The most experienced traders in the market especially appreciate and use the Hedging strategy. It applies mainly to the Forex market but can also be used with other types of assets.
We offer you to find out more about this so that you too can enjoy this fairly easy to use investment strategy and thus help you to take relevant positions covering your risks.
Hedging strategy in brief
A Hedging strategy, as its name suggests, is actually a hedging strategy. It consists, therefore, of covering an open position with an opposite position. To do this, the two items involved must be of the same quantity.
Thanks to this Hedging strategy, risks can be reduced and, therefore, money management can be optimised while capital is preserved. Hedging is used for two main purposes: the protection of your capital or the profit on corrective movements.
Hedging’s strategy to protect its capital
By using the Hedging strategy, i.e. by opening two inverse positions for a given asset and of the same amount, you are eliminating part of the risk. Indeed, the direction of the trend and the observed volatility are not very important here, as the equilibrium will be stabilised regardless of what happens.
So, we might ask ourselves why Hedging is really interesting in this particular case. This strategy is preferably used when you want to protect the gains already made on a position and when you have doubts about the short-term performance of the asset price.
It is then enough to wait for the beginning of a reliable trend to resell the position that has become obsolete and thus be able to keep open the position that is evolving in a good way.
The strategy of Hedging to take advantage of corrective movements
Correction movements are relatively frequent in the context of online stock market investment. It is therefore interesting to use them with a strategy that combines long positions and short positions such as Hedging.
In this case, it is sufficient to take a long position on an asset and give an inverse position order on the price for which it anticipates a possible technical correction and is therefore below its long-term objective. This way, if the price of the asset you follow changes to a corrective trend before you reach your target, you can reap the benefits of your short position while retaining your long position.
This method is particularly interesting, but it requires the ability to locate with precision and thanks to the pivot points, the supports or the resistances, the levels that can lead to a change of trend.
Hedging strategy for long or short positions
If you use the Hedging strategy to trade on the stock exchange through CFDs or also with futures contracts, you can always do so with the aim of protecting your positions with two opposite positions. However, the essential thing here is also to be interested in the investment horizon that you chose when you took your initial position. Depending on the case, we will use a “short or long Hedging” strategy if it is short or long.
Investors will use short hedging if they have active positions to sell in the market. In that case, the new purchase position will serve to maintain market presence should the movement continue, while at the same time embolishing the profits generated by the previous short position.
Investors, on the other hand, will use long hedging if they are not yet positioned in the market and if they wish to take long-term positions. This will protect them while they wait for the most appropriate time to take a long-term position for both buying and selling.
Use the online Hedging strategy
Now that you understand why Hedging strategy is interesting you can try it out online if you sign up for a quality Forex trading platform. That way you can cover your positions.