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Hedging and Legality.

Discussion in 'General Forex Talk' started by BlueMental, Jan 6, 2010.

  1. BlueMental

    BlueMental Private

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    Greetings All.

    As I am sure you are aware, that in the United States, hedging used to be a run of the mill tool to use in trading Forex.

    It has been set by current 'guidelines' of NFS and is not as of yet a bill passed in legistlation. They are however working towards this end. (That is a different topic that I wont go into in this post)

    Now you might wonder why I brought this up at all.

    If I wish put a GbpUsd short targeted to mature in 6 months time. While I wish to place a GbpUsd long planned to mature in 2 weeks time, whilst at the same time I wish to do intraday trading of the same GbpUsd.

    With the new set of 'rules' I can not do this in the same account. For what reason is used by NFA for eliminating Hedging, I have no idea. You would think Hedging was a shady deal used by unscrupulous thieves.

    Now think about this, "XXXX" Bank trades on a minute by minute basis in all directions with all of the currency pairs. It is a natural part of the daily customer transactions, as well as the process of investment of the liquidity available to the banks.

    The banks are not the only institutions that do this.

    Now assuming the No Hedging 'rule' bill gets passed. Then that means that there would have to be a separate legal bill passed for banks and other institutions that currently (even though we can not through American Brokers) do hedge trading on a daily basis.

    Where in the American Bill of Rights does it state that segregation and elitism are there for the benefit of the conglomerate against the individual trader?

    What is good for the goose is good for the gander.

    BlueMental
     
  2. Pharaoh

    Pharaoh Colonel

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    Ummmm. . . this is already in effect due to those lovely people at the NFA. Details are here:

    http://www.forexpeacearmy.com/forex-forum/forex-articles/4587-new-nfa-rules-what-they-mean-you.html

    Different brokers have dealt with it in different ways. Some implemented the anti-hedging rules very strictly and even did it earlier than necessary. Others allow hedging during the trading day, but close things out on rollover. Some got traders to open accounts in branches in the UK and elsewhere. It's very possible that there are some new rules in the pipeline to make things more consistent.

    Since the regs could be adjusted at any time, I can only think of two permanent solutions for you.

    1. Multiple accounts.

    2. A non-US brokerage.

    Isn't it nice that the American government and regulators are trying so hard to get us to move our money into offshore brokerages?
    :unhappy:
     
  3. cowmadagan

    cowmadagan Sergeant

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    There's another answer, and that's to pretend that the crosses are the same as your original. I mean if you want to hedge an AUD/USD, do it in NZD/USD or (less so) CAD/USD. If you want to hedge EUR/USD, do it in USD/CHF (especially recently (01/06/09).
    The fact is, this doesn't really work, but it's something...and it's something you can do if you didn't use a stop.
    BTW...don't be stubborn...use stops and then reenter when it's finished its temper tantrum.
    Also, can I get a great big 'HOODAMAN' for Pharaoh? I'm glad someone reads the new laws...Even senators get confused by what regulation actually boils down to.
    Also, don't forget that in November or something they limited the leveraging to 100:1 vs. 200:1 on mini accounts.
    I know one broker that has a very easy to remember website kept all of their operations in NY while moving the accounts to London all of those who wanted to take advantage of the higher leveraging, and adjusting the regulations from the NFA to the FSA.
     
    #3 cowmadagan, Jan 6, 2010
    Last edited: Jan 6, 2010
  4. Music Man

    Music Man Corporal

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    I am SO happy I trade with theCollectiveFX -- no counter-party, no NFA trading restrictions. :)

    MM
     
  5. BlueMental

    BlueMental Private

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    What you say is true to an extent, but also very ineffective as a profitable strategy.

    GbpUsd ranges far more pips than any of the correlated pairs. EurUsd is the snail of the lot, so depending on which pair you are trading, you can hedge either with the mirror or clone pairs, but all sorts of calculations are needed for this to be effective. Like the pip movement ratio between GbpUsd:AudUsd is plus minus 1.4:1

    However there are very profitable ways of using hedging over and above as a security for a failed trade.

    I enjoy (and make most of my profit) from what I call hedge scalping. When doing this, I trade with 1/5th of my balance.

    Here is a hypothetical scenario of how it works.

    1 lot short goes sour, and is 20 pips in the red by the time it reaches near or very near the top of the M1 zigzag. (If you are familiar with the indicators and bar patterns etc. you should be able to hit the mark 8 out of 10 times)

    So to recover the 20 pips, all one has to do is go long with 3 lots, 1 lot hedges the 1 lot in the short trade, whilst the other 2 make scalp profit. So excluding the spread, you need to make 10 pips to break even.

    If for whatever reason, it retraces and you close at 5 pips profit, you close all 3 long positions, and catch it again on the next upswing.

    If you misread completely, and the market goes south, you equalise your hedge with a further short of 2 lots.

    Once you see which way the market is going, lets say the trend turns upward on the M5 chart. Then you close the 3 lots short positions until the peak of the M5 uptrend, while on each M1 down swing you go short with 4 lots.

    It seems complicated, but is actually very simple, and what ends up happening is you trade with very close to 90% of your capital with basically zero margin call risk.

    The other day I traded this way and ended up with a 28% gain on my balance. Lots of small profits, between 1.4 to 12 pips and 1 large but low volume of lots loss of 135 pips and about 6 or 7 small losses of 1 or 2 pips.

    This you can not do by hedging on a different pair because it doesn't give you the benefit of getting your free margin back.

    If you were to try doing this with EurUsd/GbpUsd for example, you get cornered right at the start, unless you are working with about 0.5% of your balance and are REALLY lucky.

    So for hedging acalping I use my Australian account, and for normal - cut losses with SL - I use my US account.

    I still think that it is absolutely ridiculous that abolishing hedging, which began in 1800, by a regulatory group that has no legal power to implement it's 'guidelines' or to prosecute fraudulent brokers.

    They have no real power, and are trying by the wrong means to clean up a mess that will not disappear for a long time to come, and as Pharaoh implied, they are throwing out the baby with the bathwater.

    The con brokers will always find loopholes and suckers to catch regardless of what rules, regulations or governmental laws are in place.

    Blue Mental.
     
  6. TheBluePrince

    TheBluePrince Private

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    Can someone please explain how this is done? I have an account with Interactive Brokers. Can someone please tell me how I would short and long positions in Forex for a future maturity? Is this a way of holding options on forex to protect your investment?
     
  7. cowmadagan

    cowmadagan Sergeant

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    Hey Prince,
    To answer your question, the main point of this article is that you can't in a leveraged account (anymore) at least in the US. Before you ask, I'm really not sure where you can.
    If you really want to do it, I'm sure you can have the same effect if you go through your bank or something and actually buy bonds or treasuries or whatever.
    I've got a PhD holding economist friend and he has a saying that applies to this kind of hedging though:
    Less risk, less profit.

    The other problem is that you used the word 'options'. You'll have to wait for someone like Pharaoh to answer that question, because my broker doesn't sell options, and I'm really not sure who does...I'd be interested in doing options too, especially for those days where I have no idea where it's going to go.
     

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