There can be other reasons to hedge for example to protect your capital against inflation.
Of course this does not apply to taking on a long and short position on the same symbol.
When economic correlations between specific currency pairs are thoroughly understood one can certainly use it to their advantage.
Then it becomes possible to set up multi dimensional structures where one does not rely any longer on long or short movement because a carefully balanced state was set up.
In that case it becomes possible to extract or shave off profit on the movements not related to long or short but from the wandering of markets from and to each other.
Which can be considered extremely safe when compared to single directional trades.
The problem lies in the fact that these balanced structures need calibration points, points where the wandering is at its lowest value and where wandering is at its max.
And of course the point where they are both equal in value this would be your entry point and from then on it does not matter if either one goes up or down all that matters is that there is movement in between...
Profits from these types of structures are relatively small because markets can not wander away from each other too much because otherwise one would quickly become overvalued in respect to the other economy's.
An attempt has been made in the analysis of Pythagorean structures.
This involves 3 pairs which means the structure will always be virtually flat and the result will always be zero.
These 3 dimensional structures rely upon equations from this guy.
If we consider EURUSD we can see the following:
The math involved is simple we take for example EURAUD and we multiply it by AUDUSD to give us the impression of EURUSD.
The attempt in the analysis of Pythagorean structures involves taking on 3 positions simultaneous.
The result will be a combined structure that will always be virtually flat because the amounts in all 3 currency's are exactly the same.
Here are some examples.
Assume we go LONG on EURGBP and we go SHORT on GBPUSD, we have then an equal amount of GBP LONG and GBP SHORT.
If we add one more position, SHORT on EURUSD, we then have the following triple structure:
1 position in which GBP is LONG and 1 position in which GBP is SHORT which == equals to 0.
1 position in which EUR is LONG and one position in which EUR is SHORT which == equals to 0.
1 position in which USD is LONG and 1 position in which USD is SHORT which == equals to 0.
So we have 3 positions which will absolutely result in nothing because it is a perfectly balanced situation, when we consider all values to be the same.
I see i made a mistake but you can figure it out i hope.
Now this structure has one advantage which is that it becomes possible to track and analyze the wandering between these markets.
To do this one only has to record and analyze how far these movements usually go and then it will provide results that can be used to determine the calibration points i spoke of above.
Additionally one could analyze timings between when things happen to see if they happen in a repeating fashion.
The cost-less structure will provide free information that can be implemented as an indicator to reveal when a currency has become too cheap or too expensive in relation to other currency's.
And perhaps it could eventually, when it becomes understood, be able to reveal when it is time to act where and on which one, which if done right, could higher the odds on some successful trades.
So here you have my take on hedging of course it will need the serious amount of coding to put it to work but that is what we do so i hope it inspires some people.
I do not see hedging as a bad thing unless you are not knowing what you are doing and i consider it a mechanism to reveal correlations as well as to lower risk sometimes even in a paradoxical fashion.
Some FX customers call it so, but there is no such thing called "hedge strategy" when you buy and sell the same instrument.
Hedging (in fact it is a fake hedging as the first post explains) is an unwise way of implementing a strategy.
So, what works for you is the strategy part, not the hedging part.
You can achieve the same result with your strategy and without using fake hedging ... and without exposing to the disadvantages of fake hedging.
Please read the first post in this topic.
@Attila Alp Oğuz
I want to have this discussion with you because you are one of the people who claim that you can achieve the same result without using hedging.
I am going to propose this strategy to you, and i would like your explanation on how to achieve the exact same results without using hedging.
The strategy is simple.
Now could you please explain to me how we can possibly get the same result, without the flat (hedged) entry ?
I am eager to hear your explanation, and perhaps also why this would be an unwise way to implement a strategy...
Just wait for 10 pips in any direction (you, in fact, wait by opening two reverse trades at the same time), then trade for the reverse direction for 20 pips.
If I'm not missing something, this strategy will provide the exact same result with yours ... excluding spreads.