✔️ Information reviewed and updated in April 2024 by Pedro Martínez González
It is normal that trading and its theory seem difficult and even that you think that you may never fully understand it. While it is true that there are many terms that can confuse you or that can leave you overwhelmed, the reality is that learning these things is very simple. In addition, it is really necessary and is part of learning to be a trader, to begin to familiarize yourself with the terminology of the world of investments.
Hedging, also known although not as popularly as hedging, is one of those that may cost you at first, but when you master it you will see how simple it really is.
What is hedging?
Hedging it is simply a trading strategy that serves to mitigate or soften the risks of an investment. It is a method that is widely used and it is also quite simple, basically it is about opening a position that mitigates the risk of another.
E.g.: sSuppose we want to carry out a EUR (Euro) / USD (United States Dollar) operation, but it turns out that this operation carries a risk, then we decide to buy USD (United States Dollar) / CHF (Swiss Franc) in order to mitigate the risk of the first operation.
This is basically because the currencies are related to each otherIn other words, if the euro goes up, the Swiss franc will go down. So, if our first position loses, the second will win, in this way, the amount of money that you can lose with the operation is reduced.
Although the concept as such is quite simple, in practice it is notTherefore, in order to perfect this practice, you must practice a lot. Even professional traders can have problems with hedging.
Types of hedging: some of the most popular
There are some more popular and used hedging methods over others. We name you some of the most used:
🌟 Currency Hedging
It is the most widely used of all the types that exist, and this is mainly due to the fact that the foreign exchange market is the one that lends itself the most to this technique. Many currencies are related to each other. That is, when one is affected, that same effect drags another currency in the opposite direction..
🌟 Stock Hedging
It happens in a similar way as in currencies, but in this case stocks are used. With the exception that in these cases short operations are used to mitigate the possible loss of a long-term operation.
🌟 Hedging to hold a position
This method is the simplest of all and it is simply based on acquiring a reverse position to ours in order to mitigate losses. For example: if a EUR / USD purchase is made, the reverse purchase would be USD / EUR.
✅ Advantages of hedging ✅
- Reduces capital losses by a significant percentage
- This type of strategy will allow you to manage and expand your portfolio.
- In many current brokers these practices can be applied.
- It allows you to be able to anticipate some market movements.
❌ Disadvantages of hedging ❌
- While it is true that it can help you mitigate a possible loss, the truth is that it is not a free strategy. Every time you use it you will be investing money in it that you will not be able to recover
- Although there are many brokers that accept this type of hedging, there are still many who have it prohibited
🖐️ Conclusion 🖐️
After all this, it is clear that the objective of this practice is to compensate for a total or partial loss of an asset that is being exchanged. Depending on how you use this practice, you are likely to see fewer or more results. However, keep in Note that every time you do it you are limiting the possible benefit you could get because it is a money that is not used to win but to avoid losing.
Like almost any technique or concept in the world of trading, if you are working with a real account, a mistake can mean losing a lot of money; It is very important that you know well what you will do before carrying out this strategy, because if you do it wrong you can even lose double the money.
Very good explanation, it has clarified my doubts and I have understood it perfectly! Thank you!!