to Stop or to Hedge

Originally posted by Trae ↑

Just clicked on the CFD forum in passing and I believe a strategy change may assist many with their frustrations.

Risk management 101:
The reason traders place stops is for risk protection. For mine, a stop is a risk in itself.
Just as locking in profits makes sense for a trader, surely the opposite is true for losses. (Locking in loss is just compounding down..)

My dislike for losses doesn't stop there.
There's an old saying that "there's two types of economist. Economists that don't know and economists that don't know that they don't know.". Traders without inside are no different (although value prevails in the end. Usually..)

Unless were taking arb, I see directional trading as a similar prospect. For mine a good strategy is a strategy that can profit off a completely random chart with no human driven momentum (a random walk).

When traders spend there days placing directional trades its a constant effort and prone to getting chopped up.
Calc the trade, place the trade which is immediately in the red due to the spread or transaction cost, enter a stop, get stopped out just before price retraces, chase price, repeat...yuk

Here's a concept: place a stop hedge instead. Example: If you place a stop at -5k and you hit the stop you just locked in a 5K loss (compounding down).
If you place a conditional hedge at -5K that gets hit, ignoring the spread cost, you just capped your loss at 5K. You didn't luck it in though. You now hold the position until the next obvious turning point, collapse the hedge for a profit then profit again as price retraces. (You just need to get your head around netting orders off system). Your now in a position to translate a losing trade into a winner (i do this on a daily basis).

Taking this to the next level, how about turning traditional trading completely on its head. Start the trading session by opening a large long and an equal short position on the same instrument (preferably at least the spread thick in the money).

Now you're 100% hedged. Zero risk, zero reward (unless you hold overnight and pay holding costs).
Now that you're set, sell all day - 'scalp city'.
When the market over extends to the upside and looks like it's run out of steam reduce your long taking a profit (leaving you net short), proffit from the fall until the market is over extended to the downside then reduce your short locking in anothet profit leavinf you net long ....repeat..

If you decide it's time for lunch, want to hold overnight, find the market to choppy or see an economic nrws event release just increase the respective long/short to leave you fully hedged.

Simple right. It's good for morale when every time you sell you make a profit.
You can do it all day long (at least until your positions dry up).

There it one gotcha. That's if you wrongly pick the top or bottom and price continues in the same direction, your now nett long or short exposed in the wrong direction. I wont give all the secrets (because it's complex to explain) but the answer lies in multiple executions at order sizes scaled to the probability of mean reversion then increasing the offload of the opposing position upon reversion

GLTA

Expand

Previous post was made from a mobile phone so excuse the spelling.

Something i should have added was trade limited exposure in fractals, include time or price based reduction of exposure to zero.

The reasoning behind time based exposure reduction is by example, you mean revert from the downside (so your now nett long). Hit your limts to the upside (perhaps 1, 2 ,3 std deviations) which switches you to full hedge then downside exposure. Price however continues higher and for sake of example, continues on it's upward trajectory infinately. If you retained downside exposure you would eventually blow up.

By including time or price based exposure reduction your risk will be taken off the table in a trending market and if your straegy is twaeked, the cost of this will be measured in perhaps 1 or 2 trades.

If a time based approach is selected, for mine it should be used in conjunction with market shock limits. Just as a traditional trader may set stops at extremes, by setting static ATR style conditional hedges that reduce your exposure to zero if the chart suddenly goes directional.