Just because its on Investopedia, does not mean that the author knows what he is doing. This is the reason why so many newbie retail traders fall into the trap - because there are hundreds of so-called "guru" traders, not making money from trading, but from their "tutorials" and "courses" and all sorts "education" for newbie traders.
Guys, Fernando is right. If you hedge without using closeby then you are wasting money, and I can 100% guarantee it and can prove it mathematically. Without sounding too condescending, let's break it down like we were explaining it to a child.
If you have offsetting orders of (1) + (-1) what is your net position? If you said (0) then you were right. If you don't understand this then you aren't alone because many traders struggle with the concept of a net position, but it's really easy to understand. Let's look at a fictitious and hypothetical scenario to compare two different methods which achieve the same net trade.
Trader A: opens a 1 lot buy trade at the Ask and immediately closes it at the Bid. Trader A has lost 1 spread and 1 commission
Trader B: opens a 1 lot buy trade at the Ask and immediately hedges it with a 1 lot sell, nullifying his position and virtually closing it. Trader B has lost 2 spreads and 2 commissions.
Would you rather be trader A or B?
If you said B then all hope is lost, put the remaining sum of your money in a savings account because you shouldn't be trading.
Why not simply close the first sell with 2,500 points profit.
Do not open a buy.
Open the 2nd sell and close with 2,000 points profit.
Total profit 4,500 points, the same but without any possibility of additional costs with opening the buy (possible spread, commission and swaps charges on 3 trades)
(I will ignore the fact that your maths is off due to the gap between opening the buy and the resell as it makes no difference to the end result.)
I'm showing the whole chart, but in truth, you never know if the downtrend will continue or not.
Then, unless you satisfied with these 2500 pts & you taken profit to re-enter, i think it's not a non sense to take a security upon this trade.
All gaps & extra cost are covered by the second entry volume size, by reusing the same lot size as the locking order (n°2), in theory it cancels it and make the whole deal as profitable as if it was only the first order opened which made the 4500 pts. Most of the time, even if it doesn't cover the exact 4500 pts * 1 lot, it remains profitable (extra cost included) :
Ex : with a gap & extra cost <=> 500 pts (which is overvalued!)
1*(2500+2000)-(1*2000)+1*(2000-500) = 4000 pts
Then after, these are the maths for the standard setup : entry volume = hedge volume = re-entry volume
Once you're sure of the direction of the price, once you're emotionnaly safe regarding the final issue of your deal, nothing prevents from using a higher lot size for the second entry.
I admit it's not essential, but in any case it's deleterious & finally everybody does as he wishes with its money.
Thats why im surprised about your previous reply "your EA will know how to behave during a crash" there is only a couple of things to do in any situation in the market that requires exit
1- stop loss exit
2- manual exit
No EA will be able to react with a flash crash, no strategy will work
Unless your broker allows confirmed stop loss "which in theory should work" and which is the proper answer that i was waiting for but man you didn't say it
so why we discuss about hedging or non hedging strategies in flash crash scenarios?
when all things got worst in such cases though i am writing a strategy that when it seems a crash are starting my EA will start closing all trades and start again 15 or 30 minutes later.
this is one of the most sophisticated things i am resolving during my 9 years trading journey.
he can prove this method will not work mathematically and i will prove this method will work under live market conditions you will see later.
I don't mind sharing knowledge, some tips & tricks but I refuse to underrate my products.
In your post #332 you show a big arrow on the chart with "That's what it prevents from"
"Hedging" the position prevents nothing. If the sell is closed instead of adding the "hedge", it doesn't matter what the market does, there is no position open therefore no exposure.
34 pages and no one have sent any expert post that analyzes my mentioned strategy in post #138
no one even didn't try to answer my questions there by a professional expert viewpoint.
we can not focus on 1 strategy and work on it only as a team and then find a solution for that.
(just like windows making by a group of Microsoft engineers that each group Take responsibility of a part of mission only and work on it)
probably we can not do teamwork together.
1.some traders are opposite against hedging they repeat those claims tens of times on 34 pages. (The assignment of this group is clear)
2.another group work is just confirming another traders posts .for example trader A has post number 000 that he mentioned in his post that hedging is not work and or trader B
that he claims hedging is working.
3.another group are neutral or agree with hedging but each person is talking about fragmented section . (they come here and give us questions about
non related subjects for example : flash crash , gap , etc... without any attention to mentioned strategy and we have to make solution step by step not at the same time for all problems)
i thin i have to continue this path lonely because here i am wasting my precious time for no reason and no result.
Maybe they don't want to.
What would it gain them to do so ?
Unless of course, you pay them...
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