Should I green up?
People often ask me if it is worth greening, or redding, up; hedging your profit so you win what ever the result. In a word yes, but a longer description follows.
First off the market is very efficient, so in essence you could argue that it makes no difference. If you hedge you need to place another lay order. The hedge value is calculated by laying off the profit at the current lay price, thereby dividing your profit by the price. If the price is efficient in the long run hedging or not hedging will make no difference. Correct!
However, life is never simple. Profits and losses do not follow a straight path. For anybody speculating on any market there is a bumpy road. The statement above is true, if profits were spread equally. But when they are not you run the very real risk of long term under-performance. Second, your aim is to minimise risk and by letting a profit run you end up subjecting it to the vagaries of the underlying result. This dramatically increases risk. If you do this on a big result, at a big meeting, that occurs infrequently; then you escalate that risk dramatically. By hedging you eliminate this risk and allow yourself to progress on a smoother, more confident, plane. You also can compound easily your results and if you are winning at a reasonable rate that dramatically improves your performance.
In the following graph you can see I have taken some actual data from this year and set one on the path of greening and one on the path of letting profits / losses run. You can note how much better the top line, greening, performs. If you start compounding the results, the results get even better and that line shoots off the top of the chart. Of course you could compound stakes on the bottom line but because the results are subject to the vagaries of who wins and what the individual result was, you have no easy metric to scale and it wouldn’t work very well. The gap between the two will be exponential in the long term.
So in short, hedge your profits and losses all the time. If you don’t, you are making a value judgement on the gambling position and also detracting from better performance over time. That’s not theory, that’s what I has seen in many years of practice. Which is why I recommend it.
The line eventually gets wider and wider!
Category: General, Trading strategies
