Ratio hedging is so XX. century…
Plotting a grid of 1/2 fluctuation sized steps can yield the idea of halftime drums, or DubStep hedging.
You open a position with the utmost consideration for being in accordance, in harmony with the direction of progression.
Yet, the market starts moving against your holding, what should you do?
- know the instrument = be conscious of the fluctuation size
- do nothing until 1/4 of fluctuation size pressure from your open plus a little slack
- open a hedge that is 25% greater than the position to be hedged with the following conditions: a) have a target for the hedge position at 68.75% of 1/4 fluctuation size b) get your strictest trail stop involved with the right launch codes to protect any gains made by the hedge-trade c) repeat the same thing for 10, 1/2 fluctuation size steps out
- there should be a target setting logic in place that would adopt to motion in the opposite direction, meaning, it would not always just aim further out, but could retract as long as it is still happening in gains
The size increase is to make up for some lost ground between the steps.
This hedge-trade may be called in multiple times, each time yielding you something.
The whole manouver would only make sense on an ECN, low raw spread account where the commission is not very high and high leverage is always a handy thing.
How does it look like?
The green equity line separating from the blue balance line shows the presence of a hedge-trade. When the green gains on the blue, a hedge-trade gets closed out. At the meeting point the account has no open positions.
What is so great about this type of hedging? That it takes a back seat, it only steps in when something is really off, and it puts on a fight for a good size section, going into war as many times as needed be.
Remember that hedges can give you relief, but may ultimately become an over sized counter weight that can sink your ship, this is why my current thinking is that hedging should be precise, powerful and predictable.