Hedging Strategy

Hamed A

Newbie
7 0
I am new to trading but I have read that hedging is a good way to make money. Do you know of any Hedging ea's I can use? What is your idea about hedging?
 

timsk

Legendary member
7,604 2,377
I am new to trading but I have read that hedging is a good way to make money. Do you know of any Hedging ea's I can use? What is your idea about hedging?
Hi Hamed,
Welcome to T2W.

I'm sorry to say you're barking up the wrong tree. If trading was merely a case of plugging in an EA and watching the money role in, then we'd all be muli-squillionaires! It just doesn't work like that I'm afraid.

There may be traders who utilise a hedging strategy to make money - but I don't know of any. Where hedging can be very effective is in protecting profits to help ensure you don't lose money. The emphasis is very different as it requires the trader to have a methodology in place to begin with that generates profits.

By way of example, suppose you're an equities trader and you have long positions (i.e. betting the value of shares will rise) in half a dozen different U.K. companies. In line with the buoyant stock market, they are all doing well. However, you fear that Labour will win the general election and there will be a strong market reaction and you could see a significant percentage of your profits eroded very quickly. On the other hand, if the Conservatives win by an outright majority, you feel the markets will continue to rise - so you don't want to sell your holdings. To protect your current positions, you open a short position on the FTSE100, i.e. betting that the index as a whole will fall in value. If Labour are elected and the markets fall overnight, your short index trade will offset any fall in your long equities trades. In effect, you're neutral, neither making or losing money regardless of whether the market rises or falls.

Now, if you're very lucky, you might manage to make money on both trades. Let's say that Labour are elected and, as you feared, the market drops sharply. Your FTSE short goes into profit immediately. After a week or a month, everything settles down and the markets start to move back up. You then close your index short for a profit and watch as the value of your equities positions return to their previous highs and continue ever upwards. That's a way of making money from hedging, but it relies on 90% luck and only 10% skill - and is not a trading methodology as such that you can utilize repeatedly. If the Conservatives get back in, you close out your short FTSE100 trade asap. Yes, in all probability you will have incurred a small loss, but that's the price of insurance, peace of mind and a good night's sleep!

Hope that helps,
Tim.
 
 
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