Having just come off the non farm payrolls or nfp reports which are a major “event risk” I am getting more insights and it appears although I am out of the dangerzone and yet my profits are not improving greatly, I am starting to get a few new ideas.
As usual with an NFP which is the job figures for the US, or a US fed rate decision, the market always reacts very strongly and you get some massive movements that make you quake a little.
Especially when you see the number and it’s way out as it has been the last 2 times, and you know things are about to get crazy. Last time it was way over expectations, this time way under, so the USD started rocketing down.
This would have been good news, except I massively shorted the EURUSD to protect myself against any sudden moves downward by the euro.
But I realised the Euro hedge I have which about $40k out of balance is actually also hedged against the $31k I have against the USD in CAD and NZD.
I had hedges on the USDAUD as well as the USDGBP but they were smaller and biased against the USD, so when the USD started dropping, my equity rose by about $1000, making it a good day.
But what it means in terms of the bigger picture of hedgind, it means if I am concerned about the USD falling, I can buy high interest NZD against it – it doesn’t even have to make money! It just makes nice interest, and protects me should the USD keep falling, as it will be made up for by a spread across 5 currencies which means it doesn’t have to be all hedged into the euro, and when the euro falls again, there will be the chance to regain the equity.
The USD falling of course does present the opportunity to get in even deeper, but the rumblings have begun, if it moves beyond $1.10, it may be off to spend some time in that range, in which case we certainly will be building up the hedge. When these things unfold, we buy NZD as well as EUR, to keep the huge USD hedge from gobbling my equity, because I’ll be taking profit on the NZD side knowing when the USD rises again, the euro will fall, but because I havent invested deeply, I will get equity back on the USD side. the NZD side will fall but there’s not nearly as much falling there even though it’s hedged. So what you end up with is stuck with NZD rather the EUR. Both are picked to fall, but the NZD pays great interest, and doesn’t have a sovereign risk that could see it quickly bottom.
There is more chance of getting my money back suffering less with the NZD, and what’s more, if I’m worried about makingmy money back when the euro finally falls, than lean in to the NZD euro also, that way you’re hedged again, also, again, on a great interest rate, on a currency set to benefit greatly if there’s a serious problem with the euro.
We are steering away from the euro knowing if there’s a problem we already have USDEUR, and we chose to go with NZDUSD and NZDEUR rather than buy more EURUSD in an attempt to hedge the big long USD position we already put out.
I started playing with the options and saw that you could set and change the default stop loss or take profit. One of the main reasons I dont use these is because it wastes too much time when im trading quickly setting these. Now I can do it by default, my thinking was in how often I am finding meagre profits when I awake, wondering if the market didnt roll up and down and end up right where it started, not unlikely. If i had take profits, it could have bounced up and down, taken all the profit, and I would have done very little.
It frustrated me to think if the market jumped suddenly, my profit would trigger and yet my losses would continue but the market jumps unexpectedly far less than times I am not watching the screen and I am perhaps losing profit, especially during the day when things are so slow, I may easily go an hour or two without checking. Often these are little ripples, often it seems, the profit is just easing away the moment I notice it jumped up, these are the little day moments I want to grab. Especially trading tight during the short but slow and choppy day movements, and looser at night so I get better profits when I sleep, but also, it means a nice spread of short and longer profit takes should there be a jump – knowing, that by it’s nature, every jump in fx eventually has its retrace and the retrace is the main thing I’m fighting.
Too often, I miss the chance to take good profit before the retrace kicks in and I find myself selling at exactly the wrong time, at the top of the retrace before the continuation begins extending again.
But it was only when the NFP kicked in that I realised it wasnt just about when I wasnt watching and couldnt trade.
Because on an NFP or US fed decision, I can barely trade in the first half an hour, the system gets so clogged – by people who are all trading on auto, naturally – Usually for the first 5 minutes I can only watch the carnage, at which point I may be able to start forcing a trade in maybe one every minute or two, while scrambling to take a few choice juicy profits while the numbers jump from side to side.
When the profit takes are already there, I don’t need to close positions, they will close themselves, I can focus on buying knowing that no losses will close when it does its crazy swing in the first few minutes, but all profits will be taken.
My profit jumped $15 in the first minute of the NFP as all my little regular positions Id built up in the last few hours trading with the take profit on all closed out with profits, something I never could have done with the system clogged and the price jumping up and down regularly.
Whats the point in having a skyrocketing position if you cant grab it before it starts falling again, while youre trying to throw down new positions based on the data read?
Better to grab the profit and if the price keeps falling, as long as you have a strong hedge, the momentum will fade and once the dust settles you can begin to clean up your hedging configuration.
Which inspires different trade set ups based on your hedging position.
Then I started to think, what if I had followed the implicit suggestion at daily fx of going long AUDUSD and short GBPUSD knowing those combos would make immediate leaps to the other side of it’s range if the data favoured, but struggle to move quite so much in the other direction if the data was unfavourable.
In this case it hammered the USD and the AUD went flying up, even hammering on the GBP.
It seems that I am learnig the deeper level of hedging and that is indirect hedging, seeing what they talk about on daily fx, that even though the USD was the currency hit, it still opened the door to the AUD rising against the GBP, and I believe the EUR was up on the AUD, and also gave the GBP a good smack, because the drop in the USD pulled the price pressure of these two which have been getting a kicking from the USD much longer than the GBP has.
I am starting to understand.
It has only just occured to me. Hedging with a stop loss around a big event risk is guaranteed money, unless it’s a fizzer, but we know the big movers like nfp can shift a market 1-2% in 10 or 20 minutes, and 1 or 2 events of that magnitude happen most weeks.
USD, AUD, GBP all have jobs figures, GDP figures and interest rate announcements every month. The trouble with the euro is that it’s made up of different economies and though the german is the biggest, it can’t really move the market 1% in a short period so that we can be reasonably sure that we can exit the game with a good result.
Next week there is AUD and GBP rate decisions and also a Canadian jobs figure. CAD is not a currency I hedge, but it does raise the idea of testing out fundamental trading on event risks – it is essentially gambling, but with very good odds on the pay out. It could go either way, but losses can be limited, and profits maximized, so we have to be in, even if it is only $5k with a $5 stop and taking $20.
What would stop you hedging specifically for the event? Nothing. It makes perfect sense.
Part of the delight of hedging is that on top of my usual day to day trading, I can also set off spot trades on event risks, that means even if I lose $10-20 on one side (while making $50-200 on the other) that loss would be covered by the movements in my normal trades anyway.
Even if we get a massive jump, our hedges will be further protected by the fact this will provide some extra doses of capital.
This as well as doing carry based trades. There is lots of fun to be had using money to make more money!
So you set two lots against each other – this alone requires $500 to be leveraged and therefore removed from your equity – with a .5% profit and say, a .1% loss, one of them hits the stop, you lose $100, bang, then rolls on to take your profit of $500 – you have profited $400 provided it doesn’t knock one stop out, then swing back and knock the other . . .
So what are the risks, there is “slippage” where low liquidity means you simply cant get out of your position automatically fast enough, and rather than a $10 loss it may turn up a $12, $15 loss because the robots just arent fast enouh when theyre getting slammed from a data read.
But what I see is the risk of volatility triggering the wrong stops. Last night, the swings were huge due to the lack of liquidity, it momentarily swung down as far as it ended up swinging up. To have both your stops knocked out would be really bad.
The advice given here is to make the profits stops rather than the losses. The problem is if you get a huge move, it takes the profit and then just keeps rolling. The other suggestion is to make the stops nice and big so that initial volatility won’t knock the stops until the trend emerges.
The other risk other than the stops being too tight is the profit being too loose, so you get the profit shooting up, the stop on the other side is triggered, but it stops short of the profit, and then flies down again – you’d probably still end up with a profit here.
What about a second hedge, where the profits are as big as the losses on the first hedge. that is the second hedge cancels out the loss on the first hedge, leaving you with just the profit.
In an emergency where it knocks out every stop, you’d end up only taking one loss on one side. But if the stops were big on the first hedge, this could be a favourable set up, because you make a profit on a small move as well as a big move.
The only way you lose is if it somehow knocks both small stops in volatility, then knocks a big stop, before falling back before you get your profit. That would be pretty hard luck and low probability.
Perhaps you need a range of hedges.
We could chose a range 3 pairs around a currency facing an active risk, and but $15 each side of each. $90k. Each $15k is 3 lots of $5k.
one has a .2% stop / .4% take; the next a .4% stop but a 1% take, and the last has no stop or take. Or it has no take on the danger side, and and no stop on the safe side.
That means if it jumps around and then takes off, we take 1% but only lose .8%, while if shoots off, we take 1.4% but only lose .6% if it jumps around and stays still, yes, we lose up to .6% – only $30 on $5k – but in any case we still have the last set with no stop or take, floating about, and we have to decide when the best time to cut that is. usually after 5-15 minutes the clear trend is deduced and you must tap out of the position hoping that the other side will run significantly. In fact you are then just back to your classic game, buying the rise, riding the hedge as far as it goes.
But then once you add the consideration of trends and hedges you get another aspect.
You can see why this type of hedging isn’t so straightforward. You have to be very strategic and thats where it works in step with the established hedges and having contingencies.
With the USD we’d want the stops down and the profits open, whereas in profits on the EUR side we know would be limited. We also know that if it does reach 1.5% that is a massive swing and the massive profit could be taken knowing that the profit was nice, we can re hedge, and the spike would surely be mature and extended at that point.
So profit open on the USD side, loss open on EUR?
So last night my usd stops would be triggered at .1%, and then the EUR would have shot off and triggered at 1%. success! I probably would have biased towards the euro because it was hedged against so it would have been nice. But what if it was the opposite? The US stops may still have been triggered in the initial volatility and then the USD would have soared, but id have nothing on that side, so I would have eaten a huge loss. The idea would have been to put the USD stops out further in this set up becuase remember the USD can come back.
Also once the fail pattern had been established, you’d only have to buy big – real big – on the winning side to match the hedge up favourably, and possibly eject the otherside but this is ninja stuff that can’t be counted on, and I wouldn’t really want to play with until I was more familiar.
It appears that there really is no foolproof way of ensuring a profit.
I believe the 3 hedge system with consideration of trends and hedges already in place is the ticket. The only way you lose in this system is if it swings mildly, knocks both your early stops out, and never reaches the profit margins further out.
What we really have to do is begin experimenting with hedges and stops on event risks and see what the results are. We will learn soon enough if wild swings do knock out our stops.
We want to increase our capital investment so trying a few small multi layered hedges with very deep stops is a fine way to experiment as we are ready to let our hedges build up in a natural way, trying things out and being able to handle a few failures.