Is Hedging a critical for success for futures or options trading
Hedging seems to be a critical part of success for either futures or options trading. Do traders REALLY understand this for the profit or loss?
As I am learning this current course, I am leaning towards a more fundamental view of the market versus a technical approach.\
Click here for the course I speak of: http://quantlabs.net/blog/2014/12/options-and-futures-free-apple-itunes-u-course-to-learn-for-automated-trading/
I also posted an article how technical trading does not really make money if you use this exclusively for your trading decisions.
It seems to be successful as a futures trader, you may need to understand the fundamental difference between cash positions and future positions while hedging. You long for both positions which will determine your success by the direction of your basis between the two pricing points. Do people consider this at all? It seems basis direction is critical on how your futures or options pricing plays out. It also depends if you're longing or shorting the market with whatever futures contract you choose. I've hinted in a previous post that transaction or storage costs are never factored which will eat into your profit potential but no one seems to consider this.
No one either is consider their net outcome on a weight or unit basis of their trade. It is also driven by the number of contracts you take for what the exchange will allow on the commodity you choose. Do people actually ever calculate this? Perplexed where were people seem to focus on more complicated mathematical models that you really need to. Even on a futures FX contract the spotmarket plays a critical role. It is not a simple fact of watching charts and hoping for the best. Also for FX future contracts, do people ever consider the amount charged on a 1% price change versus what the contract offers in total cost?
People may not really understand what a risk adverse hedger is especially from an optimal hedging point of view? Have they ever taken some form pricing Theory pertaining to portfolio risk? Do people understand what a positive indifference curve is for a risk averse investor? Do they actually forecast multiple portfolios to figure out the risk aversion cash position versus future positions? Do know they even know what an optimal hedge is as there seems to be some mathematical magic happening here to calculate the sort of things but no wonder retail or day traders could get slaughtered without this knowledge. There is a lot of stats going on here.
Do people really understand what diversification really means? I mean where you can substitute the futures market as a way to calculate your true risk against future cash positions in your trading.
More importantly when you say risk reward based upon the amount you risk considering based on the amount you are willing to hedge. Did you know that you could calculate this optimal hedging not just algebraically but graphically as well with the frontier curve laid on top of that indifference curve. I'm not sure if people know about this stuff. You can also calculate your expected rate of return against your risk.
Pretty powerful info that could be neglecting calculating your future positions during your trading.