Forex Hedging Strategy

[forexboy]

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Hello everyone, I think most of you are already familiar with the hedging strategy. However, for the benefit of the newbie trader I will explain the basic of forex hedging strategy.

Forex hedging can be done by placing both order which is a BUY and SELL at the same time. At this condition, no matter where the market moves you are perfectly hedge. Some traders are taking advantage of this type of strategy by opening two broker account. The first broker they have is an "interest free" where they don't charge interest with your active order while the second account does pay a good interest for the overnight active trades. With this perfect hedging strategy, they are earning only through interest. However, this type of strategy requires balancing the amount of each account to avoid margin call.

The other strategy which will be the focus of this thread is hedging with correlated pairs. A good candidate for a correlated pairs are the EUR/USD and the USD/CHF.

The procedure is very simple where you have to open both Long or buy order at the same time on a currency pair EUR/USD and USD/CHF. After opening the two order, we have to wait for un-correlation to happen between the two currencies.

Example 1,

EUR/USD  went up +250 pips
USD/CHF went down to -150 pips

When such un-correlation had happened, we have to close both orders to gain +100 pips then we need to re-enter another set of entries again.

Example 2,

EUR/USD went down to -250 pips
USD/CHF went up to +150 pips

when such un-correlation had happened, we have to place another set of entries and just leave those orders a dangling pairs.

Money management also plays a very important role on this system, so use the appropriate lost sizes for your orders.

I'll be running a demo on this type of trading and will be giving you some update on its results.

I had just recently opened a demo account on Instatrader and you can access my account with the read only password below;

Login: 284445
Investor: 4jmngun

Please feel free to join me and share insights for the further improvement of this strategy.

[forexboy]

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To give this strategy a start up, I already placed an order at the price on;

EUR/USD   1.4160
USD/CHF   1.0771

Let's just wait for tomorrow's un-correlation movement to occur.

[Ping]

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The more uncolleratad it becomes, the better it is ba?

In your Example 2,

EUR/USD went down to -250 pips
USD/CHF went up to +150 pips

Can you kindly elaborate "we have to place another set of entries and just leave those orders a dangling pairs?"

Thanks.


 

[forexboy]

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Since this two currency pairs are correlated there is always a time where they will move back to their equal position.

On my example 2,

EUR/USD -250 pips
USD/CHF +150 pips

You just have to leave this pairs without stop loss(You should have good money management to avoid margin call) then enter a new set of LONG entries for EUR/USD and USD/CHF. It's just like you're creating a grid system, maybe the correct term for this system is hedging grid strategy.

[Ping]

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Going by your Example 2 again pls.

LONG EU and UC, then it went:
EUR/USD -250 pips
USD/CHF +150 pips

Then open another LONG position for both?  How much lot size relative to each other?

When do you decide to close?

Which position goes to broker 1 (no swap), and broker 2 (with swap)?



 

[forexboy]

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"Then open another LONG position for both?  How much lot size relative to each other?"
- It means that you are going to place another set of market order for EU and UC at the same time. Perhaps on this demo, try using the smallest lot available.
So the situation goes like this;
  You have the losing opened position which are;
   1st set
   EUR/USD -250 pips
   USD/CHF +150 pips
   2nd set
   EUR/USD -2 pips
   USD/CHF -3 pips

"When do you decide to close?"
- You are only going to close a set when one pair has a higher gains than the other pair.
Example,
   EUR/USD from -250 pips only went down more for only -300 pips while,
   USD/CHF from +150 pips went up more for +400 pips, then this is the time to close this set earning you a total of +100 pips

"Which position goes to broker 1 (no swap), and broker 2 (with swap)?"
- I'm referring to the "perfect hedge strategy" not this "correlated hedging strategy". If you are interested in using the perfect hedge strategy, simply use a single currency pair. If going Long pays an interest for that pair then you go Long on the broker 2(with swap), and if going short charges an interest then that pair goes to the first broker 1 (no swap)
Example
  GBP/JPY going Long will pay you an overnight interest thus Long on Broker 2(with a swap)
  GBP/JPY going Short charges you an overnight interest thus Short on Broker 1(no swap)
 

 

[forexboy]

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Update result

Floating Position;

1st set
EUR/USD  -199 pips
USD/CHF   +102

Re-entered
2nd set
EUR/USD @1.0876
USD/CHF @1.3965

[forexboy]

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Update result

Floating Position;

1st set
EUR/USD  @1.4160 -270 pips
USD/CHF  @1.0771 +125 pips

2nd set
EUR/USD @1.0876 -75 pips
USD/CHF @1.3965 +21 pips

New set
3rd set
EUR/USD @1.3890
USD/CHF @1.0901

[forexboy]

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Update result

Closed Position;

1st set
EUR/USD  @1.4160 +199
USD/CHF  @1.0771 -117

Floating Position;

2nd set
EUR/USD @1.0876
USD/CHF @1.3965

New set
3rd set
EUR/USD @1.3890
USD/CHF @1.0901

Total Profit: +86

[Ping]

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Not bad, how many days?

How much USD per pip size?



 

[forexboy]

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@Ping
The number of earning depends on the un-correlationship between the two currency to happen. You can check my demo account by using my "read access only" password on my first post.

Update result

Closed Position;

EUR/USD @1.3890 +199
USD/CHF @1.0901 -117
Profit: +82

Floating Position;

EUR/USD @1.0876
USD/CHF @1.3965

Total Profit: +168

[Ping]

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Anong brokers gamit mo?


 

[forexboy]

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I had just recently opened a demo account on Instatrader and you can access my account with the read only password below;

Login: 284445
Investor: 4jmngun

[Ping]

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What's your take on this - http://paymanila.com/forum/index.php?topic=760.0 ?

Di man sya directly hedging, pero since divergence yan, parang may konting relation din?




 

[forexboy]

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That's another good hedging strategy. What I've been doing around here is just the basic of hedging correlated pairs.

I think the purpose of that divergence is to make an entry when the two correlated pairs that you are trading move further from one another, meaning they move further apart from being correlated. Thus this is the time to place a hedging on the two pairs because at some point they will return to being correlated and profit earns.