I assumed I start with $100 on a not yet defined asset. I open a short and a long trade simultaneously and calculate the value of each trade when the asset changes its value. Than I calculated my overall equity and the resulting loss/gain. I did that for two scenarios: Asset is bullish and asset is bearish. You can see the results in the following table (upper is bullish, lower is bearish):
First I was surprised that it really seems to work. Then I found the explanation: When you loose 10% on a trade you need to gain 11% to get your original value back. This difference is your gain when you go short and long at the same time. The calculation shows that the overall profit is rather small: If the asset moves 10% the equity would only gain 0,45% in a bullish market and 0,56% in a bearish market respectively. But: There is never a loss!
Of course the calculation is ideal: No spread, no fees, no taxes. But I thought it is worth trying. In order to get close to the ideal case above I searched for assets on eToro that neither have fees, nor an expiration date. I found several possibilities and picked natural gas. I have never traded this commodity before and I didn't intend to do it in the near future. So I thought it's a good idea, since I don't mix the trades up with other manual trades.
I opened two trades - one short one long - with approximately 2,5% of my total equity for each trade. I kept the stop losses wide open so that the strategy is properly applied. Unfortunately the price for natural gas changed right after I opened the first trade, so they are not exactly synchronous. But one pip difference shouldn't ruin my experiment. In order to achieve higher gains than the ones shown in the tables above, I choose a leverage of 10 for both trades. Of course I had to pay the spread (10 pips), so both trades are red. Now I hope natural gas will go up or down, so that I can see if my calculations were right.
The status right after opening the trades was:
sell trade: -3,67%
buy trade: -3,33%
overall: -3,5%
What do you think about this experiment? Do you believe it can work? Let me know your thoughts!
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