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Hedge your losers to turn them into winners


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Hedge your losers to turn them into winners

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  #1 (permalink)
 haydfree 
Birmingham, AL
 
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I saw a video on youtube about changing your net R just by letting your winners run, and converting losers into BE, i.e., cutting losers more quickly, and how these two things can really change the math in your trade logs.

This got me thinking hard about how much I'm missing out on in the market. Call it FOMO if you must, but I've backtested this new money management strategy and I'm just here looking for someone to tell me where I messed up because it seems too good to be true.

The new money management strategy is as follows:


If that's unclear please let me know and I'll clarify. I just thought it was a clever way to attempt to limit losses, but I'm curious what y'alls thoughts are. Some issues I can think of off the top of my head:
- you're waiting for an opposite signal to hedge, but you don't get it, leaving you with a huge loss and no stop loss
- Not enough capital to continue stacking hedges until you get a winner
- Commissions

Is something like this feasible? Thanks

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 forgiven 
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I have never seen that idea , another one that I have seen is to enter with a half position , when price moves the distance of your risk add the other half and move your stop to brake even on the first half entry . this way if the boat goes down its only half full , if you get a runner you get paid for all the passengers . hope it helps .

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  #3 (permalink)
RandomDude
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You aren't allowed to open position in the other direction on the same instrument, but wouldn't flattening would yield the same result?

Regardless, and maybe I am not understanding the concept, but if I knew how to successfully remove risk when price was going against me, then wouldn't I be better off doing the opposite during that period? If it is 50/50, then thinking all I am doing is increasing my transactional costs.

Will keep thinking about it ;-)

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  #4 (permalink)
lightsun47
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Will it be possible to showcase this on a chart or something? Maybe it's much easier to understand that way. Thanks.

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 bobwest 
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An early step in this procedure is "Open opposite position to hedge, so you are both long and short."

There's a problem with this, and it's that when you "open opposite position" you do not end up both long and short. You end up with no position. It simply closes the original trade. Example: I'm long 1 contract and I "open" a 1-contract sell. The sell sells me out and I am net flat, no position. You can't be long and short the same thing at the same time in the same account. Going short sells out your long, or vice versa.

It is possible to have a long in one account and a short in another one, or with another broker even, but this is explicitly against exchange wash trade rules.

Discussion here:

Even if you did use different accounts (and the broker didn't catch you), or different brokers, you would still be net out of the market between the two. You would have no exposure to risk, because you would be net flat.

I didn't really follow the rest of the diagram, because it seemed pretty complicated and the issue of you having simply closed your position out in the "hedge" step made it not work anyway, at least as I understood it.

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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  #6 (permalink)
 Arch 
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bobwest View Post
An early step in this procedure is "Open opposite position to hedge, so you are both long and short."

There's a problem with this, and it's that when you "open opposite position" you do not end up both long and short. You end up with no position. It simply closes the original trade. Example: I'm long 1 contract and I "open" a 1-contract sell. The sell sells me out and I am net flat, no position. You can't be long and short the same thing at the same time in the same account. Going short sells out your long, or vice versa.

It is possible to have a long in one account and a short in another one, or with another broker even, but this is explicitly against exchange wash trade rules.

Discussion here:

Even if you did use different accounts (and the broker didn't catch you), or different brokers, you would still be net out of the market between the two. You would have no exposure to risk, because you would be net flat.

I didn't really follow the rest of the diagram, because it seemed pretty complicated and the issue of you having simply closed your position out in the "hedge" step made it not work anyway, at least as I understood it.

Bob.

the wash trade rule mentions at the same strike price. Given this is futures and not options, the "strike price" would be different if the buy/sell orders on different accounts are 1 tick apart?

I think a simpler solution is to do 1 e-mini:10-micro on the same account

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 bobwest 
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Arch View Post
the wash trade rule mentions at the same strike price. Given this is futures and not options, the "strike price" would be different if the buy/sell orders on different accounts are 1 tick apart?

I think a simpler solution is to do 1 e-mini:10-micro on the same account

I agree on the micro/mini idea in the same account, as far as the wash rule goes. They don't wash each other out, because they're not the same product. Also, 10 micros is generally equivalent to 1 mini, and so you would be hedged and not have an issue with the wash sale rule. But you would still make the same amount on one side that you lose on the other (a true hedge), and so I don't see an advantage. You would pay additional commissions to stay effectively flat, basically. Whether it makes this hedging strategy work I couldn't tell you, since I thought the strategy was complicated enough that I didn't really follow it.

As to the "strike price", that's the price, in an option, where the underlying item can be bought or sold, when the option is exercised. The strike price is not affected by the price of the buy or sell of an option, and there's no strike price for futures, anyway. https://www.investopedia.com/terms/s/strikeprice.asp

Here's the wash trade rule. What it's concerned with is that you not both buy and sell the same item, so it lists the parts of an item's description, including "product and expiration month" and "strike price", which is mentioned only in the case of an option.

Rule 534 (“Wash Trades Prohibited”)
No person shall place or accept buy and sell orders in the same product and expiration
month, and, for a put or call option, the same strike price, where the person knows or
reasonably should know that the purpose of the orders is to avoid taking a bona fide market
position exposed to market risk (transactions commonly known or referred to as wash
trades or wash sales). Buy and sell orders for different accounts with common beneficial
ownership that are entered with the intent to negate market risk or price competition shall
also be deemed to violate the prohibition on wash trades. Additionally, no person shall
knowingly execute or accommodate the execution of such orders by direct or indirect
means.

Bob.

When one door closes, another opens.
-- Cervantes, Don Quixote
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 SMCJB 
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haydfree View Post
The new money management strategy is as follows:


If that's unclear please let me know and I'll clarify. I just thought it was a clever way to attempt to limit losses, but I'm curious what y'alls thoughts are. Some issues I can think of off the top of my head:
- you're waiting for an opposite signal to hedge, but you don't get it, leaving you with a huge loss and no stop loss
- Not enough capital to continue stacking hedges until you get a winner
- Commissions

Is something like this feasible? Thanks

Isn't this just martingale?

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