The 3 Genders of Hedging (Humanitica)

The need of hedging comes from the presence of human error.
Human error is for instance opening a position without a reason, not having / eliminating stop losses, and you cannot blame an EA for opening a trade at the wrong place/ time, only the maker who failed to factor in all possibilities and failed to include / find the necessary / right filters.

I have started a video series on hedging, called 4-step Auto Hedging in Forex.

In my opinion, there are three different hedging systems, and they all have their use.

1. Ratio Hedging

The fore-mentioned videos talk about a 4-step hedging system that is meant to prevent you from the equity/balance ratio dropping below a certain level. The weakness of ratio hedging is that it only relies on the equity drop and does not consider other factors, so you may end up with a hedge at a wrong place/time especially when you are opening larger sizes that you may be tempted for especially when having larger leverage at your disposal. The 4 steps as a reminder are: 33% hedge (the rope trade), 5% equity drop later 1/2 hedge, 5% equity drop later overhedge, and if for some reason push comes to shove, 5% later a full hedge gets clicked on – after which manual close outs mean the resolution.

2. Break Out Hedging

Break out hedging may be too far out to be accommodating, and would not eliminate the possibility of a margin call. This is where my good old, “re-calculate needed size, post pending order, wait, delete order” sequence can be utilized. To not be allocating to much bandwidth, it is sensible to to only start posting orders when price is within stone throw distance. I use my Forest model for this kind of hedging which by now includes the hedging line. This, roll-out, automatic hedging can be done with over size as well, and the routines can close out the hedges when the next mile stone was made.

3. Proactive hedging

I know, all hedging genders are proactive, they try to prevent from losses, but this particular kind is the early bird of the tree. If you were a human, this would be your place to chip in. The opened hedge sizes do not exceed the open position sizes (in the opposite direction), so if nothing is open, nothing happens. Since there is a place and a need to catering for the trading robots, Humanitica would have to define for the human what he/she is allowed to do in order not to cause any harm to the robots and the account balance. A lot of the human role can and should be handed over to the Human-Substitute Bots, for a human is not capable to carry out a 24-hour service, nor can they make emotionless judgements. Yet, they must be trained in order to aid their chances of survival.