Hedging forex pdf

"No loss" recovery hedging system.

Question: Would you be willing to trade any system or strategy you want on your $10000 account and turn every trade you take into a win trade (of $200 or $20) or a breakeven trade and have only a small theoretical chance of losing let's say $600 in worst case scenario?

Some traders would probably say no, if your answer to this question is also NO, then have a nice day;) If your answer is YES or MAYBE, then before you will jump out of your seat thinking you just found a holly grail of trading, please read carefully all stuff below and download and test a demo version of my newest EA, because it might also work for you!

So everything started with the following simple question:

"Is it possible to design a recovery system that is using a smart hedging mechanism able to "beat" the forex market? - and also your broker "

Apparently and surprisingly the answer to that question is YES*.

(*= of course only under certain conditions)

So to prove the statement above, I've coded an EA that is using "back-and-forth" hedging mechanism (it's NOT a martingale system), which I'll explain in the pdf manual. This trading technique is probably not new and maybe it is also discussed many times on this forum. However, I couldn't find any EA for it so I've coded my own.

Thus, just for the illustration let's say you have just entered a "sell" trade and you are now waiting to see what will happen next. Let's think about this situation for a moment. For sure we cannot predict the upcoming market events with a 100% accuracy. Then what can we say regarding the future market direction? Unless you are an extremely experienced trader, the answer is of course: not so much! However, the one and the only one peace of reliable information, that we have at that moment, is that the market will eventually go "up" or "down" w. r.t. the current price level. It can take a day, a week or even a month but the market will move up or down, simply because it has to!

We can take this one peace of reliable information and use it to our advantage. And here is how:

At any point in time, any price level we can open a "buy" or "sell" position and add several new positions by anticipating to new market movements. Thus, when the first trade is a "sell" order and market moves several pips in the opposite direction (up), then we could open a new "buy" position, and vice-versa. While doing this back-and-forth hedging we could also calculate the new Lot size required to cover for our previously opened trade(s) at our original TakeProfit, but ALSO at our original StopLoss level! By doing some simple mathematical calculations we can easily discover that the Lot sizes of our new recovery trades are not necessary always bigger than the previous ones. This is so much better than a martingale system which will just blow up your Lot sizes just within a few trades.

Of course there are some constrains, w. r.t this trading methodology. For example we need to make sure our open trades will not eat up our freemargin, which we will use to open new trades in case of market direction change. So this automatically means (unless you have a $100000 account) that we need to trade only with small lot sizes, e. g.: using mini lots (0.1 of standard Lot size) but also not to small e. g.: micro lots (0.01 Lot size) because of calculation errors that are introduced by the "MODE_MINLOT and MODE_LOTSTEP" restrictions. Furthermore our account size needs to be large enough to be able to cover for some equity dips and the required margin. Our StopLoss and TakeProfit levels need to be carefully chosen to minimize the resulting recovery lot sizes. We also need to make sure the system can survive several recovery attempts, when market will be ranging. (The wise recommendation for ranging condition is to exit at the best price and take some small losses). Furthermore, we need to add some on-the-fly correction for our spreads, slippages and swaps and commissions. To help the system a little bit we will also add a BreakEven with a TrailingStopLoss mechanism and will also automatically close all positions when our pre-set ForceTakeProfit target is hit.

Nevertheless, this type of trading could have some potential for success when positions are opened manually or according to a proven trading system. How about the risks involved in this kind of trading? It depends on several factors like: account size vs lot size, spreads and slippages, selected recovery levels, etc. As I said before the most important is to avoid ranging markets and assuring our account has sufficient FreeMargin for opening new trades. Otherwise the system will not be able to recover and it will take a loss. The only way to find out the limits of this system is to play.

with it and adapt the parameters according to desired trading behavior. Please try it first on your demo account or in strategy tester (99% modelling only!) When the settings are properly chosen you will see, that it is really very very hard to lose money with this system.

Link to this EA:

Link to the manual:

Plus US regulations do not allow hedging.

nevar nobody is saying the lunch is totally free. there is some risk involved in this trading strategy (see the manual!), but when used properly the risk is very very low.

nbtrading: there are plenty of brokers that allow hedging (mine does for sure! markets). See also:

nevar nobody is saying the lunch is totally free. there is some risk involved in this trading strategy (see the manual!), but when used properly the risk is very very low.

nbtrading: there are plenty of brokers that allow hedging (mine does for sure! markets). See also:

That does not mean a lot to US residents (that a lot of brokers allow hedging) unless they want to be targeted by the law enforcement. Anyway. thanks.

nevar nobody is saying the lunch is totally free. there is some risk involved in this trading strategy (see the manual!)

''Would you be willing to trade any system or strategy you want on your $10000 account and turn every trade you take into a win trade''

this is your initial claim now you are saying ''there is some risk involved in this trading strategy''.

If you do not like this strategy, ok just skip this thread and go forward, do not waste time here. I wish you the best.

This is a forum, it is free to say anything or you can save the universe with a free strategy , so dont be offended. All the best.

Sounds interesting, will go through it ..

Thanks for sharing .

I was thinking how to improve this system even more and I think I have succeeded in doing that. So the main problem occurs during the ranging market conditions. Then the EA will keep opening buy and sell positions every time the price will cross the recovery line levels. In worst case scenario it could open even 10 positions (or even more). This will totally destroy the FreeMargin level and introduce a risk of "unfinished recovery" cycle. So my idea.

was to introduce a "moving recovery target" mechanism. The idea is to shift the recovery levels closer to the market, each time a new recovery trade is opened. Doing so, the EA would be targeting lower and lower recovery levels and this would increase the chance of successful recovery.

To test this improved recovery system the EA (version 01.1) is programmed to enter the market almost randomly, where every new market entry decision is based only on the information from the previous candle and a new position is automatically opened when the previous trade (or trade group) is closed. The entry logic is:

This is of course the stupidest entry algorithm ever, so normally your account would be wiped out in several days. This kind of trading would end in a random walk towards the $0 line. So let's run a backtest from 2007 until now and see if this system can survive this worst case random test.

- initial deposit $10000.

- EA settings: see tester report.

- dukascopy data 2007-2014 is used.

- fixed spread of 3pips (to simulate my broker's spread)

- backtest performed using tickdata with 99% of modelling quality, this is extremely important since the results are very.

sensitive to small price changes.

- back tester set to "every tick" mode.

Strategy Tester Report:

Link to the full statement:

So as you can see, apparently this strategy can withstand even 7 years of random trading! Personally I think it is, a very GOOD result.

p. s.: I'll post the updated EA version 01.1 as soon as possible.

What nbtrading was trying to tell you that US residents can not use that EA. They are obliged by the law to use US regulated brokers, and US forex brokers regulations prohibit single symbol hedging (among other things)

ACCA Hedging ForexRisk. pdf.

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What is hedging as it relates to forex trading?

When a currency trader enters into a trade with the intent of protecting an existing or anticipated position from an unwanted move in the foreign currency exchange rates, they can be said to have entered into a forex hedge. By utilizing a forex hedge properly, a trader that is long a foreign currency pair, can protect themselves from downside risk; while the trader that is short a foreign currency pair, can protect against upside risk.

The primary methods of hedging currency trades for the retail forex trader is through:

Spot contracts are essentially the regular type of trade that is made by a retail forex trader. Because spot contracts have a very short-term delivery date (two days), they are not the most effective currency hedging vehicle. Regular spot contracts are usually the reason that a hedge is needed, rather than used as the hedge itself.

A forex hedging strategy is developed in four parts, including an analysis of the forex trader's risk exposure, risk tolerance and preference of strategy. These components make up the forex hedge:

Analyze risk: The trader must identify what types of risk (s)he is taking in the current or proposed position. From there, the trader must identify what the implications could be of taking on this risk un-hedged, and determine whether the risk is high or low in the current forex currency market.

The forex currency trading market is a risky one, and hedging is just one way that a trader can help to minimize the amount of risk they take on. So much of being a trader is money and risk management, that having another tool like hedging in the arsenal is incredibly useful.

Forex Hedging: How to Create a Simple Profitable Hedging Strategy.

Ultimately to achieve the above goal you need to pay someone else to cover your downside risk.

In this article I’ll talk about several proven forex hedging strategies. The first section is an introduction to the concept which you can safely skip if you already understand what hedging is all about.

The second two sections look at hedging strategies to protect against downside risk. Pair hedging is a strategy which trades correlated instruments in different directions. This is done to even out the return profile. Option hedging limits downside risk by the use of call or put options. This is as near to a perfect hedge as you can get, but it comes at a price as is explained.

What Is Hedging?

Hedging is a way of protecting an investment against losses. Hedging can be used to protect against an adverse price move in an asset that you’re holding. It can also be used to protect against fluctuations in currency exchange rates when an asset is priced in a different currency to your own.

When thinking about a hedging strategy it’s always worth keeping in mind the two golden rules :

Hedging might help you sleep at night. But this peace of mind comes at a cost. A hedging strategy will have a direct cost. But it can also have an indirect cost in that the hedge itself can restrict your profits.

The second rule above is also important. The only sure hedge is not to be in the market in the first place. Always worth thinking on beforehand.

Simple currency hedging: The basics.

The most basic form of hedging is where an investor wants to mitigate currency risk. Let’s say a US investor buys a foreign asset that’s denominated in British pounds. For simplicity, let’s assume it’s a company share though keep in mind that the principle is the same for any other kind of assets.

The table below shows the investor’s account position.

Without protection the investor faces two risks. The first risk is that the share price falls. The second risk is that the value of the British pound falls against the US dollar. Given the volatile nature of currencies, the movement of exchange rates could easily eliminate any potential profits on the share. To offset this, the position can be hedged using a GBPUSD currency forward as follows.

In the above the investor “shorts” a currency forward in GBPUSD at the current spot rate. The volume is such that the initial nominal value matches that of the share position. This “locks in” the exchange rate therefore giving the investor protection against exchange rate moves.

At the outset, the value of the forward is zero. If GBPUSD falls the value of the forward will rise. Likewise if GBPUSD rises, the value of the forward will fall.

The table above shows two scenarios. In both the share price in the domestic currency remains the same. In the first scenario, GBP falls against the dollar. The lower exchange rate means the share is now only worth $2460.90. But the fall in GBPUSD means that the currency forward is now worth $378.60. This exactly offsets the loss in the exchange rate.

Note also that if GBPUSD rises, the opposite happens. The share is worth more in USD terms, but this gain is offset by an equivalent loss on the currency forward.

In the above examples, the share value in GBP remained the same. The investor needed to know the size of the forward contract in advance. To keep the currency hedge effective, the investor would need to increase or decrease the size of the forward to match the value of the share.

As this example shows, currency hedging can be an active as well as an expensive process.

Hedging Strategy to Reduce Volatility.

Because hedging has cost and can cap profits, it’s always important to ask: “why hedge”? For FX traders, the decision on whether to hedge is seldom clear cut. In most cases FX traders are not holding assets, but trading differentials in currency.

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Carry traders are the exception to this. With a carry trade, the trader holds a position to accumulate interest. The exchange rate loss or gain is something that the carry trader needs to allow for and is often the biggest risk. A large movement in exchange rates can easily wipe out the interest a trader accrues by holding a carry pair.

More to the point carry pairs are often subject to extreme movements as funds flow into and away from them as central bank policy changes (read more).

To mitigate this risk the carry trader can use something called “reverse carry pair hedging”. This is a type of basis trade. With this strategy, the trader will take out a second hedging position. The pair chosen for the hedging position is one that has strong correlation with the carry pair but crucially the swap interest must be significantly lower.

Carry pair hedging example: Basis trade.

Take the following example. The pair NZDCHF currently gives a net interest of 3.39%. Now we need to find a hedging pair that 1) correlates strongly with NZDCHF and 2) has lower interest on the required trade side.

Using this free FX hedging tool the following pairs are pulled out as candidates.

The tool shows that AUDJPY has the highest correlation to NZDCHF over the period I chose (one month). Since the correlation is positive, we would need to short this pair to give a hedge against NZDCHF. But since the interest on a short AUDJPY position would be -2.62% it would wipe out most of the carry interest in the long position in NZDCHF.

The second candidate, GBPUSD looks more promising. Interest on a short position in GBPUSD would be -1.04%. The correlation is still fairly high at 0.7137 therefore this would be the best choice.

We then open the following two positions:

The volumes are chosen so that the nominal trade amounts match. This will give the best hedging according to the current correlation.

Figure 1 above shows the returns of the hedge trade versus the unhedged trade. You can see from this that the hedging is far from perfect but it does successfully reduce some of the big drops that would have otherwise occurred. The table below shows the month by month cash flows and profit/loss both for the hedged and unhedged trade.

Carry hedging with options.

Hedging using an offsetting pair has limitations. Firstly, correlations between currency pairs are continually evolving. There is no guarantee that the relationship that was seen at the start will hold for long and in fact it can even reverse over certain time periods. This means that “pair hedging” could actually increase risk not decrease it.

For more reliable hedging strategies the use of options is needed.

Buying out of the money options.

One hedging approach is to buy “out of the money” options to cover the downside in the carry trade. In the example above an “out of the money” put option on NZDCHF would be bought to limit the downside risk. The reason for using an “out of the money put” is that the option premium (cost) is lower but it still affords the carry trader protection against a severe drawdown.

Selling covered options.

As an alternative to hedging you can sell covered call options. This approach won’t provide any downside protection. But as writer of the option you pocket the option premium and hope that it will expire worthless. For a “short call” this happens if the price falls or remains the same. Of course if the price falls too far you will lose on the underlying position. But the premium collected from continually writing covered calls can be substantial and more than enough to offset downside losses.

If the price rises you’ll have to pay out on the call you’ve written. But this expense will be covered by a rise in the value of the underlying, in the example NZDCHF.

Hedging with derivatives is an advanced strategy and should only be attempted if you fully understand what you are doing. The next chapter examines hedging with options in more detail.

Downside Protection using FX Options.

What most traders really want when they talk about hedging is to have downside protection but still have the possibility to make a profit. If the aim is to keep some upside, there’s only one way to do this and that’s by using options .

When hedging a position with a correlated instrument, when one goes up the other goes down. Options are different. They have an asymmetrical payoff. The option will pay off when the underlying goes in one direction but cancel when it goes in the other direction.

First some basic option terminology. A buyer of an option is the person seeking risk protection. The seller (also called writer) is the person providing that protection. The terminology long and short is also common. Thus to protect against GBPUSD falling you would buy (go long) a GBPUSD put option. A put will pay off if the price falls, but cancel if it rises.

On the other hand if you are short GBPUSD, to protect against it rising, you’d buy a call option.

For more on options trading see this tutorial.

Basic hedging strategy using put options.

Take the following example. A trader has the following long position in GBPUSD.

The price has already fallen since he entered so the position is now down by $70.

The trader wants to protect against further falls but wants to keep the position open in the hope that GBPUSD will make a big move to the upside. To structure this hedge, he buys a GBPUSD put option. The option deal is as follows:

Trade: Buy 0.1 x GBPUSD put option.

The put option will pay out if the price of GBPUSD falls below 1.5000. This is called the strike price . If the price is above 1.500 on the expiry date, the put option will expire worthless.

The above deal will limit the loss on the trade to 100 pips. In the worst case scenario the trader will lose $190.59. This includes the $90.59 cost of the option. The upside profit is unlimited.

The option has no intrinsic value when the trader buys it. This is an “out of the money” option. The time value, or premium is there to reflect the fact that the price may fall and the option could therefore go “in the money”.

The trader pays $90.59 for this privilege of gaining downside protect. This premium goes to the seller of the option (the writer).

Note that the above structure of a put plus a long in the underlying has the same pay off as a long call option.

The table above shows the pay outs in three different scenarios: Namely the price rising, falling or staying the same. Notice that the price has to rise slightly for the trader to make a profit in order to cover the cost of the option premium.

To help you test the trading ideas presented here the following free downloads are provided:

Want to stay up to date?

Why Sell Options? Writing uncovered options has the traditional connotation of “picking up nickels. Selling Options: How Much Margin Do I Need?

When selling (writing) options, one crucial consideration is the margin requirement. Correct planning. Creating a Simple Profitable Hedging Strategy.

When traders talk about hedging, what they often mean is that they want to limit losses but still keep. How to Enhance Yield with Covered Calls and Puts.

Writing covered calls can increase the total yield on otherwise fairly static trading positions. It’. Option Spread Strategies.

A basic credit spread involves selling an out-of-the-money option while simultaneously purchasing a. How to Create an Option Straddle, Strangle and Butterfly.

In highly volatile and uncertain markets that we are seeing of late, stop losses cannot always be relied. Spread Trading and How to Make it Work.

If you find yourself repeating the same trades day-in and day-out – and a lot of active traders do. FX Derivatives: Using Open Interest Indicators.

Currency forwards and futures are where traders agree the rate for exchanging two currencies at a given.

Hi Seyedmajid – is it possible to share your experiences.

i have made a winning hedging strategy that always make profit no matter where market is going…

this is my ultimate strategy after 8 years of trading.

can you share bro.

super article on hedging and thoroughly explained.. thanks steve.