how to hedge

[wildshoetwt]

i've heard people say that the best traders "hedge" and that the best best traders "hedge hedges" what do they mean by this?

i get the generaly idea behind hedging, but how do you know how much/when to hedge


is it a long term (ill just hedge this and hope it goes my way) or a short term thing (i'll hedge the dips in the trend im in and make some small profits along the way while protecting in case of a reversal?)

 

[Martinghoul]

It's a judgement... Nobody knows anything, everybody just takes a view, based on their risk preferences.

 

[Bint_Crusher]

i've heard people say that the best traders "hedge" and that the best best traders "hedge hedges" what do they mean by this?

i get the generaly idea behind hedging, but how do you know how much/when to hedge


is it a long term (ill just hedge this and hope it goes my way) or a short term thing (i'll hedge the dips in the trend im in and make some small profits along the way while protecting in case of a reversal?)

Be very careful of hedging until you have a lot of experience trading. If you want to learn about it here is a useful site.
Welcome to Topiary.org.uk
:smart::smart::smart::smart::smart:

 

[DionysusToast]

God damn - I even saw the title & I still clicked it...

Brilliant!!!!

 

[anley]

i've heard people say that the best traders "hedge" and that the best best traders "hedge hedges" what do they mean by this?

Too much crap is written about hedges and it often implies that the trader has it both ways, ie if the market goes up he makes but if it goes down he doesn't lose. Please tell me where to do those types of hedges because I'll pay you 80% of my profits, it's free money after all.

A proper hedge only does one thing, it locks in a price. Assume you've long at 100 and the market goes to 120, that means you're securing 120 as your hedge level so if the market dumps you can still sell at 120 but if it goes higher than 120 then sorry you'll still have to sell at 120.

Using a real example, you might be long £100,000 of stock and feel that the market is about to dump, you don't want the hassle of selling out of your stock (possibly for tax reasons as well) so you sell £100,000 of FTSE futures. if the market dumps 20% chances are your stock will be down around 20% but your futures will be up 20%, net result - you're even.

But if you're wrong and the market shoots up 15% then you'll make on your stock but lose on your futures, net result - you're even.

That's how hedging works.

Now for the people that get really fancy with their hedges this will normally happen - the hedge will **** up and it will end up costing them money. Moral, if you hedge, keep it simple which means the best hedge, bar none, for 90% of traders is to cover your position.