. If you want to earn the spread yourself you must deal through a BROKER, not a market maker (There are alternative platforms out there that will allow you to do this, BUT you then pay a fee).

Ultimately this is about deciding on which trading platform suits your trading style the best. Personally I think that for most people OANDA is way ahead of the rest, because of their ‘no minimum trade size’ policy. It means that you can scale your trades to your account balance, and still deal at competitive rates. If you do everything by percentages it means that if you can manage a $1,000 account well, there’s no reason why you cannot manage a lot more (and have the basis for a life-long source of income). With the other platforms, you have to risk a fortune just to learn the ropes. Not a good way to go.

~chaffcombe

Hedging your domestic currency

If USD or EUR’s are not your domestic currency, and yet your domestic currency is one traded at OANDA, the most conservative option is to open a 2nd linked account and sell your USD (or EUR) account balance against your domestic currency. Then just leave it alone, except for periodic adjustments, as your account changes in value.

For example if your domestic currency is AUD, and you have sent OANDA A$5,000 to open an account. Make your first trade Buy AUD$5,000 against USD, and stick the trade in a second account. DON’T TRADE IT – as it’s a permanent hedge.

If you later have a view on AUD/USD treat this as a separate position and trade it in your main account. (This is one on the very few times I advocate trading ‘both-ways’).

As your account grows or shrinks adjust your hedge to represent your latest NAV.

BTW if people in this position don’t do this, they are speculating, whether they like it or not, on the currency in which their account is denominated.

I have lived and breathed trading ever since trading fx professionally in London, Toronto and Philadelphia in the early 70’s (yes I know that shows my age!). While my professional career subsequently took me from the trading desk to designing treasury systems for some of the world’s leading financial institutions, my desire was to always trade for myself. As a consequence, following 5 years with a major international stock-broker

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