Quiet night after that rowdy open on the currencies. Talk about abusive. Some big boys went out gathering stops in a major way.
I was looking at one of my platforms and noticed that I was flirting with getting my target, but just not quite.
But check out the BE line on the sell side- could that be right?!
So I set up an analysis of hedge loss and what it does to the BE line, and by inference to the target line. Here's what I found:
For every opposition open trade created in a move (Buy vs Sell in my case) a potential hedge is made if the market reverses. If the market went down from here for whatever reason, every one of those buys would get hedged out, and until I ran past the level where there weren't any more to hedge, I wouldn't stop losing money. And I only pick up speed making up for all that hedge loss after moving a while.
What the charts told me was that BE was uniformly about 2.5 steps farther away for every hedge that got made. That's regardless of step size. I have 11 buys opened so that means I'll have to move around 27-28 steps into the sell zone before I hit BE. Just what the chart shows. At that range the target comes pretty quickly, but still, that's a lot of movement just to get on even ground. And should it just barely miss - lets say it only goes 20 steps into the sell side and then comes back out - well then I've got to have a 50 step move to the upside to make any money. Bummer.
So what about step size? Well, consider a $5.00 move that for some reason doesn't cycle. Maybe you've already got some hedging going on, whatever. That $5 move is about 9-10 steps on a $0.5 step size, it's more like 16-17 steps for a $0.30 step size. If it reverses and goes the other way, you'll hit BE around 23-25 steps away on the $0.5 grid, but now you've got to go around 40 steps on your $0.3 grid setup. 24 steps is $12 on the $0.5 grid. 40 steps on the $0.30 grid is also $12......but you're way out of the box now on the $0.30 grid, 30 steps is not enough. Plus you are carrying around 24 open unhedged trades on the $0.30 grid compared to 14 open unhedged trades for the $0.50 grid on the way to BE. The larger grid is a lot more conservative from the standpoint of margin.
I did try a $1.00 grid - it was the same. A $5.00 move eats up 5 hedges if it reverses, will need to go to around $12 on the reverse, but you'll only have 7 unhedged open trades exposure.
So there you go. A move of $x away from inner grid that doesn't cycle takes about the same $2.5x move the other way to BE no matter which grid spacing you use, but you'll have a lot more money on the line with the smaller grid size. And have a lot more risk of building a hedged box in 30 steps.
There is one advantage revealed by the charts for the smaller grid spacing - targets come quicker. An unhedged move of $3 or so will clip a $200 profit with the $0.30 grid, but you have to move over $6 to get $200 from the $1.00 grid.
Here are the charts in a zip if you are interested. They've got the P/L lines for 1 through 10 hedges for various grids.
I was looking at one of my platforms and noticed that I was flirting with getting my target, but just not quite.
But check out the BE line on the sell side- could that be right?!
So I set up an analysis of hedge loss and what it does to the BE line, and by inference to the target line. Here's what I found:
For every opposition open trade created in a move (Buy vs Sell in my case) a potential hedge is made if the market reverses. If the market went down from here for whatever reason, every one of those buys would get hedged out, and until I ran past the level where there weren't any more to hedge, I wouldn't stop losing money. And I only pick up speed making up for all that hedge loss after moving a while.
What the charts told me was that BE was uniformly about 2.5 steps farther away for every hedge that got made. That's regardless of step size. I have 11 buys opened so that means I'll have to move around 27-28 steps into the sell zone before I hit BE. Just what the chart shows. At that range the target comes pretty quickly, but still, that's a lot of movement just to get on even ground. And should it just barely miss - lets say it only goes 20 steps into the sell side and then comes back out - well then I've got to have a 50 step move to the upside to make any money. Bummer.
So what about step size? Well, consider a $5.00 move that for some reason doesn't cycle. Maybe you've already got some hedging going on, whatever. That $5 move is about 9-10 steps on a $0.5 step size, it's more like 16-17 steps for a $0.30 step size. If it reverses and goes the other way, you'll hit BE around 23-25 steps away on the $0.5 grid, but now you've got to go around 40 steps on your $0.3 grid setup. 24 steps is $12 on the $0.5 grid. 40 steps on the $0.30 grid is also $12......but you're way out of the box now on the $0.30 grid, 30 steps is not enough. Plus you are carrying around 24 open unhedged trades on the $0.30 grid compared to 14 open unhedged trades for the $0.50 grid on the way to BE. The larger grid is a lot more conservative from the standpoint of margin.
I did try a $1.00 grid - it was the same. A $5.00 move eats up 5 hedges if it reverses, will need to go to around $12 on the reverse, but you'll only have 7 unhedged open trades exposure.
So there you go. A move of $x away from inner grid that doesn't cycle takes about the same $2.5x move the other way to BE no matter which grid spacing you use, but you'll have a lot more money on the line with the smaller grid size. And have a lot more risk of building a hedged box in 30 steps.
There is one advantage revealed by the charts for the smaller grid spacing - targets come quicker. An unhedged move of $3 or so will clip a $200 profit with the $0.30 grid, but you have to move over $6 to get $200 from the $1.00 grid.
Here are the charts in a zip if you are interested. They've got the P/L lines for 1 through 10 hedges for various grids.
A good man knows his limitations ~ Clint Eastwood
I still haven't seen it recycle with a small profit at a price grid level, so this one is definitely in the beta phase.
